Singapore Tax Transfer pricing is increasingly important for international trade. This article provides information on transfer pricing in Singapore, including details on transfer pricing documentation, penalties, consultation, and adjustments.
Transfer pricing is a concept in taxation and accounting that refers to the methods and rules for setting the prices of goods, services, and intangibles within enterprises which have the same control or ownership. Examples of such enterprises include branches and head offices. About 60% to 70% of all international trade takes place within enterprises based in different countries but located within the same corporate group. Hence, transfer pricing is very prevalent in today’s economic environment. This prevalence makes transfer pricing one of the most important issues in international taxation.
To prevent abuse of transfer pricing, many countries around the world have adopted transfer pricing rules based on the arm’s length principle. The arm’s length principle states that the parties to a transaction are independent and to be regarded as equals. The parties involved should treat the other as if the two were unrelated parties. This principle allows an appropriate allocation of profit taxation rights among countries that use transfer pricing to conclude double tax conventions. The OECD and World Bank are both in favour of setting intragroup pricing rules by using the arm’s length principle. Most countries which have transfer pricing rules allow the parties involved to choose their own prices, but also allow the country’s tax authorities to adjust these prices if any of them fall outside an arm’s length range. Such adjustments are usually made by adjusting taxable income of all involved related parties based within the tax jurisdiction, as well as adjusting any other taxes imposed on any parties based outside the tax jurisdiction.
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Transfer Pricing in Singapore
One of the countries which has set rules regarding transfer pricing is Singapore. In Singapore, the Inland Revenue Authority of Singapore (IRAS) has provided a set of guidelines to be followed when transfer pricing transactions are conducted. The IRAS has also provided an e-tax guide for taxpayers’ convenience.
The IRAS recommends a three-step approach to apply the arm’s length principle in transfer pricing transactions. The first step is to conduct a comparability analysis. A comparability analysis examines the comparability of transactions in certain elements and makes adjustments for material differences. These elements are as follows: contractual terms of the transaction; functional analysis; characteristics of goods, services, or intangible properties; and commercial and economic aspects. Several other factors must also be taken into account; these include whether the transaction examined is to be evaluated on a separate or aggregate basis, whether to use one year’s or multiple-year data, how losses should be considered, and what internal or external comparables are to be selected.
The second step is to identify the most appropriate transfer pricing method and tested party. There are three different categories of transfer pricing methods to choose from. The first of these are traditional transaction methods. These include the comparable uncontrolled price (CUP) method, the resale price method, and the cost plus method. These methods compare the price of related-party transactions with those of transactions made between independent parties. The second are transactional profits methods, which include the transactional profit split method and the transactional net margin method (TNMM). Transactional profits methods compare profits made from related-party transactions with those made from independent-party transactions. The third are other methods deemed to be more appropriate, or a combination of various methods. Whenever necessary, the correct tested party must also be determined.
The third and final step is to determine the arm’s length results. This is to be done by applying the most appropriate transfer pricing method to the data on comparable independent party transactions. Such an analysis will lead to results that produce a range of prices or margins. As these results may not always be completely reliable, the IRAS suggests using an interquartile range to avert this problem. This is especially true in cases where there are wide ranges of prices or margins, because it implies that there are comparability issues or defects that can neither be identified or quantified and thus remain unadjusted. In such cases, the minimum and maximum data points should be excluded because they are outliers.
Singapore Transfer Pricing Documentation
Transfer pricing documentation refers to records prepared and kept by taxpayers to prove that the pricing of their transactions with related parties adheres to the arm’s length principle. Transfer pricing documentation in Singapore must adhere to the Income Tax (Transfer Pricing Documentation) Rules 2018 (to be referred to as “the Rules”), which came into operation on 23 February 2018. These rules include information on citation, commencement, and application; definitions; form and content of transfer pricing documentation; and exemptions.
Starting from the 2019 year of assessment (YA), Singapore taxpayers who have met certain conditions will be required to prepare transfer pricing documentation, as is mentioned in Section 34F of the Income Tax Act. However, a taxpayer who has met these conditions but also has one or more exemptions for specified transactions is not required to do so. Nevertheless, the IRAS recommends that all taxpayers prepare the documentation because it would help them better manage their transfer pricing risks.
The following taxpayers must prepare transfer pricing documentation: those who have derived more than S$10 million in gross revenue from their trade or business over the basis period concerned, and those who had been required to prepare transfer pricing documentation for the basis period immediately before the basis period concerned. The information to be prepared in the documentation must include an overview of the businesses of the group in which the taxpayer is a member which is relevant to its Singapore business operations, as well as the taxpayer’s business and its transactions with related parties, including transfer pricing analysis and functional analysis. This documentation must be completed by the filing due date of the tax return. Although taxpayers are not required to submit the transfer pricing documentation when they file their tax returns, they are still required to submit their transfer pricing documentation within 30 days of the IRAS’ request. Taxpayers must retain the documentation for a period of at least five years from the end of the basis period in which the transaction took place. Some of the exemptions which would excuse otherwise-qualified taxpayers from preparing transfer pricing documentation include related-party transactions with value below a certain amount, as well as related-party transactions subject to the same tax rate.
