2015 Singapore Transfer Pricing Guidelines

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By Luis Coronado and Henry Syrett*

Ernst & Young Solutions LLP, Singapore

On January 6, 2015, the Inland Revenue Authority of Singapore (IRAS) released revised transfer pricing guidelines (2015 Singapore TP Guidelines). The release follows the issuance of a public consultation paper on September 1, 2014, which had generated much interest and response from Singapore taxpayers. The publication of the 2015 Singapore TP Guidelines is considered to be the most significant development in Singapore's transfer pricing landscape since the issuance by the IRAS of its transfer pricing guidelines nine years ago and the enactment of the arm's-length principle six years ago.

The publication is in line with the IRAS's greater focus on transfer pricing. In the past year, we have observed a marked increase in transfer pricing queries and consultations from the IRAS across different types of transactions. In addition, there has been a build-up of transfer pricing expertise within the IRAS through the years as a result of structured training (including training by the Organisation for Economic Co-Operation and Development (OECD)) and transfer pricing consultation as well as audit cases and competent authority proceedings. In this connection, the IRAS has strengthened its transfer pricing manpower resources. Particularly for Advance Pricing Agreements (APAs), the IRAS has expanded resources to meet increasing APA applications from taxpayers. With more than 50 APAs completed to date (including APA renewals), the IRAS is well-experienced in handling APA cases. At an international level, the IRAS is active in participating in OECD discussions and other fora that shape the direction of transfer pricing policies globally.

This marked emphasis placed by the IRAS on transfer pricing comes at a time when several high-profile cases in the media have put transfer pricing in the spotlight globally. Major multinational companies have found themselves exposed and accused of using transfer pricing to engage in base erosion and profit shifting (BEPS).

To address governments' increasing concerns that multinational companies are reducing tax liabilities through BEPS activities, the OECD initiated an action plan to tackle BEPS in July 2013 with a mandate from the G20. The action plan consists of 15 Action Items, four of which relate to transfer pricing. Of these four, the OECD released two transfer pricing discussion drafts on September 16, 2014 (Action 8 on transfer pricing for intangibles and Action 13 on transfer pricing documentation and country-by-country (CbC) reporting). In this regard, the OECD has created the expectation that taxpayers will prepare appropriate transfer pricing documentation to demonstrate transfer pricing compliance. Translating this to a country level, taxpayers would like to have clarity on what is required so as to be considered compliant.

The 2015 Singapore TP Guidelines constitute a 102-page document that consolidates all previous circulars and guidance provided by the IRAS relating to transfer pricing and provides further details on the IRAS's position on additional transfer pricing matters, such as the approval of taxpayers' self-initiated adjustments. Whilst the release of the document is not a direct reaction to the OECD's releases, the guidance should be seen as a welcome clarification of what is expected of Singapore taxpayers with respect to transfer pricing compliance.

Introduction of Contemporaneous Documentation Requirements

The most striking aspect of the 2015 Singapore TP Guidelines is the confirmation that the IRAS requires contemporaneous transfer pricing documentation to be maintained by the taxpayer. In other words, taxpayers are required to prepare documentation to support transfer pricing positions and have this in place (at the latest) by the time the company's tax return is filed, although it seems the IRAS might extend this to November 30, which is the due date to lodge an annual tax return.

Practices around the region vary with respect to filing and reporting obligations. Some countries, including China, in certain circumstances, require certain taxpayers to actually submit transfer pricing documentation by a specified deadline. Meanwhile, in countries like Indonesia and Vietnam (among many in Asia), the rules require taxpayers to file a specific information return attached to their annual income tax return, which includes various disclosures on the state of the company's transfer pricing.

The IRAS does not require the taxpayer to submit the transfer pricing documentation with the tax return. Instead the 2015 Singapore TP Guidelines require that the documentation be submitted to the IRAS within 30 days after request. Transfer pricing documentation should be dated upon preparation. These are new requirements that suggest to taxpayers that they should ensure their transfer pricing documentation is prepared in advance and ready for submission.

Transfer pricing guidelines were first issued by Singapore in 2006 (the 2006 Singapore TP Guidelines). In this regard, we do not foresee significant additional burdens for taxpayers who have already prepared appropriate transfer pricing documentation. In addition, the 2015 Singapore TP Guidelines prescribe certain cases in which taxpayers are exempted from transfer pricing documentation. These exceptions may reduce the administrative burden for taxpayers.

One of the exceptions involves the introduction of thresholds, which should be applied based on each type or category of related-party transaction on an annual basis. Taxpayers need to aggregate across both cross-border and domestic related-party transactions when applying these thresholds. These thresholds are set forth in the table below:

Category of related-party transactions Threshold (SGD)
 per financial year
Purchase of goods from all related parties 15m
Sale of goods to all related parties 15m
Loans owed to all related parties 15m
Loans owed by all related parties 15m

All other categories of related-party transactions. Examples:
  Service income
  Service payment
  Royalty income
  Royalty expense
  Rental income
  Rental expense
 For the purpose of determining if the threshold is met, aggregation should be done for each type or category of related-party transaction. For example, all service income received from related parties is to be aggregated.

