Singapore: Changing Expectations on Transfer Pricing Documentation


By Luis Coronado and Henry Syrett

Ernst & Young Solutions LLP, Singapore*

It has been eight years since the Inland Revenue Authority of Singapore (IRAS) first released its Circular on Transfer Pricing Guidelines. During that time, there have been significant changes in the international tax landscape. In Singapore, we have seen supplementary guidance from the IRAS to clarify the transfer pricing treatment of related-party loans and services, as well as guidance on how to apply for Advance Pricing Agreements. With respect to the Association of Southeast Asian Nations (ASEAN), over the past year we have seen significant developments in transfer pricing rules in Indonesia, Malaysia, the Philippines, Sri Lanka, and Vietnam.


Looking further afield, major multinational companies have found themselves exposed, accused of using transfer pricing to engage in Base Erosion and Profit Shifting (BEPS) activities. In some cases, this perception of tax avoidance has led to product boycotts and other actions that have been detrimental to their wider businesses.


On a mandate from the G20, in July 2013 the Organisation for Economic Co-Operation and Development (OECD) initiated an action plan to tackle BEPS. The action plan consisted of 15 actions, four of which relate to transfer pricing. Of these four, the OECD released two deliverables on September 16, 2014 (Action 8 on transfer pricing for intangibles and Action 13 on transfer pricing documentation and country-by-country (CbC) reporting).


It is in this context that, on September 1, 2014, the IRAS released a proposed update to Section 4 of its transfer pricing guidelines, setting forth its expectations of taxpayers with respect to transfer pricing documentation. The update was released in the form of a consultation paper, inviting comments from the public by September 24, 2014.


Introduction of Contemporaneous Documentation Requirement


The most eye-catching element of the consultation paper is that, for the first time in Singapore, there would be a requirement for taxpayers to prepare contemporaneous transfer pricing documentation — in other words, to prepare documentation to support transfer pricing positions and have the documentation in place by the time the company tax return is filed (at the latest).


Practices around the region vary with respect to transfer pricing documentation obligations. Some countries, including China, require certain taxpayers to actually submit transfer pricing documentation by a specified deadline. Meanwhile, the Malaysian and Vietnamese rules require a taxpayer to indicate in its tax return that transfer pricing documentation has been prepared. Others have a requirement to prepare and attach to the annual income tax return a specific transfer pricing information return.


The IRAS has not gone down this path. It does not require a taxpayer to submit the transfer pricing documentation with its tax return, but instead requires that the documentation be made available upon request. There are exemptions for certain types of transactions and for small- and medium-sized entities (SMEs), but only to the extent that the SMEs do not have transactions with overseas group entities or with Singapore entities that have a different tax rate.


Alignment with the OECD'sDocumentation Guidance


Many of the proposals put forward by the IRAS are in fact broadly aligned with those of the OECD's Action 13 report. The IRAS should be seen as a pioneer in introducing these concepts into its domestic guidance. Specifically, the IRAS consultation paper introduces the concept of a two-tiered approach towards documentation, in line with the OECD guidance. Taxpayers are expected to present significant information pertaining to its global group on one level and, on the other level, some very specific information relating to the local entity's operations. While the 2006 guidelines were more accommodating to differing approaches to documentation, the 2014 iteration is far more specific.


A notable omission in the IRAS's proposed guidance 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 attracted more public comments than any other aspect of the plan. The main controversy stems from the need for taxpayers to open up significant extraterritorial information to local tax authorities. While the IRAS does request certain extraterritorial information in its group level information, at this time it does not require taxpayers to prepare and provide a CbC reporting template similar to that proposed by the OECD.


It has been reported that some countries' tax authorities may be waiting for the outcome of the OECD's February 2015 meeting before introducing such requirements. This meeting has been proposed to reach conclusions on how the CbC reporting tool should be filed and shared, while preserving the confidentiality of the document. It remains to be seen whether the IRAS is one of these tax authorities.


Penalties forNon-Compliance


Again, the IRAS and the OECD are broadly aligned when it comes to penalizing taxpayers for not adhering to transfer pricing documentation requirements. The OECD advocates the use of monetary penalties if contemporaneous documentation has not been prepared and monetary penalties in the event of an adjustment, which can be more severe in the absence of documentation to support the initial position taken. A final approach suggested by the OECD where the burden of proof typically sits with the taxpayer is to shift the burden of proof to the tax administration if adequate documentation has been provided on a timely basis.


The IRAS has proposed a mix of these approaches in its consultation paper. A fixed monetary penalty could be imposed on the basis that the taxpayer had not complied with recordkeeping requirements. In addition, the IRAS has reiterated that taxpayers may be subject to transfer pricing adjustments, which may themselves be subject to tax penalties. The way that this is currently worded would suggest that the burden of proof would only shift to the IRAS when adequate documentation has been prepared to support a particular position.


Finally, the IRAS has stated that it may not defend a taxpayer's position before another country's tax administration, e.g., under a Mutual Agreement Procedure, if the taxpayer has been remiss in meeting its transfer pricing documentation obligations.


What Happens Next?


The IRAS has sought views and comments on five particular aspects of the consultation paper. Following this, the new guidelines are expected to be released towards the end of the year. The implementation date for the Singapore rules remains to be confirmed, but it is unlikely to be delayed until the OECD finalizes its positions at the end of 2015.



This commentary also will appear in the November 2014 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.



  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.