According to Singapore’s latest transfer pricing guidelines, all taxpayers ought to update their transfer pricing documentation whenever there are material changes to the operating conditions that affect their transfer pricing or functional analyses. The IRAS also recommends that taxpayers also update their transfer pricing documentation at least once every three years, even if there are no impactful material changes. The guidelines add that taxpayers must review and refresh their transfer pricing documentation once a year. Therefore, taxpayers are to prepare a documentation for each basis period. However, to reduce taxpayers’ compliance burden, the IRAS allows taxpayers to use the transfer pricing documentation that they have previously prepared to support the transfer price if the past documentation is a qualifying transfer pricing documentation.
A qualifying transfer pricing documentation is one that has been prepared in one or two preceding years and fulfills the following conditions: the transaction documented in the past documentation is the same type as the transaction in the current year; the transaction documented in the past documentation is undertaken with the same related parties; the past documentation was prepared in accordance with the requirements under the Rules, properly dated and prepared in English; and information contained in the past documentation on the following matters remain relevant in the current year: the commercial or financial relations between the taxpayers and their related parties; the conditions made or imposed between the taxpayers and their related parties; conditions made or imposed between the taxpayers and their related parties; and the arm’s length conditions within the meaning of Section 34D, including comparability with the conditions or circumstances observed between independent parties.
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Singapore Transfer Pricing Penalties
Although transfer pricing is not inherently illegal or abusive, it can be manipulated in such a way as to be so. To combat such manipulation, also known as transfer mispricing, Singapore recently introduced penalties for violating transfer pricing documentation requirements. When the IRAS released the latest edition of Singapore’s transfer pricing guidelines, it also mentioned changes introduced in the newest legislation and the Rules regarding the penalties. For example, a fine of up to S$10,000, an increase from the previous maximum fine of S$1,000, will be imposed with effect from YA 2019 against those who commit any of the following offenses: failure to prepare or maintain transfer pricing documentation based on the requirements under Section 34F of the Income Tax Act, failure to prepare transfer pricing documentation by the time of making of the tax return, failure to return transfer pricing documentation for a five-year period following the end of the basis period of the covered transaction, failure to submit transfer pricing documentation within 30 days of a request by the IRAS, or providing any documentation or information that the taxpayer knows to be false or misleading. A taxpayer who commits any of the offenses mentioned may be viewed as errant and non-compliant by the IRAS and other authorities. This taxpayer would also be at a heightened risk of being affected by any transfer pricing adjustments made by the IRAS and could even be turned down for mutual agreement procedures and advanced pricing applications with the IRAS.
There are also penalties related to non-compliance of the arm’s length principle. On occasion, the IRAS has to make transfer pricing adjustments to enforce compliance of the principle. Starting from YA 2019, a surcharge on transfer pricing adjustments made by the IRAS as per Section 34D of the Income Tax Act will also be legislated in Section 34E. This surcharge is worth 5% of the amount of increase in income or decrease in allowance, deduction, or loss to be imposed on the taxpayer as a result of the adjustments. The surcharge is payable within one month starting from the date of notice of surcharge. Although not explicitly stated as such, this surcharge is effectively a penalty imposed on those who do not adhere to the arm’s length principle.
Starting from YA 2018, taxpayers who have related-party transaction values in excess of S$15 million as disclosed in their audited accounts must also file a related-party transactions reporting form together with the submission of their income tax return by the filing deadline. This form, known as Form C, is deemed to be part of taxpayers’ income tax returns. Taxpayers who fail to file, or incorrectly file, Form C will have a penalty imposed on them. According to Section 105M of the Income Tax Act, there are also penalties for non-filing, late filing, or incorrect filing of country-by-country reporting. These penalties include a fine of up to S$10,000, imprisonment for up to two years, or both.
We at Paul Hype Page & Co do not want any of the above to happen to you regarding transfer pricing documentation. We will use what expertise and knowledge we have to ensure that you do not fall afoul of any laws or commit any violations.
Transfer Pricing Consultation Program
The IRAS has also set up a transfer pricing consultation (TPC) program. Its objectives are to ensure that taxpayers comply with existing transfer pricing guidelines and identify areas in which the IRAS may be able to advise taxpayers on good practices regarding transfer pricing. The IRAS uses this program to review and audit the transfer pricing methods and documentation of selected taxpayers. There are several risk indicators which the IRAS uses to identify which taxpayers to select for the program. These risk indicators are the value of related-party transactions, the performance of the business over time, and the likelihood that taxable profits may have been understated because of inappropriate transfer pricing. There are also certain circumstances which the IRAS considers to be high-risk with regard to transfer pricing. Some of these circumstances include transactions with cross-border related parties that are of large value when compared to the taxpayer’s other transactions, operating results that appear to be out of line with businesses in comparable circumstances, transactions with related parties subject to a more favorable tax treatment, and indications of any sort that transactions made are likely to be subject to a transfer pricing audit by the relevant tax authorities. The IRAS may also request information from taxpayers for the purposes of risk assessment.
