Relocation is a factor that can drive M&A transactions. There may be many non-tax reasons for enterprises to relocate, but there will always be tax consequences to consider. In this article, we outline the possible tax traps and opportunities for this type of activity.
Main Tax Traps
The main tax issues in business restructurings, which can amount to traps if not fully taken into account in the planning stage, include the tax deductibility of finance costs, the loss of unutilised tax losses and tax depreciation against future profits and tax incentives. In addition, there are recent developments in public disclosures and mandatory reporting requirements such as DAC6, the exchange of information for tax purposes (EOI Standard), Foreign Account Tax Compliance Act (FATCA), Common Reporting Standards (CRS), Country by Country Reporting (CbCR) etc. Lastly, there may be new transfer pricing considerations and the operation of different tax treaties which could impact overall tax costs.
Relocation can lead to a simplification of the group structure and will require a re-examination of transfer pricing strategies and documentation. However, there may be other considerations depending on business activity. For example if the business is digitally or platform based consideration will need to be given to the impact of new digital economy taxes.
Where relocating, entities take advantage of tax exemptions and tax holidays. Care will need to be given to the application of controlled foreign company rules in holding company locations. In managing this risk, one will need to consider the commercial requirements of the group and build commercial substance in intermediate holding company locations.
Business location decisions should not be driven by tax, but consideration of tax matters can present opportunities in addition to risks.
Main tax opportunities
The main tax structuring opportunities are centred around tax incentives / additional tax deductions for specified activities or industries identified as being beneficial to Singapore’s economic development for eg. manufacturing of approved products with high technological content or providing qualifying services, regional headquarters, fund management, pioneer activities, shipping, treasury centre, R & D businesses, etc.
The trend to consider relocation created by these incentives has been accelerated as a result of “external” business considerations such as Brexit and COVID-19.
Furthermore, it could be relevant to consider the choice of the jurisdiction for relocation as to allay the concerns on tax issues such as the repatriation of profits. Tax treaties can impact the tax costs associated with the chosen method for repatriating profits: for example, dividends, related party loans, royalties, management fees. The potential application of the OECD’s multilateral instrument (MLI) on the operation of a tax treaty will also need to be considered. The MLI’s potential application of the principal purpose test (PPT) to prevent abuse of the use of a tax treaty, may need to be considered in addition to the application of beneficial ownership test. Treaty shopping is under scrutiny and even though the PPT has more limited impact in Europe than for other jurisdictions (due to EU law anti-abuse provisions), it should counteract location choices driven by tax considerations.
In addition to considering the business aspects of relocation options, it is important to consider the tax risks and opportunities. The changing tax landscape, coupled with other factors such as Brexit, COVID-19 and new more digitalised ways of working are encouraging companies to reconsider their existing business location and tax strategies and adapt them to optimise their commercial and tax position.