Managing Associate Nicola Simmons recently chaired a discussion on the rapidly changing cross-border tax regulatory landscape for technology businesses and the opportunities for investment in emerging markets.
The panellists involved were Partners Kassim Meghjee and Gary Richards, Head of MDRxTECH Tom Grogan, and Singapore-based Managing Associates Stephanie Pierce and Vincent Sim.
Topics of discussion included the key commercial and strategic considerations relevant to software technology businesses, the investment opportunities for FinTech businesses and crypto assets in Asia, the legal issues connected with cross-border income flows and tax treaties, tech targeted taxes and reporting, and extracting profits under the remittance basis and double tax treaties.
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What to consider when launching a tech product
Our MDRxTECH offering allows us and our in-house software developers. Product people and data scientists to assist clients in designing, building and developing technology solutions.
Generally we look at three things when building tech products:
- First, product market fit – to serve the right customer with the right product at the right time. Venture capitalists like Andreesen tend to agree that the best way of knowing what users want is to ask them, over and over and over again. We have lots of approaches and methodologies to shape these conversations.
- Secondly, the extent to which our stakeholders (including the business' owners, employees, investors and market) prioritise the familiarity and/or credibility of the legal jurisdiction in which the business is incorporated. The UK and Singapore are both highly credible in this regard.
- Finally, the legal, regulatory and tax position - that is to say, how easy and efficient is it to do business in a given jurisdiction.
In determining the location of the business, we consider:
- Data transfer and/or localisation rules – i.e. to what extent (if at all) can data be processed and stored into or outside of national or regional boundaries. There are actually surprisingly few date centres.
- Geopolitics and potential instability.
- Individual technologies - jurisdictions are always jostling to be "the" jurisdiction for the latest innovation or technology, with mixed success. Blockchain and crypto projects often look at Gibraltar in Europe for example, which has created its own purpose built regulatory framework. The UK has done a lot of work to try and ensure it remains an international centre for data science and AI excellence.
Only about 20% of our clients are in the UK. We currently have live projects in North America, Europe and Africa and have worked extensively across the Middle and Far East. The technology is jurisdiction neutral - code is code.
Singapore as a fintech and crypto hub
Singapore is a naturally entrepreneurial environment that likes to be on the cutting edge as much as possible. It is a key hub for financial investment in the region and indeed in the world due to its geography, its highly educated work force, and the proliferation of high-quality professional services. As well as encouraging innovation it also has a reputation as a safe and regulated environment in which to do business, which may likely be why it features so heavily in conversations in this sphere.
There is a great deal of government support for Fintech – there are many initiatives led by the Monetary Authority of Singapore (MAS) to support fintech and innovation. Singapore as a society is very open to fintech and innovation in that sphere. The government has also invested heavily in what they call 'Smart Nation' initiatives that seek to digitalize government and public services. That technology has started to permeate daily life and Covid-19 has partly accelerated this.
Interest in crypto in Singapore is also growing. DBS is the largest bank in Singapore, and launched its own crypto trading platform in December 2020 (DBS Digital Exchange) and its first Security Token Offering thereon in 2021.
The extent of regulation in Singapore depends on the specific financial service being provided. When it comes to crypto assets, we will need to examine the rights attached to the crypto asset to determine if it is a capital markets product – in which case then it is likely that the existing regulatory framework of the Securities and Futures Act would apply. Conversely, if the fintech offering is a payment service (such as e-wallets like Alipay), the Payment Services Act would likely apply (and this Act also regulates crypto activities if they constitute digital payment token services, such as operating a crypto exchange) alongside the Financial Advisers Act.
Singapore's tax regime is generally friendly towards foreign investment, as Singapore has a territorial system of income taxation – which means that income is subject to income tax if it is either sourced in Singapore or sourced outside, but received in, Singapore. The corporate tax rate is a relatively low 17% and there is no withholding tax on dividends paid by Singapore companies. There is also no capital gains tax, but depending on the facts of each case, there may be a risk that gains from a disposal of an asset may be taxed as trading income if the taxpayer's activities look to be trading in nature.
For larger and more established businesses, Singapore also has a range of tax incentives that may be available to reduce the rate of income tax or exempt income from tax. Singapore also offers tax incentives for funds that are managed by fund managers in Singapore, which exempt certain "specified income" from "designated investments" from Singapore income tax. Crypto assets have not been designated as "designated investments" for the purpose of these incentives and so currently funds which trade crypto assets may have some Singapore income tax exposure in this regard. However, as crypto assets become more mainstream as an asset class, the Monetary Authority of Singapore is likely to include crypto assets as "designated investments" in the near future.
UK corporate tax on fintech and crypto businesses
The location of the business' headquarters, and customers' offices/businesses will affect where the business is located and hence how it is taxed – both in terms of allocation of profits, corporation tax, tax deductibility of cross-border payments and also VAT (particularly as regards royalty payments there's the question of withholding tax and double tax treaties).
Double tax treaties (or the lack thereof) can completely remove profitability if wrongly handled.
For internationally mobile tech companies (and their customers), it is not always clear which jurisdiction should be owed what tax. One way countries can fight back is to impose a withholding tax on cross-border payments – for example, where a customer to a tech business supplier deducts from its service payment a certain amount of tax that is to be paid straight to theirs or the supplier's tax jurisdiction. An applicable double tax treaty might remove the withholding tax or reduce the rate – which can often start at 30% - provided the reliefs are duly claimed.
There has been a lot of discussion in the recent few years about taxing tech companies differently. For example, the UK introduced Diverted Profits Tax to encourage other countries to agree that the international tax rules needed to change. Then other countries (including France and again, the UK) introduced a Digital Services Taxes aimed largely at platform companies. These taxes applied based on turnover rather than profit. It is possible that agreement will be reached among OECD countries to impose a minimum rate of tax, and any cross-border transactions may require one country to top up the tax.
Personal tax for investors in fintech and crypto business
The usual methods of profit extraction for investors will come in the form of dividends, sales, salaries (where the investor is also a director or employee) and in some cases, loans. What makes a crypto investor's option for profit extraction a little more interesting is the option to acquire crypto assets themselves.
An individual investor's tax liability on such profits will depend on their tax residence(s), the tax residence(s) of business, the type of profit extracted and their relationship to the company. Where there is a UK and non-UK aspect, one would also look at the relevant double tax treaties (if any), as they can dictate which jurisdiction has primary taxing rights over which profits, and how the relevant tax is applied.
At a very high level, an investor receiving dividends from the fintech company, and a director selling crypto-assets acquired in the course of their employment will usually be subject to income tax on the profit earned (unless certain tax planning steps were made in preparation of the issue). In the UK, income tax is levied at up to 45%. Employees and directors selling such assets will also need to consider national insurance contributions. Conversely, independent investors selling business interests or crypto assets should be subject to capital gains tax on profits, which is charged at lower rates – likely maximum 20% and possibly 10% if certain reliefs apply.
The position can be flexible in the fintech space especially, as fintech entrepreneurs/investors often have the advantage of being internationally mobile, and so the tax position and residence would be subject to change as the company grows and expands internationally.
To build and launch a tech business, entrepreneurs will need to consider their market, their users and their product. When deciding where to locate the business or corporate structure, a further factor will be location and contributions of local staff. The chosen location of the business will then dictate how to structure the company or group, and those factors in unison will affect where and how the company and its investors are taxed. More and more the UK and Singapore are viewed as viable locations for such ventures.
If you would like further information on any of the issues above, please contact one of our speakers.