The (R)Evolution of Transfer Pricing in Singapore
By See Jee Chang & Lee Siew Ying
As published in the Business Times on 11 March 2015
Transfer pricing has become a buzzword of late, not only in the international tax arena, but also for companies here in Singapore.
Transfer pricing, which has to do with the prices charged in transactions between related companies within a group, has been singled out, rightly or wrongly, by tax authorities in developed countries as the key modus operandi by which some major multinationals (MNCs) have shifted profits from high-tax jurisdictions to low-tax ones.
Tax authorities argue that this results in these MNCs not paying their fair share of tax, leading to less tax revenues to fund public goods, which may mean that small and medium-sized enterprises (SMEs) and individuals have to shoulder the extra burden.
Singapore, with a relatively lower corporate tax rate of 17%, is not known as a high-tax jurisdiction. Theoretically, this should discourage MNCs from shifting profits out of Singapore and hence, transfer pricing should not be an area of focus for the Inland Revenue Authority of Singapore (IRAS). But this is not proving to be the case, as since 2006 IRAS has been scrutinising transfer pricing practices; this level of scrutiny is set to increase even further if recent developments are anything to go by.
Why is IRAS concerned about transfer pricing?
Tax authorities in many nations, including the US, UK, France and Japan, have been increasingly launching extensive audits on MNCs, in certain cases slapping them with a hefty tax bill upon concluding they are guilty of profit shifting through various aggressive tax planning schemes including transfer pricing.
Some MNCs have disputed these conclusions, and have taken the tax authorities to court. However, many MNCs are spooked by the extensiveness of such tax audits and in their attempt to avoid such tax audits, some MNCs may pull back profits from their intra-group transactions involving lower tax jurisdictions, such as Singapore, to placate these tax authorities. In other instances, they may reconsider their existing structures and operations in Singapore altogether.
IRAS is wary of MNCs pulling back too much profit out of their Singapore operations without basis, at the expense of Singapore’s tax revenue. IRAS is also concerned with the longer term impact to Singapore as a business location, as unresolved transfer pricing controversies can be very costly and time-consuming for businesses.
As such, IRAS started reviewing the transfer pricing of Singapore taxpayers to ensure compliance with the arm’s length principle, which is premised on independent and commercial basis. This also highlights IRAS’ commitment to be a good treaty partner (Singapore has signed double tax treaties with over 70 countries) and a responsible member of the international tax community, one that upholds international tax and transfer pricing principles.
Key changes to Singapore’s Transfer Pricing Guidelines
On 6 January 2015, IRAS released new, comprehensive transfer pricing guidelines which replace those issued since 2006.
The most significant change in the new guidelines is IRAS’ requirement and expectation that taxpayers prepare and maintain transfer pricing documentation to substantiate that their related party dealings are at arm’s length.
Although the 2006 guidelines stressed the benefit of preparing such documentation, IRAS had revealed that based on the cases subject to transfer pricing audits and reviews, a significant majority of taxpayers still did not have contemporaneous transfer pricing documentation. This compelled IRAS to issue new guidelines explicitly requiring documentation to be prepared.
The new guidelines also introduced the concept of “contemporaneous” documentation – documentation must be adequate and prepared no later than the tax return filing date for the financial year in which the transaction takes place. For example, transfer pricing documentation for transactions carried out in the financial year 2014 should be prepared no later than 30 November 2015.
Other significant changes include:
- Expanded lists of information required, especially at the group level, which will require more time and effort by taxpayers to document. However, there is no requirement for documentation to be prepared in a “master file and local file” format/report, and there is also no country-by-country reporting requirement;
- Documentation needs to be updated at least once every three years, absent of any material changes. Financial update of benchmark should be done annually;
- Safe-harbour thresholds for exemption from documentation but limited to certain situations;
- Taxpayers need to test the financial results of the tested party annually, and to make appropriate year-end adjustments at the year-end closing of financial statements; and
- Taxpayers may be penalised for not complying with record-keeping requirements for tax if they are unable to provide transfer pricing documentation upon request, or denied any year- end adjustments made to the financial accounts if no supporting documentation is available.
Transfer pricing will continue to be a focal point for IRAS. The new guidelines represent another significant milestone in Singapore’s transfer pricing regime, and an affirmation of IRAS’ intent in ensuring that taxpayers maintain sufficient transfer pricing documentation and comply with the arm’s length principle.
With the release of the new guidelines, companies should start to:
- Prepare and maintain contemporaneous documentation if none has been prepared;
- Consider updating the transfer pricing documentation, in view of the new information requirements;
- Prepare contemporaneous documentation during/before the financial year end, in order to support year-end adjustments (a condition for recognition for tax purposes) even though the deadline is up till 30 November;
- Re-evaluate relevant transactions and supporting analyses if new guidance impact arrangement/transactions (e.g. use of Berry ratio, use of global comparables etc.);
- Prepare to respond to transfer pricing consultation or at least detailed query on transfer pricing matters; and
- Consider implementing a consistent transfer pricing strategy and policies, to better mitigate double taxation risks in the longer term.
In summary, a company that undertakes pro-active transfer pricing planning and diligently prepares and maintains adequate and timely transfer pricing documentation stands the best chance of satisfying IRAS that it has complied with the arm’s length principle. Being pro-active is paramount.
The writers are respectively a tax partner and transfer pricing senior manager at Deloitte Singapore. The views expressed are their own.