Think of COVID-19 what you will, there is no doubt that the reactions to it by various governments around the world are going to have massive, possibly unprecedented, economic implications in due course; and if you believe that these same governments are not going to be out hunting for tax revenues when it is over – or even beforehand, good luck with that.
How the global economy will play out however, is for fortune tellers to foretell and minstrels to recount. But the “lockdown” itself brings immediate tax challenges to businesses in Singapore and elsewhere. It also raises some interesting questions about the fitness for purpose of current (and long-held) internationally accepted tax principles in this new age of technology, as it begins to dawn on us that there is actually a lot you can do from anywhere. Some of these principles may be well past their sell-by date.
This article looks at some of the immediate tax issues thrown up for companies and individuals, and throws down some food for thought on traditional tax concepts that are now being put under the microscope.
As you will be aware, the imposition of self-isolation and lockdown law has caused the music to stop in the game of musical chairs of international trade. Some people will have been trapped abroad; but far more likely, many will have been trapped at home.
So why is this important in a tax context? Well, from the point of view of a company, the answer comes in three words, but two concepts: Tax Residence, and Permanent Establishment (PE). Both of these concepts have a bearing on where the company may be taxed. From the point of view of an individual, there may be personal tax implications, not to mention immigration complexities (which we won’t cover in this article).
Singapore’s stop-gap measures
In the current crisis, a number of countries have introduced “stop-gap” measures for dealing with hopefully, the temporary situation. Some may be complementary with each other, some may clash. However, Singapore has introduced its own measures which we discuss briefly below. On the face of it, the measures seem pragmatic. They acknowledge that “permanence” cannot be implied when the intention was plainly temporary or involuntary. But a closer look suggests they are not that dramatic in the context of the normal rules. The measures cover companies and individuals. Obviously, Singapore has no control over how other countries may approach these issues when the shoe is on the other foot.
Implications for “accepted” norms of taxing businesses with international operations
As noted above, all countries are given the right to tax value-add activities that are conducted within their borders. Sometimes, under domestic law, they will give themselves the ability to tax even a one-day visit. Fortunately, tax treaties have stepped in to prevent a complete administrative bloodbath, by requiring a presence to have a degree of permanence or regularity before a business becomes ensnared in the tax administration of another country; and few will dispute that this is an acceptable approach. It may have some rough edges in practice (such as defining more precisely when a PE is “tripped”); but it is generally acceptable nonetheless.
Where the right to impose tax becomes increasingly murky however, is in relation to tax residence. Not only is the question of residence elusive at the best of times, but the current global confusion, which has spurred the inevitable reach for (and in many cases acceptance of) technology, has shown it to be largely a concept of vanishing significance.
These remarkable times are now (or should be) causing us to re-examine some fundamental concepts that were formulated when steamships and wax seals were the norm. It may now be time to consider addressing the following innocent questions:
- Where is a company actually tax resident?
- Why should tax be imposed by reference to residence rather than source as it is in most countries? It is after all the crossover between the two that gives rise to double taxation and the fundamental need for tax treaties in the first place.
- What if, as a matter of incontrovertible fact, a company does not have any real control centre, and it actually is spread across the globe? Is the company resident nowhere? Or everywhere?
There do not seem to be any convincing answers - other than self-perpetuated tradition, and the fact that there is no compelling motive for most tax-revenue-thirsty jurisdictions whose systems are based on worldwide taxation to change the status quo. With COVID-19 pressing pause on the record player, tax revenues are expected to fall. On the other side of the equation, governments have increased spending to keep businesses dancing. Will governments take this brief moment to consider addressing these questions?
There are more challenges ahead, undoubtedly. The Chinese word for crisis, we are repeatedly and possibly incorrectly told, means both danger and opportunity. Nevertheless, this crisis presents an opportunity to grab the nettle and re-examine some fundamental tax issues, and make sure we do not waste this unanticipated time for reflection. “Because that is the way it has always been done” is not an acceptable answer.