An Advance Pricing Arrangement (APA) is an ahead-of-time agreement between a taxpayer and a tax authority on an appropriate transfer pricing methodology (TPM) for a set of transactions at issue over a fixed period of time.
The APA programme has been a part of the Singapore transfer pricing regulations for several years now. However, the APA programme has, so far, not been as widely preferred by Singapore taxpayers as by taxpayers in other jurisdictions which have a similar programme in place – the USA, Japan, Korea, India etc.
Until the recent past, Singapore taxpayers/ MNCs that had Singapore operations did not find a need to seek APAs, as taxpayers historically retained significant operating profits within Singapore, leading to a return of healthy year-on-year margins. Singapore’s lower tax rates, coupled with a robust tax incentive regime meant MNCs would typically endeavour to leave as much profit as they could in Singapore, and so enjoy a lower effective tax rate for their Group. Because of this, transfer pricing audits in Singapore were relatively uncommon. This provided reasonable comfort to Singapore-based operations on their transfer pricing positions.
This has been changing over the past few years. MNCs are looking at realigning their profitability positions on account of some of the following:
- A reduction in corporate tax rates and the introduction of tax holidays or tax incentive schemes by other countries. This often prompts MNCs to try to optimize their profits by shifting them to these jurisdictions.
- Significant transfer pricing litigation in aggressive jurisdictions (Japan, Korea, India), leading to MNCs being bullied into attributing greater profits there (at the expense of Singapore) to mitigate their risks, and to “buy” peace.
This realignment of profitability positions (using transfer pricing techniques) would potentially lead to an erosion of the tax base of Singapore. Probably with this in mind, as well as to endorse the global BEPS initiatives, the Singapore IRAS significantly expanded the scope of its transfer pricing regulations through a set of transfer pricing guidelines issued in 2018. Some of the significant aspects introduced within these guidelines include:
- Maintenance of contemporaneous documentation to substantiate transfer pricing arrangements.
- Clarification of the powers of the IRAS to disregard the form of a particular transaction where found inconsistent with the substance.
- Levy of penalties in cases of transfer pricing adjustments, as well as where transfer pricing documentation is not properly maintained.
The contemporaneous documentation requirement, coupled with the authority provided to the IRAS for disregarding transactions and consequential levying penalties could lead to significant transfer pricing disputes in Singapore. Considering this, the APA option would ideally provide taxpayers with a viable option for mitigating potential transfer pricing risks.
The APA is an extremely progressive mechanism available to taxpayers to get certainty on their transfer pricing arrangements over a long-term period. The process and approach taken in Singapore are consistent with international standards, making it easy to implement and conclude with countries with whom Singapore has a DTA.
In view of the tightening of transfer pricing regulations in Singapore and the need for maintenance of contemporaneous documentation, it is likely that transfer pricing audits are just around the corner. In such a scenario, it is prudent for taxpayers to review their present pricing arrangements with a view to gauging potential risks in these areas. Based on this, the APA route could be considered especially where transactional values are relatively significant.
 Base Erosion and Profit Shifting
 Inland Revenue Authority of Singapore
 Double Taxation Agreements