1m per category of transactions

Apart from cases in which the threshold values are not exceeded, transfer pricing documentation is also not required in the following four situations:

  •   Where the taxpayer transacts with a related party in Singapore and such local transactions (excluding related-party loans) are subject to the same Singapore tax rates;
  •   Where a domestic loan is provided between the taxpayer and a related party in Singapore and the lender is not in the business of borrowing and lending;
  •   Where the taxpayer applies the safe harbor 5% cost mark-up for routine services; and
  •   Where the related-party transactions are covered by an APA with the IRAS (however, an annual compliance report is still required in the case of an APA).

Although transfer pricing documentation may not be required under the 2015 Singapore TP Guidelines, the IRAS still expects taxpayers to evaluate and decide whether transfer pricing documentation is necessary for the purpose of complying with the transfer pricing documentation rules of other countries.

Introduction of Guidance ConcerningAdjustments

In the 2015 Singapore TP Guidelines, the IRAS has given guidance on categories of adjustments and when these should be considered by the taxpayer. It has also included proposed treatment of taxable or allowed adjustments. Adjustments may be necessary as a result of a change in a business, such as changing the mix of product sales or experiencing a significant over- or under-performance of business segments. In addition, adjustments may also result from a taxpayer's own review of past transfer pricing practices and finding gaps in pricing versus policy. The fact that the IRAS has provided such guidance on adjustments may be interpreted as an invitation to taxpayers to get their past years' pricing in order.

Four types of transfer pricing adjustments are provided in the 2015 Singapore TP Guidelines. The most common type of transfer pricing adjustment for taxpayers is generally a year-end adjustment made before closure of accounts. If taxpayers fulfill the IRAS conditions on proper transfer pricing documentation and analyses, the IRAS will tax upward adjustments and allow downward adjustments. Otherwise, upward adjustments will be taxable but downward adjustments will not be allowed.

The next types of adjustments are compensating adjustments and corresponding adjustments, which relate, respectively, to APAs and to mutual agreements under a Mutual Agreement Procedure (MAP) article of an income tax treaty. For these two types of adjustments, the IRAS will tax upward adjustments and allow downward adjustments based on the negotiated APA or mutual agreement. Because corresponding adjustments relate to mutual agreements and such are only possible if there is an income tax treaty in place, corresponding adjustments are not possible for jurisdictions with which Singapore does not have an income tax treaty, such as the United States and Hong Kong.

The last type of adjustment, a taxpayer self-initiated retrospective adjustment, is one of the distinguishing features of the Singapore approach and encourages taxpayers to be more proactive in their transfer pricing positions. Such adjustments are adjustments arising from a taxpayer's own review of its past transfer pricing practices. In this case, the IRAS will tax upward adjustments and allow downward adjustments. However, in the absence of contemporaneous transfer pricing documentation, upward adjustments will be taxable but downward adjustments will not be allowed.

Attribution of Profits to Permanent Establishments

With regards to the attribution of profits to permanent establishments (PEs), the IRAS's position is that no further profits over and above what the Singapore business is receiving as arm's-length remuneration should be attributed to a PE of a foreign company in Singapore. The 2015 Singapore TP Guidelines list a few conditions for this to apply:

  •   The taxpayer (the PE) receives arm's-length remuneration from its foreign related party that is commensurate with the functions performed, assets used, and risks assumed by the taxpayer;
  •   The remuneration paid by the foreign related party to the taxpayer is supported by adequate transfer pricing documentation to demonstrate compliance with the arm's-length principle;
  •   The foreign related party does not perform any functions, use any assets, or assume any risks in Singapore other than those arising from the activities carried out by the taxpayer.

The IRAS's clarification on PEs is welcome as it allows taxpayers to include in their tax and transfer pricing strategies the mitigation of PE exposure by taking into account the IRAS' position on attributing profits to a PE.

Comparison tothe OECD'sDocumentation Guidance

As noted earlier, the release of the 2015 Singapore TP Guidelines coincides with the OECD's discussions involving the BEPS action plan. In fact, the 2006 Singapore TP Guidelines already advocated a group and local file approach, which is similar to the latest guidance from the OECD. Since the 2015 Singapore TP Guidelines have further advocated this approach, they are broadly aligned with the proposals put forth in the OECD Action 13 discussion draft.

