Companies Face Growing Scrutiny of Corporate Tax

News of multinationals coming under major tax investigations have been making the headlines these days. The recent public scrutiny of the tax affairs of multinationals has started a raging debate about whether countries are collecting their fair share of taxes.

Multinational corporations have been sheltering their wealth and profits in exotic locations and are under the full glare of the media spotlight.

A number of multinationals were severely criticized in the Europe recently for diverting taxable profits to low-tax jurisdictions, such as the Netherlands and Luxembourg.

Governments are now paying more attention to the cross-border tax affairs of companies and to M&A transactions. They are basically trying to protect their tax revenues, which in some cases have been badly hit by the financial crisis.

The focus on corporate taxation has also been amplified by growing public and media scrutiny.

What is Transfer Pricing?

Transfer pricing means establishing the price for a transaction that takes place between two entities (a company or subsidiary) that are owned by the same person or company. The transfer price is the price at which the goods or services are transferred or ‘sold’.

Global Impact of Transfer Pricing

After several exposés of multinationals such as Starbucks and Google, Luxembourg has recently been under spotlight, when the International Consortium of Investigative Journalists published a report accusing more than 300 companies, including the Pepsi Bottling Group, Ikea and FedEx, of benefiting from preferential tax deals. The investigation is part of a how multinational companies are shuttling revenue from country to country in order to reduce tax payments.

Through transfer pricing strategies, multinational companies have largely avoided corporate income taxes within the EU. The European Commission has launched investigations into the tax arrangements of MNC’s.

Corporate tax dodging has rippled through the foreign business community in countries like China too. Clearly, the issues involved in manipulative transfer pricing and tax evasion have crucial implications for developing countries as they are losing government revenues to both developed countries as well as tax havens.

Through manipulative transfer pricing between offshore companies, US companies transfer the money they earn in Europe to tax havens like the Cayman Islands, Bermuda, etc., and avoid paying US taxes.

President Obama recently targeted foreign profits with a tax proposal, a new approach to taxing foreign profits in the future. In his budget plan, Obama has called for a mandatory one-time, 14 percent tax on an estimated $2.1 trillion in profits piled up abroad over the years by multinationals such as General Electric, Microsoft, Pfizer Inc and Apple Inc. etc., and 19 percent tax on future profits.

The U.S. corporate tax rate is currently 35 percent, but loopholes allow many major corporations to avoid paying U.S. taxes. In a nutshell, the US government aims to eliminate tax loopholes.

Obama’s proposal is also viewed as a big opportunity for the repatriation of overseas profits to US with a significant lower tax burden. Yet another “repatriation tax holiday” is being encouraged for multinational corporations to bring overseas profits back to the United States by offering them a temporary, very low tax rate on those profits.

Transfer Pricing Guidelines in Singapore

Singapore is a key business hub, attracting global multinational corporations. The country’s strategic positioning in the wealth management and private banking sectors along with its banking secrecy rules has immensely contributed to attracting international companies to the island. Singapore’s low tax rates and generous tax incentive programs have been a key driver behind the economic success story of our little red dot.

European Union authorities have long worried that European citizens will park their money in countries like Singapore as their own tax havens come under tighter scrutiny.

On 6th January 2015, the Inland Revenue Authority of Singapore (“IRAS”) released second edition of revised transfer pricing guidelines defining how IRAS will handle these matters. These Guidelines drive key points which clearly resonate with the changing landscape in transfer pricing. The guidelines represent and the need for timely and more transparent reporting of Transfer Pricing within a multinational. The IRAS also addresses a number of elements of ambiguity which were present before.

Compliance enables the taxpayer to demonstrate their high standards of corporate governance. It also helps to maintain good relations with tax authorities. This also discourages tax and transfer pricing audits, as tax authorities would prefer to focus their audit activities on companies that are not well prepared.

Taxpayers need to be proactive in their management of transfer pricing risks through the preparation of high quality transfer pricing documentation.

Suggested Readings

Singapore Ready to Become Hub for European Businesses in Asia Singapore Budget 2018 – Overview of Tax Changes for Businesses and Individuals Indian PoEM – Will it rewrite the rules of the game for Singapore Subsidiaries? Relaxed Work Visa Rules for Foreign Spouses of Residents in Singapore, Companies Set to Benefit