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Transfer Pricing

Recent Singapore’s Transfer Pricing Guidance on COVID-19

The COVID-19 pandemic is expected to have an impact on a multinational group’s operations and consequentially on their transfer pricing arrangements / transfer pricing results.

The IRAS recently issued a set of guidelines that enable tax-payers flexibility in defending their transfer pricing arrangements where their business operations / financial positions have been impacted by Covid-19. 

Key points from the above-referred guidelines have been summarised below:

A] Documenting impact of Covid-19 on operationsCovid-19 on operations

The guidelines recommend that taxpayers, whose transfer pricing arrangements have been impacted by Covid-19, could include the following information in their transfer pricing documentation reports:

  • A broad analysis of the impact of COVID-19 on the industry in general and on the taxpayer in particular.

  • Documentation as regards the decision-making activities relating to management of risks relating to COVID-19 within the MNC Group.

  • Functional profile of the relevant parties pre- and post- COVID-19 implications.

  • The changes of any obligations or material terms and conditions with related parties due to COVID-19.

  • Comparison of the pre-COVID 19 and actual results of the profit and loss analysis, explanation and evidence for the variances and adverse impacts.

  • Details relating to COVID-19 specific government assistance that the taxpayers have received, or government regulations imposed on the taxpayers which has an impact on the operations.
B] Flexibility in conducting economic analysis

The IRAS has also introduced the “term testing” approach to analyse the appropriateness of the tax-payers transfer pricing arrangements.  The said approach is used to test multiple year average results of the taxpayer / taxpayer’s affiliate (instead of single year testing) with a view to eliminate the impact of an extraordinary event (i.e. COVID-19 for Year of Assessment 2021).   In this regard, the guidelines provide as follows:

  • The IRAS would allow taxpayers the flexibility to apply term testing where annual testing may result in volatile results. The taxpayers have the obligation to provide evidence and complement the additional suggested information mentioned above.

To avoid potential disputes, taxpayers should consider the impact on the related parties in other jurisdictions in relation to term testing.

C] Considerations for APAs

The IRAS guidance also provides useful inputs to taxpayers as regards APA related matters.  These include:

  • Any new APA application or renewal of an existing APA would need to have a high level of certainty that the business has not been significantly affected by COVID-19.
  • For current APA applications, taxpayers would need to assess whether COVID-19 related transfer pricing implications would impact the APA application.

For existing APAs, consideration should also be given whether there is any breach of the critical assumptions and agreed terms and conditions.

In gist

These are extremely welcome guidelines issued by the IRAS that allow taxpayers significant flexibility in defending their transfer pricing arrangements in times where operations may have been adversely impacted by Covid-19.  Companies facing operational and financial issues on account of COVID-19 should document these implications on a real time basis as well as ensure that their transfer pricing documentation reports are robust enough to demonstrate the impact of Covid-19 on their operations.