Understanding ‘substance’ and what it means for your company

Whether you are a multinational company with many offices dotted around Asia, or a smaller structure, the term ‘substance’ could be a lot more important than you think. While Substance is a well-known tax concept, it is rarely if ever included in international agreements and treaties. However, since the Organisation for Economic Co-operation and Development’s (OECD) recommendations to the G20 on Base Erosion and Profit Shifting (BEPS), the importance of substance has increased.

Simply put, substance is the extent to which a company or organisation has operational and economic activity in a country. For example, if the company has an office, transactions, employees and other infrastructure then it is deemed to have substance. Under the BEPS framework, if an organisation does not meet a country’s standards when it comes to substance, then they could face a higher tax burden, loss of tax treaty benefits, denial of local tax residency and other penalties.

There are numerous ways in which a company can demonstrate that it has substance. For example, having an office and employees who have basic decision-making powers. Without these basic structures in place tax authorities may conclude that the company lacks economic substance.

The end goal of BEPS is to prevent the granting of double tax treaty benefits, essentially allowing companies to establish a presence in two countries for the expressed purpose of benefitting from both tax regimes.

BEPS is a recent regulation and Singapore and other Asian countries support the BEPS principle that profits should be taxed where substantive economic activities generating the profits are performed and where value is created. It is therefore important that companies understand the new rules and ensure they are able to comply fully.

If companies run afoul of the regulations they could expose themselves to significant monetary penalties. It is therefore highly advisable that business leaders consult an expert on this area, for more information please connect with Alpadis Group via: https://www.alpadis-group.com/contact-us/