The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
April 12 — Singapore is a top-tier candidate for U.S. multinational companies seeking to relocate existing structures or create new foreign principal structures that hold, and use, group intellectual property.
With the demise of Bermuda and other zero-tax jurisdictions as viable locations for group IP—one result of the OECD's sweeping project to combat tax base erosion—U.S. groups are looking to locate their IP in jurisdictions that are less likely to trigger an audit of the transaction by the home country.
Singapore is “a real country, with real laws and real taxes,” said Adam Halpern of Fenwick & West LLP in Mountain View, Calif., at a recent tax conference. “This isn't Bermuda we are talking about. So there are pluses and minuses to this kind of approach.”
Singapore is an attractive location for U.S. group IP because of its headline corporate income tax rate of 17 percent, tax holidays, robust legal protection of IP rights, geographic proximity to Asian markets and high standard of living for company personnel who will need to relocate there.
However, Singapore has a high cost of living, and new car prices are astronomical by U.S. standards. According to Toyota Singapore, a new Camry starts from S$138,888 ($103,269). That doesn't include a government certificate of entitlement, which a prospective purchaser must bid for, and in some cases exceeds the cost of the car.
Steve Towers of Deloitte LLP's Singapore office, told Bloomberg BNA April 8 there are many examples of IP principal structures being used in Singapore and Hong Kong. “I can also point to some alternative Asia-Pacific locations—Malaysia, Thailand and even Taiwan.”
Halpern and other practitioners who spoke at a tax conference in March said that under new guidance from the Organization for Economic Cooperation and Development, which calls for joining risk-bearing with significant management functions, U.S. multinationals deciding to move intellectual property to such jurisdictions as Ireland and Singapore will need to move senior management employees there as well (24 Transfer Pricing Report 1393, 3/17/16).
Towers said one way a multinational group can exploit its intellectual property is by using a group principal company to hold, and use, group IP, thus deriving income from that use—for example, by manufacturing and selling goods where both patents and trademarks are used.
Under this scenario, Towers said, “the part of the profit derived from selling the goods would reflect the product and marketing IP.”
Because a principal structure doesn't involve the payment of royalties, “withholding tax is generally not an issue,” Towers said. “However, if the exploitation is via the manufacture and sale of goods, customs duty on the importation of the goods into the market country could be a big issue.”
Glenn DeSouza, managing director of Transfer Pricing Management Consulting in Shanghai, an allied firm of Baker & McKenzie LLP, said April 11 that a multinational company, when deciding where to place the group's IP, will take into account factors beyond its tax preferences.
DeSouza pointed out that Singapore has been ranked by the World Economic Forum as having the best IP protection regime in Asia.
Halpern said that in terms of intellectual property protection, “Singapore has a strong pro-business approach.” Singapore has patent, copyright, and trademark legislation, and its Intellectual Property Office has similar functions to that of the U.S. Patent and Trademark Office.
DeSouza said other advantages enjoyed by Singapore include:
Halpern said Singapore “is a pretty good location” for a multinational regional headquarters company to “credibly oversee operations in the Asia Pacific region. You are not far from Beijing; you are not far from India; you are not that far from Australia, Korea and Japan.”
A company may be able to “do the same kind of things from Amsterdam, Ireland and Luxembourg, but it is probably harder,” Halpern said. “Sometimes you have to go to meet with people and it is a lot easier to go to Beijing and Sydney from Singapore.”
Ryan agreed with Halpern. “Time zones matter a lot, especially for principal companies.”
Halpern said that “as a practical matter, most companies pay less” than Singapore's headline 17 percent corporate income tax rate. How much less, he added, “may depend in particular on what you are doing there in terms of employment.”
The Singapore Ministry of Finance is always interested in talking to multinational companies about tax holidays, “but it depends on what employment picture you might bring to the country,” Halpern said. Singapore's “pioneer incentive” provides a tax holiday for up to 15 years for some businesses that are expected to contribute to the country's economy.
Halpern also noted a separate headquarters tax incentive that would reduce the tax rate to 10 percent for an approved headquarters company engaged in qualifying activities.
Dividends received by local country subsidiaries generally are tax free in Singapore, which considers that “they have been taxed in the local country.” Singapore imposes no outbound withholding on dividends paid out of the country.
Nate Carden of Skadden Arps, Slate, Meagher & Flom LLP in Chicago, speaking at the Pacific Rim Tax Institute conference in March, said Singapore understands “what is going on in the rest of the world.” Its Economic Development Board—described by Singapore's government as the lead agency for “planning and executing strategies to enhance Singapore's position as a global business centre”—understands that “the price of admission may go up,” Carden said. “And their expectations around employment are going up because they know there are other places where it is no longer attractive to go because of EU state aid uncertainty or Swiss corporate tax reform.”
While the Economic Development Board wants to encourage foreign companies to invest in Singapore, it understands that it has “more leverage than they used to” in negotiations with companies, he said.
Halpern said Singapore has a “very beneficial treaty network” and has replaced Mauritius as “the go-to-investment location” for investing in India.
Singapore has tax treaties with 80 countries, including Australia, China, India, Japan, South Korea and most European countries, Halpern said.
The lack of a treaty with the U.S. is something U.S. multinationals setting up regional headquarters in Singapore must take into account, he said.
“When you are just starting out, you always worry: Do you have enough local country substance? Are you effectively running that business still partly from the United States” so that you end up with an “effectively connected income disaster?”
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