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Mishcon Academy: Digital Sessions – Tax Aware: International Tech Businesses

Posted on 5 October 2021

Nicola Simmons

Good morning, let me introduce myself, my name is Nicola Simmons, I'm a Managing Associate here in the Tax and Wealth Planning Team at Mishcon.  So today we are, as you hopefully know, are discussing the rapidly changing cross-border tax and regulatory landscape, the technology businesses and the opportunities for investment in emerging markets such as Asia.  To do that discussion I am joined by my colleagues, Tom Grogan, who is Head of MDRxTech from our London office.  We've got Stephanie Lim Pierce and Vincent Sim who are both Managing Associates in the Tax Market Planning Team in our lovely new Singapore office.  We've got Gary Richards, a Partner in our Corporate Tax Team in London and lastly but not leastly we have Kassim Meghjee, a Partner in the Taxi Market Planning Team again here in London.  We will start today with Tom, what sort of things do your clients typically think about when considering where to build and launch their tech products?

Tom Grogan

Generally we look at three things together with our clients building tech products.  So the first thing we, we tend to look at and absolutely the main thing we're focused on when designing and building products is product market fit.  Now product market fit is sort of this nirvana state, for early stage businesses.  It's this sort of pivotal stage in the life of the start-up in which it's begun to serve the right customer, with the right products, at the right time.  Andreessen Horowitz who is, is this fabled venture capitalist, he was a computer scientist, invented one of the early internet browsers, described product market fit as being in a good market with a product that can satisfy the market and we've got all sorts of frameworks and methodologies that we can use to identify and analyse what a good market is.  That is to say a large nuber of potential users, high growth in the, in the, the number of potential users and an accessible and achievable route to user acquisition.  Once we've settled that it is a good market, all the attention goes to designing a product that can satisfy it and Andreessen again is super militant in his approach to this. He says, and I quote ‘do whatever is required to get product market fit including changing people, rewriting your product, moving to a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly diluted venture capital, whatever is required’, as you can see he, he thinks it's really important and who am I to argue with Andreessen Horowitz.

Nicola Simmons

We'll now go from commercial issues to the cross border so starting with Stephanie Lim Pierce, what is it about Singapore that attracts Fintech and crypto investors in particular?

Stephanie Lim Pierce

Thanks Nicola. So Singapore is a naturally entrepreneurial environment that likes to be on the cutting edge as much as possible. It's a key hub for financial investment in the region and indeed in the world.  Singapore as a society is very open to Fintech and innovation in that sphere so one example is, when you go to pay for something aside from cash, credit cards and apps like apple pay there are all manner of other, perhaps you can pay with like Pay Now which is a Government-led initiative and Grab Pay which I haven't really seen outside of Asia.  The Government has also invested heavily in, in what they call Smart Nation Initiatives which seek to digitalise Government and Public Services.  So you can see that technology has started to permeate daily life and Covid-19 has in a way accelerated this as it has everywhere.  Interestingly crypto in Singapore is also growing so DBS is the largest bank in Singapore and it launched its own crypto trade platform last December called ‘DBS Digital Exchange’ and it's also since launched its first security token offering on its crypto exchange this year and DBS themselves have said that this bond token structure was only made possible because of the progressive development of Singapore's legal and tax infrastructure which can facilitate more STO issuances.  We can see that Singapore's strategy is to promote innovation in the Fintech space through providing a regulatory framework with clear boundaries and rules so that consumers and investors are adequately safeguarded and this has created an ecosystem that has attracted many participants in the Fintech and crypto space.

Nicola Simmons

Thank you very much Stephanie, that's helpful.  Over now to Vincent Sim. so please could you just tell us a bit more about what the regulatory landscape actually looks like for Fintech and crypto businesses in Singapore?

Vincent Sim

There are two key questions that we need to consider; first, what is the underlying subject that the financial service involves.  So if we are dealing with traditional capital markets products such as securities like shares or debentures then it is likely that we will be subject to regulation under the existing framework of the Securities and Futures Act in Singapore but when it comes to crypto assets we will first need to examine the rights that are attached to the crypto asset in question and this is to determine if it is a capital markets product like a share or debenture or if just crypto like a utility token.  So for example,  if the crypto asset confers or represents ownership in a company or if it evidences a debt that is owing by the issuer to the holder then it looks more like a share or a debenture in that regard.  Moving on to the second question we have to ask ourselves it is, what is the activity that we will be conducting?  Are we providing payment services or some other type of financial service and in the payment space I would say Singapore has kept pace with developments in Fintech.  So in 2019 Singapore enacted the Payment Services Act which regulates payment activities such as the issuance and operation of e-wallets like Alipay and also non-bank credit card products like Revolut.  It also regulates money transfer services like Paypal, merchant acquisition services like Visa and Mastercard and also the issuance of e-money and more importantly the Payment Services Act also regulates crypto services so this is quite ground breaking in the world And so where the services constitute digital payment token services such as operating a crypto exchange or otherwise facilitating the purchase or sale of digital tokens this will fall within the scope of regulation under the Payment Services Act as well.

Nicola Simmons

Is Singapore's tax regime, for want of better word, friendly towards investment in Fintech and crypto?