The TPC process begins with the IRAS’ arranging for a first meeting at the taxpayer’s premises. The IRAS will also request that the taxpayer submit information and documentation to be discussed at the meeting. During the first TPC meeting, the taxpayer’s representatives will present an overview of the taxpayer’s business model and explain its transaction flows, methods of pricing related-party transactions, and any relevant supporting documentation. The IRAS will then interview key personnel and review the transfer pricing documentation. This step must be taken for the IRAS to better understand the taxpayer’s business operations and transfer pricing. After the first meeting ends, the IRAS will request for more information or documents concerning issues which it considers necessary to be brought up in any subsequent meetings. Later, the IRAS will use all the information it has gathered from the taxpayer and use it to assess the adequacy of the taxpayer’s transfer pricing documentation. The IRAS will also identify transfer pricing issues to be discusses with the taxpayer. Sometimes, the IRAS may recommend a tax adjustment under Section 34D of the Income Tax Act if the taxpayer’s taxable profit is understated due to non-arm’s length related-party transactions. The taxpayer may then respond to the IRAS’ proposal and discuss a possible resolution to the problem before the IRAS makes a tax adjustment. Once the TPC is complete, the IRAS will send a letter to the taxpayer which will evaluate the appropriateness of the taxpayer’s transfer pricing methods and the adequacy of the taxpayer’s transfer pricing documentation. In the same letter, the IRAS may also make suggestions about ways to improve the taxpayer’s transfer pricing documentation or transfer pricing method.
Singapore Transfer Pricing Adjustments
In some cases, taxpayers may opt to initiate adjustments on their own and file amended claims. There are four types of adjustments that may be made by taxpayers: year-end adjustments at year-end closing of accounts, compensating adjustments, self-initiated retrospective adjustments, and corresponding adjustments arising from transfer pricing adjustments by tax authorities.
Year-end adjustments are adjustments made to taxpayers’ actual results at the year-end closing of their accounts to arrive at what, in the taxpayers’ opinions, are the arm’s length prices for related-party transactions as described in their transfer pricing analyses and policies. After the adjustments are made, taxpayers report the arm’s length results although they differ from the actual results. The IRAS will accept these adjustments if taxpayers have in place transfer pricing analyses and contemporaneous transfer pricing documentation to establish the arm’s length prices, make the year-end adjustments symmetrically in the accounts of the affected related parties to avoid double taxation or double non-taxation, and make the adjustments before filing their tax returns. However, this does not preclude the IRAS from subsequently conducting audits or making transfer pricing adjustments. The IRAS may also enter into mutual agreement procedure with any relevant foreign authorities.
Compensating adjustments are related to advance pricing arrangement (APA) agreements with the IRAS. If a taxpayer has entered into an APA agreement with the IRAS, the agreement will specify the arm’s length prices. However, occasionally the taxpayer’s actual results will differ from the arm’s length prices in the APA agreements. If such a scenario were to occur, the taxpayer ought to make compensating adjustments to match the terms in the APA agreements to arrive at the agreed arm’s length prices. The taxpayer is to report the adjusted arm’s length results, not the actual results.
Self-initiated retrospective adjustments are, as their name suggests, made of the taxpayer’s own volition. Changes in circumstances may compel a taxpayer to review past transfer prices related to transactions with related parties. Following such reviews, the taxpayer may decide to retrospectively adjust arm’s length prices either upwards or downwards. Among the reasons that taxpayers might review past transfer prices include reflecting revisions in transfer pricing analyses, accounting for the arm’s length charge for a transaction which they had previously overlooked, complying with a group global transfer pricing policy which had not previously been taken into account, or avoiding potential transfer pricing adjustments by a tax authority.
Corresponding adjustments arising from transfer pricing adjustments by tax authorities have to do with double taxation. Double taxation occurs when the same profits are taxed twice because of the effects of a foreign tax authority’s transfer pricing audit and the application of arm’s length prices. However, the IRAS attempts to mitigate this problem by reducing the taxpayer’s profit. This reduction is referred to as a corresponding adjustment. Taxpayers may receive relief from double taxation through the mutual agreement procedure (MAP) which is mentioned in the relevant double taxation agreement (DTA). The IRAS will only make corresponding adjustments to eliminate double taxation if a DTA exists between Singapore and the country that made the transfer pricing adjustments and if taxpayers have applied for the MAP specified in the DTA, with the application accepted by both the IRAS and foreign tax authority. If the outcome of the MAP is accepted by the taxpayers, IRAS, and foreign tax authority, IRAS will take action and effect the corresponding adjustments to eliminate double taxation.
As has been mentioned, transfer pricing is an issue of great importance in international taxation. Thus, transfer pricing anywhere, including in Singapore, has an effect on other countries, especially those which Singapore has a DTA with. Transfer pricing also impacts the amount of tax an individual or company pays.
We at Paul Hype Page & Co provide many different taxation services. We are able to help ease your tax burden by offering tax planning and advice services. Our consultants can also give you information and assistance regarding changes to any tax laws or policies.