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Updated Singapore Transfer Pricing Guidelines

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Published on 9/16/2021 - Issue Q3/2021

 

The Inland Revenue Authority of Singapore ("IRAS") issued "IRAS e-Tax Guide Transfer Pricing Guidelines (Sixth Edition)," published on 10 August 2021 ("Revised TP Guide").

 

The Revised TP Guide is a consolidation of the following four previous e-Tax Guides relating to transfer pricing: 

  • Transfer Pricing Guidelines published on 23 February 2006;
  • Transfer Pricing consultation published on 30 July 2008;
  • Supplementary administrative guidance on Advance Pricing Arrangements ("APA") published on 20 October 2008; and
  • Transfer Pricing Guidelines for related party loans and related party services published on 23 February 2009.

 

The Revised TP Guide essentially clarifies on the application of the arm's length principle and provides guidance on maintaining transfer pricing documentation and managing transfer pricing disputes, as well as the implications of non-compliance with TP requirements. The Revised TP Guide therefore replaces the previous 5th edition e-Tax Guide Transfer Pricing Guidelines (5th edition e-Tax Guide). Some of the specific guidance and clarifications in the Revised TP Guide are compulsory, while the rest are largely compliance in nature. The revisions in the Revised TP Guide may have a material impact on taxpayers with significant intercompany transactions.

 

Below we will highlight some of the significant changes stated in the Revised TP guide which taxpayers should generally be aware of:

 

Related Party Financial Transactions

There are extensive discussions in the Revised TP Guide on matters relating to financial transactions, including adherence to transfer pricing principles with respect to related party financial transactions covering alternative funding arrangements including cash pooling, hedging, financial guarantees and captive insurance.

 

The Revised TP Guide for the first time recognizes the concept of quasi equity/hybrid arrangements and, as to funding arrangements, distinguishes between loans and equity with various tests and factors which need to be considered in characterizing a funding transaction. This would allow taxpayers flexibility in determining their funding arrangements to be via pure equity, debt structure or via hybrid arrangements with both, debt and equity features.

 

The IRAS does not regard interest-free related party loans as arm's length transactions, unless taxpayers can provide reliable evidence that under comparable circumstances, independent parties would similarly provide loans without charging any interest.

 

The Revised TP Guide also clarifies that every related party loan needs to be evaluated individually, as each related party loan could be different (e.g., with regard to their terms and conditions). However, to reduce compliance burden, taxpayers having multiple related party loans may choose to determine the arm's length interest rate on aggregate basis for loan transactions which have similar characteristics.

 

In addition, the Revised TP Guide also provides significant guidance and notes on the methodologies and approaches for pricing of interest for inter-company loan transactions taxpayers may consider. The commentary and examples should further provide clarity for taxpayers to further understand and be in a better position to substantiate intercompany pricing arrangements with IRAS guided economic analysis. However, the Revised TP Guide is silent on any specific exceptions for entities that are in the business of lending and borrowing, or treasury centers. This would mean that all related party loan transactions should first be analyzed and determined to be a loan, irrespective of the taxpayer´s business, with the arm's length interest subsequently being charged on the loan amount.

 

Updates on Cost Contribution Arrangements ("CCA")

Taxpayers can now refer to Section 17 of the Revised TP Guide on the definition of a CCA and the scenario where CCAs are typically present in multiple intra-group arrangements. The two typical areas of CCAs identified are joint research and development, and multiple services amongst group entities, and key differences between these two types of CCA are also clarified in the Revised TP Guide.

 

In addition, the Revised TP Guide provides guidance and examples on how the arm's length principle can be applied with respect to CCAs. In doing so, the Revised TP Guide lists the economic requirements during entry and withdrawal of the arrangement as well as terminations. The Revised TP Guide stresses the importance of maintaining proper transfer pricing documentation and clarifies the required information to be included in a transfer pricing documentation with respect to CCAs.

 

Transfer pricing Adjustments, Surcharge and Remissions

The Revised TP Guide conveys a clear message of more stringent compliance expected by the IRAS, and the actions that the IRAS may take to enforce such compliance.

 

The Revised TP Guide clarifies, i.e., how the surcharge of 5 percent due to transfer pricing adjustment should be computed. The Revised TP Guide also sets out the administrative rules in relation to the surcharge. Based on the clarification, the surcharge of 5 percent may not be levied under certain conditions such as:

  • year-end transfer pricing adjustments at year-end closing of accounts (provided taxpayers have TP analyses and contemporaneous TPD in place, and consistently make the adjustments in the accounts of the affected related parties);
  • transfer pricing adjustments in relation to an APA;
  • transfer pricing adjustments resulting from outcome of the Mutual Agreement Procedure ("MAP") agreed by the IRAS; or
  • transfer pricing adjustments arising from arbitration decision.

The Revised TP Guide also indicates IRAS' willingness to allow for a full/partial remission of surcharge, especially in scenarios where taxpayers maintained consistent compliance records or where taxpayers have been engaged and cooperative during the TP audit. Note that previously, the IRAS used the term TP consultation. This would indicate the IRAS' intention to perform a thorough review on related party transactions moving forward.

 

Arbitration

The Revised TP Guide introduces the concept of arbitration for the first time. The Revised TP Guide sets out an arbitration process in cases where the IRAS and a relevant foreign competent authority are unable to resolve certain transfer pricing disputes under an MAP within a stipulated period. In such situation, per the Revised TP Guide, a Singapore taxpayer may consider initiating an arbitration process. Decision made by the arbitration panel on the dispute will be binding on the taxpayer and both competent authorities.

 

Benefits Test and Related Party Services

In using the "benefits test" to examine the provisions of related party services, the Revised TP Guide provides additional explanation on the treatment of costs relating to shareholder and duplicative activities.

Shareholder activities (e.g., shareholders' meetings, listing on stock exchange, and auditing of other group members' accounts in the interest of the parent company) which are common in multinational groups and are conducted for the ownership interest rather than the group members.

 

The Revised TP Guide clarifies that these activities would not be regarded as related party services, and therefore should not be charged to group members (as they would not be willing to pay for these if they were independent parties). Accordingly, costs associated with such activities should only be borne and allocated at the shareholder level. Where these activities are carried out by a group member, they should be recharged by and remunerated at arm's length by the holding company.

 

In cases where a group member is merely providing duplicated services that another group member is performing for itself or receiving from a third party, there is no commercial or practical necessity for such duplicative activities, and no service is considered provided. However, where duplication of service is necessary in some specific cases, any consideration of possible duplication of services needs to determine the nature, reason, difference, and other features of each of the activities.

 

The Revised TP Guide also allows for 5 percent mark-up on costs (as minimum mark-up) to be applied to routine support services provided by related parties. The recognition of the safe-harbor profit mark-up of 5 percent on low value-adding services based on the OECD´s simplified approach would help in reducing compliance costs and ensuring that taxpayers focus on more complex transactions.

 

Singapore taxpayers should use the opportunity to revisit/review their transfer pricing models, arrangements, policies and documentation to ensure that these are in compliance with the latest transfer pricing regulations, and to mitigate potential transfer pricing adjustments and penalties by identifying and addressing any potential areas of transfer pricing compliance risk.

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