Vincent Sim

I would say Singapore's tax regime is generally friendly towards all kinds of foreign investment.  That's because Singapore has a territorial system of income taxation and that means that income is subject to income tax if it is either sourced in Singapore or sourced outside Singapore but received in Singapore and the corporate tax rate is also relatively low 17 percent and there is no withholding tax on dividends paid by Singapore companies and there is also no capital gains tax in Singapore.  For larger and more established businesses that are looking to expand into Singapore, Singapore also has a range of tax incentives that may be available and these provide either a reduced rate of income tax or an exemption from income tax.  But as crypto assets become more and more mainstream as an asset class the Monetary Authority of Singapore is likely to include crypto assets as designated investments in the near future.

Nicola Simmons

So we've now mentioned the ’T’ word, tax.  Gary what are the corporate tax issues that a tech business needs to consider as they expand cross border?

Gary Richards

I think the issue they've always got is the team is often based in a particular jurisdiction, they'll find their customers are in a different country and that's going to bring you on to the have you established what's known as a permanent establishment enough of a presence in the customer's territory to make you taxable there even though you're based in your home jurisdiction.  You can also have VAT implications, are you now providing services in the customers territory that you yourself have to be registered for VAT.  It's all about you may bring yourself into another tax regime as well as the one you know about, the one your home country and how do those two jurisdictions link together or not that's part of the problem with tax sometimes.

Nicola Simmons

Exactly, so as Tom said it's location, location, location.  Why would a double tax treaty matter to investors in a Fintech business?

Gary Richards

Withholding taxes are a beautiful weapon if you're a tax authority because what they do is they say ‘ah customer is paying something across border’ can I impose a tax that the customer has to collect before it gets back to a software provider.  Double tax treaties are a sense a shield from that.  If you qualify for the withholding tax in the first place, not all payments across border do qualify but you know, quite a few can be and they're often in the royalty space which is obviously relevant to high-tech businesses and one thing it will do is have procedures which you need to jump through before – keyword - before you make the first payment because otherwise the tax will be collected, have to be collected by the payer and then the recipient business will have to try and get the money back from the territory.  Back to my economics point, if you have, have withholding taxes you really need to make sure that you can manage them away.  Now a double tax treaty is not just about withholding taxes, they are also about if you are paying tax on your business profits in one country because that's where the customer is based, you get a credit for that in your home jurisdiction so you don't pay tax on the, the profits twice.  So they are a really key point, the fact that it's a tech business, it's often they're more cross-border flows but actually these are if you like something's been in the tax armoury, we just need to apply in a new situation.

Nicola Simmons

We are going to turn to Kassim Meghjee , how would an investor typically extract profits from an investment in a Fintech business?

Kassim Meghjee

Thanks Nicola.  It’s like any business, your usual method of profit extraction for investors will come in the form of dividends, sale of shares, salaries where the investor is also a director and employee and in certain narrow instances, loans.  What makes crypto investors different here is the option for profit extraction where the crypto assets themselves can be given to the investors of the employee or the employees or the directors.  So similar to share options the businesses might incentivize their employees by allowing them to have a right to receive the crypto assets themselves or a right to buy at a discount the crypto assets which the, the actual business is itself involved in.  Where that incentive is offered the difference between crypto assets and the shares is perhaps felt most when the employee or the investor decides to exit from it and the distinction being the shares can be cancelled but crypto assets usually cannot.  Careful consideration needs to be given to what happens when someone who has been given those assets in a in a work environment and where, where they have got an employee or officer relationship, what are the consequences when they leave.

Nicola Simmons

So once, once they have that onto the subject of tax, how would a typical Fintech investor be taxed on that profit in the UK?

Kassim Meghjee

So that depends on the tax residency of the company itself, the tax residency of the individuals as well and the type of profit to be extracted.  So where there is a UK and a non-UK aspect, for example, as you say the UK investor owning shares in a Fintech company and for current example, say in Singapore, you would look at double tax treaty and the treaties will dictate the jurisdiction which is the primary taxing right.  The investor receiving dividends from a Fintech company or a director selling crypto assets acquired in the course of their employment will usually be subject to income tax on the profits and the high, highest rate of that is 45 percent and so, so that's the normal way when someone is who's connected will, will, will be taxed at.  If they are not connected, they are just investors then they will pay capital gains tax usually at the rate that applies to them directly.

Nicola Simmons

Well that's, that's everything from all of our speakers.  We will now be turning to questions from the audience.  Great, okay so we've got one for Tom how do you balance the tension between building something quickly and building the perfect tech product?

Tom Grogan

It's interesting that… I'm not sure it's necessarily a tension because I think by necessity you need to do both.  So we focus on building something as early as possible, as quick as possible and then once we've got that thinnest possible layer through a product we test it with users and we ask them over and over and over again how can we tweak it and it's only by putting something in front of them that were able to perfect it.  That is the nature of sort of agile builds which is just constant tight loops of iteration and improvement.

Nicola Simmons

Thank you very much Tom.  So we've got a question for Stephanie now you mentioned that Singapore's biggest bank DBS has created its own crypto platform.  Do you think other banks in Singapore will follow the lead?

Stephanie Lim Pierce

Definitely so, so DBS’s largest controlling shareholder is, is to Mastech Holdings which is Singapore's sovereign wealth fund so DBS was in a very good position to work through that regulatory framework to start its own crypto trading platform.  But now that this has been tried and tested we certainly do expect more banks to follow suit in Singapore.

Nicola Simmons

So that's the end of our questions so that brings us to our close for today's session.  So thank you very much to the audience for joining us today and for our speakers for their insight and their practical advice.  See many of you are future events for digital sessions and so that's everything thank you again and have a good day.

The Mishcon Academy Digital Sessions to access advice for businesses that is regularly updated please visit mishcon.com


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