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Transfer Pricing

Advance Pricing Arrangement – An effective dispute resolution measure?

Munjal Almoula

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[1] initiatives, the Singapore IRAS[2] 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 process

The APA process prescribed in the Singapore transfer pricing guidelines is largely in line with internationally adopted procedures. It includes a four-step approach:

Pre-filing meeting

The pre-filing meeting is a mandatory step to be adopted by taxpayers seeking to file an APA application (applies for unilateral/ bi-lateral or multilateral cases).  The process involves a meeting between the taxpayer and the IRAS for:

  • the taxpayer to explain its APA request and update IRAS on its meetings with the relevant foreign Competent Authorities (in case of bilateral / multilateral APA);
  • the IRAS to ascertain the merits of the APA request before the taxpayer undertakes further work on the APA application;
  • the IRAS and the taxpayer to identify critical and relevant areas of focus and areas where additional information, documentation and analysis are required; and
  • the IRAS to ascertain the taxpayer’s TP documentation

The taxpayer is required to submit some basic information as regards the APA sought during the pre-filing meeting including organisational details, the coverage of the transactions, the functionalities of the transacting parties, the benchmarking analysis conducted in support of the APA sought by it, etc.

Based on the discussions and documents filed, the IRAS will communicate, through written correspondence, its acceptance to proceed with the APA.

Filing the APA application

After the communication of acceptance by the IRAS, the taxpayer needs to prepare and file the APA application with the IRAS.  Whilst the Singapore transfer pricing regulations do not prescribe a format for the application, the contents of the application should, inter-alia, include a detailed write-up on the MNC organisation’s business, and provide operational details of the transacting parties, details of the transactions for which the APA is proposed, an economic analysis and financial projections for the transactions proposed under the APA, etc. In the case of a bilateral APA, the applications need to be filed simultaneously in Singapore and in the overseas jurisdiction.

Review and negotiations

Once the APA application has been accepted, it will be reviewed by the IRAS to form an opinion on the acceptability or otherwise of the analysis conducted and the positions sought by the taxpayer in the APA application.  This could involve seeking further functional and factual data by the IRAS from the applicant, or a requirement for an iterative economic analysis.  Based on this, the IRAS would undertake a negotiation on the APA positions with the Competent Authority of the overseas jurisdiction (in the case of a bi-lateral/multilateral APA) or with the taxpayer in the case of unilateral APA.  Importantly, this also involves a site visit to the taxpayer’s premises to confirm the operational details articulated in the application.  The end result of the negotiation process is to arrive at a mutually acceptable resolution between the IRAS and the Competent Authority of the overseas jurisdiction (in a bilateral or multilateral APA) or between the IRAS and the taxpayer (in a unilateral APA).


Once there is consensus between the parties, the IRAS will issue the APA agreement to the taxpayer (in the case of a unilateral APA).  In the case of bilateral or multilateral APAs, there will be an exchange of correspondence between the IRAS and Competent Authorities (on the positions agreed), after which the APA agreement will be issued by the IRAS and the overseas Competent Authority to their respective jurisdictional taxpayers. Apart from articulating the agreed transfer pricing arrangement, the APA will also provide compliance guidelines to be adhered to by the taxpayer.  Adherence to the compliance guidelines enables the taxpayer to avoid facing a transfer pricing audit during the period covered by the APA.

Benefits of the APA

The APA programme has been extremely successful in some of the overseas jurisdictions, especially in jurisdictions where tax authorities conduct frequent transfer pricing audits or where there has been a history of transfer pricing adjustments leading to protracted litigation.  APAs have been shown to provide a proactive alternative dispute resolution mechanism which avoids material cost and time investments for taxpayers. APAs allow taxpayers to resolve their transfer pricing matters judiciously in a more conducive environment.  Some of the key benefits of the APA programme include:


Transfer Pricing is an in-exact science or rather an art. There does not exist a strait-jacket formula to arrive at the arm’s length price. The determination of the arm’s length price involves complex analysis based on an individual’s interpretation of the functionalities of an organisation, coupled with reliance on publicly available data which often may not reflect relationships that subsist amongst related parties.   Differences in interpretation between the taxpayer and tax authorities could lead to significant transfer pricing adjustments for taxpayers. 

The APA programme allows taxpayers to proactively discuss and agree their transfer pricing arrangements upfront and provides certainty to taxpayers, hence mitigating the risk of future transfer pricing adjustments.  Such certainty is provided over several years.

Avoid economic double taxation

Where one of the MNC group entities suffers an adjustment in relation to its transfer pricing arrangements, the MNC Group will suffer economic double taxation unless a corresponding adjustment is allowed in the jurisdiction of the other transacting entity.  Bilateral and multilateral APAs ensure that any transfer pricing arrangement is pre-approved across all locations in which it has an impact. This mitigate economic double taxation.

Cost and time saving

The APA process usually takes around 1-3 years to conclude.  Once concluded, taxpayers are not required to maintain fully-fledged transfer pricing documentation for the period covered by the APA.  Further, taxpayers avoid undergoing transfer pricing audits and the consequential appeal process (in case of adjustments). This provides significant cost and time efficiencies.

Cooperative and informed process

The APA process is conducted in an extremely co-operative manner involving a sharing of views, ideas, and solutions between the taxpayer and the IRAS.  As against this, a tax audit usually involves significant stress as they are generally initiated where the IRAS suspects faulty transfer pricing practices.  Further, the APA programme involves the IRAS getting a thorough understanding of the taxpayer’s operations and business processes through detailed discussions as well as through site visits.  This ensures a more accurate determination of the arm’s length price through a more informed process.

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.


[1] Base Erosion and Profit Shifting

[2] Inland Revenue Authority of Singapore

[3] Double Taxation Agreements