Singapore Transfer Pricing Regulations—Winds of Change

This article was first published by Bloomberg Tax on 23 August 2021. Reproduced with permission from Copyright 2021 The Bureau of National Affairs, Inc. (800-372-1033) www.bloombergindustry.com.

The Inland Revenue Authority of Singapore (IRAS) has recently issued its e-Tax Guide—Transfer Pricing Guidelines (Sixth Edition) (the guidelines).

The guidelines are a consolidation of four earlier e-Tax Guides released by the IRAS:

• transfer pricing guidelines published on Feb. 23, 2006;
• transfer pricing consultation published on July 30, 2008;
• supplementary administrative guidance on advance pricing arrangements published on Oct. 20, 2008; and
• transfer pricing guidelines for related party loans and related party services published on Feb. 23, 2009.

This makes the guidelines a comprehensive document that provides a ready reference to the IRAS’s approach to transfer pricing matters.

Apart from consolidating the existing commentaries on various transfer pricing matters, the guidelines also contain several important amendments and updates including:

• amending the transfer pricing consultation process to a transfer pricing audit;
• discussion and guidance as regards the levy of surcharge in case of transfer pricing adjustments;
• discussion of the remission of surcharge;
• guidance on the arbitration process on transfer pricing matters unresolved through the MAP process;
• treatment of shareholder services;
• guidance on differentiating funding arrangements between loan and equity as well as on transfer pricing arrangements on alternate funding approaches such as cash pooling, financial guarantees, etc;
• guidance on benchmarking inter-company interest payments;
• discussion of cost contribution arrangements.

The amendments and updates are extremely useful and welcome, particularly in the area of differentiating funding arrangements between loans and equity (introduction of the concept of quasi-equity funding arrangements) as well as the guidance on benchmarking interest rates (on inter-company loans).

The various updates in the guidelines are in line with international standards and will not only guide Singapore taxpayers with their documentation process but will also assist Singapore taxpayers in their mutual agreement procedures (MAPs) and bilateral advance pricing agreements (APAs).

Changing the Transfer Pricing Consultation Process to a Transfer Pricing Audit

The update that would be interesting to most Singapore taxpayers is the change of the transfer pricing consultation process to a transfer pricing audit. Whilst the approach and the processes between the consultation and the audit are not significantly different, this change seems to suggest the intent of the IRAS to pursue transfer pricing matters with greater intensity.

The transfer pricing consultation process was introduced by the IRAS in 2008 with the objective of assessing taxpayers’ transfer pricing risks, reviewing taxpayers’ transfer pricing documentation, and providing recommendations to taxpayers to manage their risks. The aim was to engage taxpayers and to further assist and advise on transfer pricing guidelines and potential risks identified through the consultation process.

Over the years, the objective and the approach of the transfer pricing consultation process went through several changes. As against the original intent of facilitating taxpayers’ compliance with the transfer pricing guidelines, the process in subsequent years entailed a more detailed review of the transfer pricing approaches adopted by taxpayers and the documentation they maintained to substantiate their pricing arrangements.

The IRAS put in place a well-designed criterion for identifying cases that would be selected for the consultation process, introduced a three-step procedure to be adopted for conducting and concluding the consultation process, and made provision for imposing a surcharge in cases where the taxpayer’s inter-company pricing arrangements were found not to be at arm’s length.

Though the consultation process contained certain elements of what could be considered an audit, the process was still considered to be a consultation, with significant opportunities available to taxpayers for taking corrective measures on their transfer pricing arrangements before any punitive measures were actioned.

This amendment from a consultation process to an audit could therefore be considered as a message to taxpayers to start taking the transfer pricing provisions a lot more seriously. This amendment should also sound as a warning bell to Singapore taxpayers to ensure that their defense documentation is regularly maintained and in line with the requirements prescribed by the IRAS.

This view seems to gain further support from amendments made in the guidelines covering the levy of the surcharge (in respect of transfer pricing adjustments) and the introduction of remission to the surcharge in certain cases.

Levy of Surcharge and its Remission

The provisions categorically specify the levy of a surcharge in respect of any and all adjustments made by the IRAS in connection with a transfer pricing audit. The guidelines prescribe a very limited set of situations where the surcharge may not be levied, which largely include consequential upward adjustments made to align with decisions emanating from MAPs, APAs, or an arbitration process.

The only exclusion to an upward adjustment not attracting a surcharge is in case of year-end adjustments made at year-end closing of accounts. These adjustments are typically made to synchronize the transactional prices with the arm’s-length price which usually stems from a transfer pricing analysis.

The provisions further provide for remission of such surcharge in cases where taxpayers have been cooperative during the audit process, and where taxpayers have maintained proper documentation in accordance with the requirements prescribed by the IRAS.

When read in their entirety, the updates do seem to suggest a change in the IRAS’s approach to transfer pricing matters.

Planning Points for Singapore Taxpayers

In order to mitigate potential transfer pricing adjustments, and consequential surcharge levies, it is imperative that Singapore taxpayers put in place a robust defense with regard to their transfer pricing arrangements on a consistent basis. This could involve the following:

• Review operating model/transfer pricing model—the IRAS would endeavour to check if the pricing policy adopted for the various inter-company transactions is aligned with the operations of the taxpayer. Accordingly, a review of the operating model and pricing policies becomes imperative to ensure that the pricing policies are set to remunerate the group entities, including the Singapore-based taxpayer, in line with their relative contribution to such transaction.
• Maintain adequate transfer pricing documentation—the IRAS prescribes the content of the transfer pricing documentation to be maintained by Singapore taxpayers engaging in inter-company transactions. Taxpayers should ensure that such documentation is maintained where required and that such documentation is comprehensive enough to defend the inter-company arrangements in the case of a transfer pricing audit.
• Collate supporting transactional documentation—this entails collating appropriate transactional documentation that could lend support to the transfer pricing documentation and assist in substantiating the pricing arrangements adopted by the Singapore taxpayer. This could include inter-company service agreements, invoices evidencing the pricing policy adopted (e.g. in cost plus mark-up arrangements), and technical manuals (to support industrial royalty payouts).
• Consider APAs—for those with complex business models or instances where taxpayers believe the IRAS may challenge the pricing arrangement, gaining upfront certainty on the transfer pricing arrangements through an APA would be a prudent approach.

While we may not be able to predict the IRAS’s approach to transfer pricing matters going forward, good housekeeping would go a long way toward mitigating transfer pricing risks. It would be prudent for Singapore taxpayers to use these updates as an opportunity to review their transfer pricing arrangements and their compliance obligations to prepare against unpleasant surprises.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.