Transfer Pricing in Singapore: Penalties, Thresholds and Other New Requirements

Earlier this month, the Inland Revenue Authority of Singapore (IRAS) released revised transfer pricing guidelines, providing a better defined view of how the IRAS will handle transfer pricing matters.

IRAS has explicitly noted that the arm’s length principle should be applied on a transaction-by-transaction basis, which suggests that each transaction should be analyzed on a stand-alone basis

These guidelines call for taxpayers to prepare and maintain contemporary transfer pricing documentation. In addition, they specify thresholds for related-party transactions that need to be covered by pertinent transfer pricing documentation.

These guidelines consolidate the previous guidance that has been previously provided by IRAS. But there are several new concepts and positions that have been put forth that finance, tax and others in the company must know.

These include a focus on stand-alone analysis as opposed to aggregate analysis, guidance on economic analysis and benchmarking, introduction of a penalty regime, and negotiating a mutual agreement procedure.

Need for Transaction Specific Analysis

IRAS has explicitly noted that the arm’s length principle should be applied on a transaction-by-transaction basis, which suggests that each transaction (including those involving tangible or intangible property, services and intercompany financing) should be analyzed on a stand-alone basis.

This will increase the onus on the taxpayer to avoid analysis on an aggregate basis. IRAS’ intention of requiring transaction-specific analyses is also evident in the examples that IRAS has provided in the transfer pricing guidelines.

That said, IRAS promises to remain pragmatic. “Where individual transactions are highly inter-related and it can be demonstrated that independent parties in comparable circumstances would typically price the individual transactions on an aggregate basis, taxpayers may consider evaluating the transactions on an aggregate basis,” it says.

”IRAS welcomes taxpayers to discuss their concerns and difficulties in applying the arm’s length principle,” it adds. “IRAS believes that such consultation and cooperation between taxpayers and IRAS is a mutually beneficial and pragmatic way to assist taxpayers in complying with the arm’s length principle.”

Thresholds for Related Party Transactions

In order to reduce the compliance burden for Singapore taxpayers, IRAS provided thresholds for a range of related-party transactions. Taxpayers will have to review their related party transaction values to determine if they meet the thresholds.

Transactions that do not meet the threshold values have to be supported by way of transfer pricing documentation, consistent with the documentation requirements in the revised guidelines.

The thresholds in Singapore dollars for each category of related party transaction is generally S$15 million per financial year, including transactions for purchase of goods, sale of goods, and loans owed to and loans owed by all related parties.

For other categories such as service income, service payment, royalty income, royalty expense, rental income and rental expense, the threshold is set at a much lower S$1 million per financial year.

Aggregation should be done for each category of related-party transactions, IRAS makes clear. “For example, all service income received from related parties is to be aggregated.”

Preparation and Maintenance of Transfer Pricing Documentation

The revised transfer pricing guidelines requires Singapore taxpayers to maintain contemporaneous documentation on a going forward basis. In addition, the detailed information that is required to be maintained as part of the transfer pricing documentation consists of information at the entity level as well as the group level.

Additional information at the group level has also been requested by IRAS, including an overview of the group’s global business, overall transfer pricing policies, group lines of business, geographic markets and key competitors.

The requirement for contemporaneous documentation suggests an annual compliance exercise for Singapore taxpayers may be in the works

Guidance on Economic Analysis and Benchmarking

IRAS has provided much needed guidance on its position on benchmarking. Guidance includes the use of databases, treatment of public vs. private companies, as well as use of loss-making comparable companies to justify lower margins.

Such guidance will enable taxpayers to employ quantitative, objective screens to justify the selection of comparable companies in benchmarking studies.

Introduction of a Penalty Regime

There was no mention of penalties for lack or insufficiency of transfer pricing documentation under the 2006 Transfer Pricing Guidelines. The revised guidelines, however, note that if the taxpayer is not able to provide the transfer pricing documentation upon request, they can be penalized under the Income Tax Act.

Transfer Pricing Consultation Process

Additional guidance has been provided on the transfer pricing consultation process. IRAS will engage with taxpayers to review the adequacy and timeliness of transfer pricing documentation, as well as the arm’s length outcome of the taxpayers.

As a result of the transfer pricing consultation, it is possible that a tax adjustment may be proposed if the taxable profit arising from the related party transactions is found to be not consistent with the arm’s length standard.

Negotiating a Mutual Agreement Procedure

In these revised guidelines, IRAS has also provided guidance to taxpayers who are interested in negotiating a mutual agreement procedure (MAP) with IRAS.

IRAS has provided procedural guidance similar to negotiating an advanced pricing arrangement (APA). This includes guidance on timelines (such as notification of intent and pre-filing meetings), as well as the information that will be required (including updates on actions taken by related parties and relevant foreign competent authorities, detailed descriptions of the covered transactions, and transfer pricing methodology and analysis).

Transfer Pricing Adjustments

The IRAS has provided detailed guidance on adjustments that are related to transfer pricing and conditions under which these adjustments will either be accepted or rejected by IRAS.

The adjustments covered by IRAS are classified as year-end adjustments arising from year-end closing, compensating adjustments, self-initiated retrospective adjustments, and tax authority initiated corresponding adjustments.

For more information, the revised guidelines can be downloaded from the IRAS website by clicking here.

About the Author

Dezan Shira & Associates is a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity  and conciseness. For further details or to contact the firm, please visit www.dezshira.com

Photo credit: Shutterstock

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