'Substance' – A Singapore's Perspective

One of the principles underpinning the OECD Base Erosion and Profit Shifting (“BEPS”) project is the concept of “substance”. Taxation is to be aligned with substance so that profits are being taxed in the location where value is created. However, what constitutes “substance” has not been clearly defined. This paper seeks to examine the concept of substance as applied in different contexts and attempts to put forth a notion of substance that is relevant to Singapore. Having examined the subject matter, the authors are of the view that it is no longer sufficient to have “substance” as a vague guiding principle or a simple threshold test. In view of the recent development in international tax rules, the concept of substance requires a measure of economic realities in order to resolve international tax issues by some norm justified by some concept of proportionality. Such an analysis would necessarily be a multi-faceted and subjective one. In this sense, it is doubtful whether there will ever be a consensus internationally on what constitutes substance or an acceptable level of substance, and the implementation of this principle would not be void of conflicts.