From International Tax
January 16, 2019
By Luis Coronado, Molvin Yiu, Martin Richter and Monica Leung
The two markets of Hong Kong and Singapore are often compared with each other, however, where their transfer pricing regimes are concerned there are differences.
Following the enactment of the Inland Revenue (Amendment) (No. 6) Ordinance 2018 (Amendment Ordinance) on July 13, 2018, which codified transfer pricing (“TP”) principles and introduced mandatory TP documentation requirements into the Inland Revenue Ordinance (Cap. 112) (IRO), Hong Kong has reached a significant milestone in its TP regulatory environment.
Similarly, 2018 marked an important year for Singapore taxpayers with the publication of the Income Tax (International Tax Compliance Agreements) (Country-by-Country Reporting) Regulations 2018 (“CbCR Regulations”) under the Income Tax Act (“ITA”) in the Singapore Government Gazette on February 5, 2018 and the legislation of the Income Tax (Transfer Pricing Documentation) Rules 2018 (“TPD rules”) made under section 7 of the Singapore Income Tax Act (“SITA”) on February 22, 2018 as well as the release of the fifth edition of the Singapore TP Guidelines (“2018 Singapore TP Guidelines”) by the Inland Revenue Authority of Singapore (“IRAS”) the following day.
For Hong Kong, the introduction of the fundamental TP rule (“FTPR”), which applies from assessment periods on or after April 1, 2018, is core to the Hong Kong TP regulatory regime.
It requires intercompany transactions between associated enterprises to be conducted at arm’s length in a manner consistent with the definition of the arm’s length principle as stipulated in 2017 Organization for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“OECD TP Guidelines”).
Subject to fulfilling certain prescribed criteria, the FTPR generally applies to cross-border intercompany transactions whereby Hong Kong’s Inland Revenue Department (“IRD”) is empowered to adjust taxpayers’ profits upwards and losses downwards whenever intercompany transactions are deemed non-arm’s length and the taxpayer is considered to have gained a Hong Kong tax advantage. Consequently, any adjustment made may attract a penalty of up to the amount of tax undercharged.
In Singapore, the TPD rules are effective for the Year of Assessment (“YA”) 2019 onward and apply to both cross-border and domestic intercompany transactions. The TPD rules detail form and content of TP documentation and set out exemptions.
In addition, the obligation for taxpayers to prepare and maintain contemporaneous TP documentation is now enforceable under section 34F of the SITA, albeit with certain conditions and exemptions formally codified under the TPD Rules. Further, a penalty regime for non-compliance with TP documentation requirements and the arm’s length principle may entail a fine not exceeding S$10,000 ($7,376) and a new 5 percent surcharge on any TP adjustments made, regardless of whether there is tax payable on the adjustments.
In addition, the 2018 Singapore TP Guidelines provide examples and explanations on certain aspects of the TPD rules. These include enhanced guidance on the comparability analysis and transactional profit split method (“PSM”), as well as a completely rewritten section relating to TP documentation requirements, in particular written legal agreements.
A further pillar of the Hong Kong Amendment Ordinance is the adoption of the OECD’s recommended three-tiered documentation structure comprising country-by-country reporting (“CbCR”), a master file (“MF”) and local file (“LF”). All three forms of documentation are to be prepared in a manner consistent with the content requirements and formats outlined by the OECD TP Guidelines.
Ultimate parent entities (“UPE”) of multinational enterprise groups that are resident in Hong Kong with consolidated turnover of HK$6.8 billion ($867 million) (i.e., reportable group) are required to prepare and file CbCR no later than 12 months after the end of the respective accounting period for accounting periods beginning on or after January 1, 2018.
Under certain circumstances, a secondary filing mechanism including surrogate and local filing is applicable and written notification containing information relevant for determining the obligation for filing CbCR must be filed with the IRD within three months after the end of the relevant accounting period.
All companies carrying out a trade or business in Hong Kong are required to prepare MF and LF for accounting periods beginning on or after April 1, 2018 and be ready within nine months of the year end, unless they meet either one of the exemptions available based on size of business and related party transactions, with specified domestic transactions being excluded from the exemption assessment.
Although the IRAS acknowledges a three-tiered documentation structure consisting of documentation at group level; documentation at entity level; and CbCR, the Singapore TP documentation requirements are not identical to the OECD’s MF and LF documentation requirements. It should be noted that the 2018 Singapore TP Guidelines require the inclusion of certain additional content as compared to the OECD TP Guidelines in order to be considered compliant from a Singapore perspective as outlined in the Second Schedule of the TPD rules.
The CbCR related provision stipulates that a Singapore-resident UPE with consolidated revenues of at least S$1,125 billion is required to prepare and submit CbCR no later than 12 months after the end of the accounting period for accounting periods beginning on or after January 1, 2017, whereby no secondary or surrogate filing mechanism nor notification requirement for non-Singapore headquartered MNE groups exists.
Whilst the above outlined TP regime and the three-tiered approach to TP documentation are the most prominent, there are also a number of other noteworthy changes made to the respective location’s TP environment.
Hong Kong has introduced an advanced pricing arrangement program (“APA”) and a provision for treatment of intangible related returns, whereas Singapore has provided enhanced guidance on the APA program and dispute resolution mechanisms, the exchange of information, attribution of profits to permanent establishments and financing arrangements.
The two markets of Hong Kong and Singapore are often compared with each other. However, due consideration should be given to the nuances in the organization of the economic, legal and tax environment that ultimately impact the direction and development of the respective jurisdiction’s tax system.
The TP regime in Hong Kong, for now, seems to focus mainly on the disclosure of intercompany transactions for compliance purposes to satisfy internationally recognized standards.
Singapore, in contrast, goes a step further. The Singapore TP regime has been updated on an annual basis since 2015 to account for global developments adapting to the current international tax and TP trends. This ensures an appropriate level of compliance and also promotes apposite implementation and day-to-day management of TP policies, therefore reducing the taxpayers’ administrative and tax compliance matters in the long run.
Luis Coronado is EY Asia-Pacific Transfer Pricing Leader, Partner and Molvin Yiu is Director, International Tax Services at Ernst & Young Solutions LLP. Martin Richter is Hong Kong Transfer Pricing Leader, Partner and Monica Leung is Senior Manager, International Tax Services, Ernst & Young Tax Services Ltd.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.