The Covid-19 pandemic has created unprecedented shock to the global economy. Certain sectors are more badly affected than others and few businesses will emerge unscarred.
Businesses are being confronted with a new reality—cash flow challenges, disrupted supply chains, people movement restrictions and even temporary closures arising from lockdown. The tax issues that emerge may often be overshadowed by the more immediate priorities of dealing with the financial and operational impact of the Covid-19 pandemic. Even then, it is imperative to take stock of the associated tax issues, which include the following:
- Can companies preserve tax losses, which may expire due to time limit for loss carrying forward?
- How would current financial results affect inter-company transfer pricing? Must market support payments be made to achieve the targeted arm’s length profit margin?
- Will import duties be impacted when businesses change suppliers as part of risk diversification?
- Do employers have reporting and social security contribution obligations on remuneration attributable to their employees working at home in another jurisdiction?
- Is there unforeseen taxable presence created due to lockdowns and project delays?
- Do the changes in business plans affect the ability of enterprises to satisfy tax incentive conditions? Is there a need to approach the authorities for renegotiation?
- How would tax residency statuses be affected?
We delve into some of these tax challenges using three scenarios that illustrate common situations faced by taxpayers.
Our discussion considers the guidance provided by the Secretariat at the Organization for Economic Co-operation and Development (OECD) and the Inland Revenue Authority of Singapore (IRAS). We hope that these illustrations will help you think about your own business situations.
Scenario I—Delayed Construction Project
A Malaysian company has been engaged to undertake a five-month construction project in Singapore. Malaysian employees are deployed to Singapore for this construction project. The project started on January 1, 2020 and was slated for completion by May 31, 2020. Due to the circuit breaker measures introduced in Singapore, the project was put on hold since early April 2020 and is expected to be completed earliest by end of July 2020. Given Malaysian’s movement control order, the Malaysian employees remained in Singapore during this period even though the project was put on hold.
- Would the Malaysian company have a permanent establishment (PE) in Singapore given that the construction project now takes seven months instead of five?
Under the Singapore–Malaysia tax treaty, a PE will be triggered if an enterprise has a fixed place of business, which includes a construction project that exists for more than six months.
The IRAS has indicated that it will respect the guidance provided by the OECD. On this, the OECD Secretariat’s view is that the duration of temporary interruption of activities at construction sites should be included in determining the life of a site and establishing whether that site constitutes a PE. Correspondingly, a site should not be regarded as ceasing to exist when work is temporarily discontinued. This is despite the exceptional circumstances arising from Covid-19. Hence, the Malaysian company should be considered as having a PE in Singapore and will be required to file an income tax return in Singapore.
- Would the Malaysian employees have Singapore tax liability in respect of their employment income?
Based on Article 15 (Dependent Personal Services) of the Singapore–Malaysia tax treaty, remuneration derived by a Malaysian employee in rendering services in Singapore may no longer be exempted from tax in Singapore. Therefore, applying the treaty provision as is, the Malaysian employees may be disqualified from treaty protection and their employment income rendered taxable in Singapore.
It remains to be seen whether there would be concessionary considerations for these individuals given the extenuating circumstances arising from Covid-19. However, this situation will be occurring across many borders and the specific answer in each situation needs to be determined. The IRAS has responded to tax practitioners’ queries that it is looking into this issue and will provide clarifications in due course.
- Would the Malaysian company be liable for Singapore Goods and Services Tax (GST)?
For Singapore GST purposes, a supply of service is considered made in Singapore and falls within the scope of Singapore GST if the person supplying the service belongs in Singapore. This is when the person conducts business in Singapore from a physical place with some degree of permanence, which gives rise to a “business establishment” or “fixed establishment.”
A person would be regarded as belonging in Singapore if he has a business or fixed establishment in Singapore that is most directly concerned with the supply of the service. The IRAS would regard the presence of human and technical resources to constitute a fixed establishment in Singapore, if they are available in Singapore for an aggregate period of more than 183 days in any 12-month period or if the human and technical resources are present in Singapore on a recurring basis.
The extended stay of the Malaysian company’s employees in Singapore for the construction project would therefore create a fixed establishment in Singapore for GST purposes for the Malaysian company. This could trigger GST registration liability for the Malaysian company in Singapore if the value of the services to be rendered by the fixed establishment in Singapore is more than SG$1 million ($713,633).
If not for the travel restrictions imposed by both countries, the employees would not have remained in Singapore for more than 183 days. They are, arguably, also not available to provide any construction services during the “circuit breaker” period. Notably, the IRAS has yet to provide any clarification on the GST implications arising from such situations, and whether its guidance on PE for corporate income tax purposes may similarly apply to a “business establishment” or “fixed establishment” for GST purposes.