Under the 2015 Singapore TP Guidelines, a taxpayer is expected to present significant information pertaining to its global group on one level and, on another level, some very specific information relating to the local entity's operations. Whereas the 2006 Singapore TP Guidelines were broader in terms of approaches to documentation, the 2015 Singapore TP Guidelines are far more specific with regards to the type of information to be included in transfer pricing documentation.  Specifically, unlike the 2006 Singapore TP Guidelines, the 2015 Singapore TP Guidelines require:

  •   Group-wide information on "important drivers of business profits" and group-wide analysis of contributions to the value chain by each related party in the group;
  • Explanations of any important changes to the group business model, such as restructurings, acquisitions, or divestitures;
  •   Singapore-level information on the management structure, local business model, business strategy, industry dynamics, all related-party transactions, and the functional profile of each entity for each related-party transaction.

In this regard, the format and content of the documentation under the 2015 Singapore TP Guidelines may differ from what taxpayers currently have in place. Taxpayers will need to consider if existing documentation complies with the new guidelines.

Notably omitted from the 2015 Singapore TP Guidelines is a requirement to prepare a CbC reporting template. By the OECD's own admission, this is one of the most controversial aspects of the whole BEPS project and it has attracted more public comments than any other aspect of the project. The main controversy stems from the need for taxpayers to provide significant extra-territorial information to local tax authorities. Whilst the IRAS does require certain extra-territorial information in a taxpayer's disclosure of group level information, it has stopped short of requiring taxpayers to prepare and provide a CbC reporting template similar to that proposed by the OECD. Since the preparation of a CbC reporting template may be an onerous process for taxpayers, its omission from the 2015 Singapore TP Guidelines helps to reduce the administrative burden on taxpayers, particularly in the area of information and data collection.

Whilst the IRAS may not be introducing CbC requirements, we expect many countries will. Therefore, Singapore businesses should still review their information technology systems to see if they can retrieve the Singapore data necessary for preparation of the template.

Consequences of Incomplete Documentation

A recurring theme in the 2015 Singapore TP Guidelines is that if taxpayers do not have appropriate transfer pricing documentation in place, the IRAS may not be as supportive of the transfer pricing positions of the taxpayer. In the case of double taxation, the IRAS may not support the taxpayer's request for a mutual agreement under a MAP article. Similarly for an APA, the IRAS may not accept an APA application if the taxpayer does not meet transfer pricing documentation requirements. Furthermore, should taxpayers make transfer pricing adjustments, the IRAS may not accept these adjustments in the absence of contemporaneous transfer pricing documentation.

In this regard, the 2015 Singapore TP Guidelines serve as a "wake-up call" from the IRAS to taxpayers informing them of the increasing global scrutiny of transfer pricing practices.

What Is Next?

The 2015 Singapore TP Guidelines are seen as a consolidation and update of the 2006 Singapore TP Guidelines and related circulars, and so have an immediate effect. Practically, the tax return filing deadline for the Financial Year (FY) 2013 has recently passed. Although not explicitly stated by the IRAS, the first year for which taxpayers should prepare transfer pricing documentation in line with the 2015 Singapore TP Guidelines would logically be FY 2014. That said, for queries relating to previous FYs, the IRAS may still request taxpayers to provide transfer pricing documentation to support their pricing policies.

Taxpayers should start to collect financial data on their related-party transactions and consider whether these transactions exceed the thresholds provided and are not covered by other exceptions. For taxpayers with existing transfer pricing documentation, they should prepare a gap analysis on aspects of the existing transfer pricing documentation that need to be expanded and should review other "internal" documents relating to intercompany transactions. In addition, taxpayers may wish to review their current year transfer pricing practices and results and consider whether periodic or year-end adjustments are necessary.

While the IRAS has stated that it would accept as contemporaneous documentation any documentation prepared no later than the tax return filing date, preparing documentation after a significant time lag from the close of the FY may result in taxpayers reacting to any gaps and defending their transfer prices retrospectively. Rather, it is advisable for taxpayers to adopt a real-time approach to preparing documentation in order that related-party transactions are supported by documentation before, or at the time, these transactions are undertaken.

The 2015 Singapore TP Guidelines expanded on the original 2006 Singapore TP Guidelines and addressed details that were not previously discussed. Overall, we welcome the release of the 2015 Singapore TP Guidelines, which provide more clarity for taxpayers with their detailed guidance.

This commentary also will appear in the March 2015 issue of the  Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Culbertson, Durst, and Bailey, 894 T.M., Transfer Pricing: OECD Transfer Pricing Rules and Guidelines, Teoh and Seah, 983 T.M., Business Operations in Singapore, and in Tax Practice Series, see ¶3600, Section 482 -- Allocations of Income and Deductions Between Related Taxpayers.

Copyright©2015 by The Bureau of National Affairs, Inc.


  Luis Coronado and Henry Syrett are transfer pricing partners at Ernst & Young Solutions LLP. The views reflected in this commentary are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.