Impact of US tax reform on Singapore business

The SMU-TA Centre for Excellence in Taxation (SMU-TA CET) was set up by Singapore Management University and the Tax Academy of Singapore, to undertake tax research with a focus on international taxation. More importantly, they host regular technical talks both to disseminate research and stimulate further discussion on important tax matters.

On March 28th, SMU – TA CET’s Dr Dong Yue gave a technical tax entitled – “Tax Reform Implications for US Business and Foreign Investments – the Singapore Perspective. But why is this topic important? Well, I will allow 3 sets of numbers prove the importance of this topic –

1. In 2017, Singapore was the US’ 13th largest good export market whilst the US was Singapore’s third largest trading partner
2. Singapore’s direct investment into the US amounts to $29.31b
3. US Companies account for more than 20% of all foreign direct investment into Singapore – $339.27b in 2017

On Friday, December 22, 2017, President Donald Trump signed the massive tax bill. Formerly known as the Tax Cuts and Jobs Act – so-named because it cuts individual, corporate and estate tax rates, and the lower corporate tax rates are said to be a precursor to job creation – the bill went into history as “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018,” courtesy of a technicality enforced by the Senate parliamentarian. It is the biggest change in the US tax rules since the 1986 reform under then President Reagan. The final bill is more than 500 pages and the ultimate effect remains to be seen.

Much has been written elsewhere on the impact of recent tax reforms on the big Multinational Companies (MNCs). Particularly the new Base Erosion and Anti Abuse Tax rules or BEAT. But these changes impact MNCs with more than US$500m in gross revenue. Amongst the positive aspects of the SMU – TA CET seminar was the time given to the tax impact on SMEs as well.

Many forget that SMEs make up 99% of Singaporean companies and contribute 50% of the GDP. So it was a useful exercise to consider the impact of these reforms on the 99% and not just the 1%.

For SMEs owned by US exposed individuals? It has been a painful year or so since the new tax rules were passed. Equally impacted were the Singapore based SMEs owned by US citizens and US residents. There are many Singaporeans who are US residents (by virtue of having a green card) and they join those disappointed by these new rules. Why? Despite the headlines about a shift to territorial tax for Corporates, the reality in many cases, is the exact opposite. “Deemed distribution” rules for SMEs owned by individuals have hit many individuals hard.

Then there are Singaporean businesses whose owners have no US exposure (not US residents). The seminar touched very lightly on changes to US indirect tax rules in 2018. These rules are super important because through our practice we know that there are thousands of very entrepreneurial Singaporean businesses selling products online into the US market.

On June 21, 2018, the U.S. Supreme Court overturned decades of established law that required vendors to have a physical presence in a state before that state could require them to collect and remit sales tax (taxes similar to Singapore’s GST) on purchases by customers within the jurisdiction. The Court overturned its 1992 decision, Quill Corp. v. North Dakota, with its recent decision in South Dakota v. Wayfair, Inc., noting that "the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the Commerce Clause". Most agree that this is the most important development in the sales tax world in at least 25 years. In short, it means that many Singapore online businesses now need to file and pay US sales or use taxes despite the fact that their business is 100% only based in Singapore with no physical presence (no office and no employees) in the US at all!

Singapore based companies with any US exposure at all are urged to speak with their tax teams to ensure that they are being compliant with all these new rules.