Can tax strategies be part of companies' growth plans?

Singapore firms should incorporate tax mechanisms into their working capital management, regardless of their growth ambitions or challenges.

THE EY Growth Barometer 2017 found that Singapore's middle-market companies are very bullish about growth. 15 per cent of Singapore respondents expected growth of 26 per cent or more in the coming year, and 70 per cent forecast a revenue rise of 6 per cent or more. However, the same survey also highlighted cost-management concerns: Singapore middle-market leaders are intent on controlling costs and staying lean, with 14 per cent saying increased production costs are a challenge to growth.

Clearly, working capital management is an area that local companies grapple with. Without sound working capital management, a company can find itself in a cash crunch or even thrown off tracks in its growth journey by a lack of funds.

Surprisingly, tax is an option that companies can turn to as they manage their working capital, as tax payment can chip away at their bottom line and funds. Further, there may be tax opportunities to optimise cash flow if companies look hard enough.

Borrowing to fund the working capital needs of the company is a common and often viable option. However, it is accompanied by an interest-expense burden. Companies that choose borrowings should thus make sure that such funding arrangements can meet tax deductibility requirements for interest expenses.

To claim deduction on interest costs incurred on a loan, a Singapore company must demonstrate that the loan was used to fund a specific asset which is income producing or employed in acquiring income. If the company is unable to do so and has non-income producing assets, it may end up losing part of the interest-expense deduction under the total asset method (TAM), which is adopted by the Inland Revenue Authority of Singapore (Iras) to apportion interest expense to non-income producing assets.

The e-Tax guide issued by Iras in December 2016 sets out the application of the TAM of attributing common-interest expense to income-producing and non-income producing assets and clarified common practices. One clarification is on the strict application of the TAM. Where direct identification and tracking of the interest-bearing loan to the company's income-producing asset cannot be established, the TAM must be applied to the interest costs incurred on the loan.

Thus, companies that look to take this option should plan and put in place supporting documentation to substantiate that borrowed funds are meant for purchase of inventories or specific income-producing usage of their business carried on in Singapore. These are essential steps that will go towards managing any potential tax disputes over the application of the TAM.

Another common option to fund working capital is through repatriation of monies from subsidiaries. This may include dividends, interest charges on loans and service fees on services rendered to subsidiaries. Clearly, tax considerations are an integral part of the strategy to optimise the repatriation of cash flow, especially from overseas subsidiaries. Understanding the tax laws in foreign jurisdictions (such as local withholding tax rules), foreign exchange controls, applicable exemption or reliefs available under Singapore's network of tax treaties and Singapore tax implications of the money receipt in the hands of the Singapore company is vital.

Transfer pricing (TP) will also likely come into play. Tax authorities are becoming more aggressive in ensuring proper and fair TP practices. Hence, proper economic and business substance should be built into the plans for repatriation of cash flow from subsidiaries.

Singapore provides an array of tax incentives designed to incentivise companies to anchor substantive activities or strengthen capabilities based here. One of them is the Finance and Treasury Centre (FTC) incentive aimed at encouraging companies to use Singapore as a base for conducting treasury management activities for related companies in the region.

Under the FTC incentive, income from the provision of qualifying services to approved network companies and carrying-on of qualifying activities on own account is subject to tax at 8 per cent instead of the prevailing rate of 17 per cent. In addition, companies may enjoy exemption from Singapore withholding tax on qualifying interest payments under the FTC incentive.

MANAGING RISKS

Often, corporate leaders do not appreciate the significance of tax risk due to its technical nature. Yet, tax risk has the potential to expose the company to financial and reputational consequences if not managed properly.

To prevent precious cash flow from being eroded by unnecessary tax costs such as penalties that may be imposed by tax authorities for errors in tax filing or non-compliance with filing obligations, corporate leaders should consider implementing a comprehensive tax risk framework within their organisations.

Fundamentally, companies should consider implementing standard tax function controls that are critical in managing tax compliance and controversy risks. These include identifying what could go wrong in existing tax processes or controls, establishing a robust documentation framework for proper retention of records and performing tax health checks to spot risks in their tax filings.

Tax strategies are integral in a company's working capital management to minimise the tax bite on funds that can be better used for operations as it expands or deals with competitive threats. Singapore companies that go beyond the reactive to align their tax strategies with working capital needs will certainly reap the benefits of their working capital policies and stay ahead of the game.

  • The writers are head of tax, and partner, tax services, respectively, at Ernst & Young Solutions LLP