Scenario II—Remote Work Arrangements
A Singaporean is posted overseas to Australia on a two-year secondment beginning July 1, 2018 and was slated to return to Singapore on June 30, 2020. This individual traveled to Singapore in March 2020 and is now working remotely from his home in Singapore for his Australian employer due to travel restrictions arising from Covid-19. In his role, he connects with customers in Australia remotely via conference calls and corresponds via emails to negotiate sales terms and conclude contracts.
- Would the individual’s home office in Singapore and conclusion of sales contracts out of Singapore create a PE for his Australian employer?
Under the Singapore–Australia tax treaty, circumstances in which an enterprise will be deemed to have a PE in a state include: (i) the enterprise having a fixed place of business in the state through which it carries on business; and (ii) a person habitually concluding contracts for that enterprise in that state.
The OECD Secretariat’s view is that normally an employee’s temporary teleworking from home should not create a fixed place PE for his employer, due to the employee’s activities lacking a sufficient degree of permanency. Further, the individual’s temporary conclusion of contracts on behalf of his Australian employer in Singapore due to the travel restriction is unlikely to be considered as “habitual.” In the absence of a PE, the business profits of the Australian resident company should not be taxable in Singapore according to the provision of the tax treaty.
- What would the corporate income tax implications be if there is no tax treaty?
The IRAS has clarified that it will not consider a foreign company as having a PE in Singapore due to unplanned presence of employees in Singapore arising from travel restrictions. It is critical to bear in mind that the creation of a Singapore PE may not be necessary to give rise to Singapore tax liability under the domestic tax laws. Income that is sourced in Singapore will be taxable in Singapore even if there is no PE in Singapore.
The determination of the geographical source of income is a question of fact. To this end, the IRAS has provided preliminary feedback to tax practitioners that where unplanned presence of employees in Singapore occur as a result of travel restrictions relating to Covid-19, in determining whether an income is sourced in Singapore by the company, it is prepared to give due consideration to factors such as reasons for employees being in Singapore, whether such presence is unplanned, as well as the type and extent of the employees’ activities in Singapore.
- Would the Singaporean be taxed in Singapore on his employment income?
Under Singapore’s domestic laws, income attributable to the employment days in Singapore would be regarded to be sourced in Singapore and subject to tax for a tax resident employee, unless the employee qualifies for tax exemption under a tax treaty or elects to be a nonresident and claims an exemption under the 60-day exemption rule.
The IRAS has provided guidance that where a Singaporean posted overseas to work for an overseas employer is trapped in Singapore due to travel restrictions, it would not be considered as employment days in Singapore for the period from the date of return to Singapore until September 30, 2020 (this date is subject to review as the Covid-19 situation evolves). In such circumstances, the individual’s employment income for the period of his extended stay in Singapore will not be taxable in Singapore.
Scenario III—Virtual Board Meetings
A Singapore company typically holds its board of directors’ meetings physically in Singapore. Due to the Covid-19 travel restrictions, the directors are unable to convene in Singapore and instead conduct their board meetings remotely via video conferences.
- What is the implication on corporate tax residency since Singapore uses a “control and management” test to determine tax residency?
The IRAS has clarified that it is prepared to consider a company as tax resident in Singapore even if it is unable to hold its physical board meetings in Singapore due to travel restrictions. This is provided that certain conditions are met, including that the company was a Singapore tax resident for the previous year.
Despite the administrative concession, the board composition and sustainability of such arrangement need to be further reviewed, especially if the majority of the board members are currently nonresidents of Singapore. With anti-treaty abuse provisions, the ability of the Singapore company claiming treaty benefits will be put into question where it does not have physical substance and there is no commercial reason for setting up the company in Singapore.
For taxpayers who also operate outside of Singapore, it is worth noting that tax authorities in several countries (e.g. Australia, Ireland and the U.K.) have also provided guidance or are engaging in discussions with taxpayers to mitigate potential controversy in these areas. Generally, tax authorities have demonstrated some willingness to provide flexibility to minimize the potential tax burdens of taxpayers during this crisis. This is greatly welcomed as it provides some assurance to taxpayers that they may not be penalized on the tax front due to global matters beyond their control.
Most of the guidance discussed above is premised on the assumption that the Covid-19 situation is extraordinary and temporary in nature. If the pandemic unfolds into a prolonged crisis, the situation that we see today will become the “norm” rather than the exception. In that case, this assumption may need to be reconsidered and the ensuing tax implications re-evaluated. Engaging with tax authorities on an enterprise’s (or individual’s) specific circumstances may also be a form of recourse where general guidance is insufficient.
For businesses, the immediate next steps are to continue to monitor the evolving Covid-19 situation as well as global policy developments and integrate tax in their crisis responses. Businesses should also take stock of the pressure points fleshed out by the pandemic and identify opportunities for restructuring to ensure that their tax strategies are aligned with their post-crisis business strategies over the longer term.
Chester Wee is the EY Asean International Tax Services Leader and Partner, Panneer Selvam is the People Advisory Services—Mobility Partner and Yeo Kai Eng is EY Asean Indirect Tax Leader and Partner at Ernst & Young Solutions LLP.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.