Transfer Pricing 2024: Latest updates and developments

The Inland Revenue Authority of Singapore (IRAS) has recently announced the following updates for transfer pricing (TP):

1. 2024 amendments to the Income Tax (Transfer Pricing Documentation) Rules 2018
   Existing subsidiary legislation under the Income Tax Act 1947 (ITA) governing the form and content requirements of Singapore’s transfer pricing documentation, The Income Tax (Transfer Pricing Documentation) Rules 2018 (the “TPD Rules”), were recently amended by the Income Tax (Transfer Pricing Documentation) (Amendment) Rules 2024 (the “2024 Amendments”), published on 7 June 2024 in the Government eGazette and taking effect on Monday, 10 June 2024.
   
2. IRAS e-Tax Guide—Transfer Pricing Guidelines (Seventh Edition)
   Following these gazetted amendments above, IRAS also published the Seventh Edition of the Singapore TP Guidelines on Friday, 14 June 2024 (the “2024 SG TPG Updates”).

Broadly, we see the 2024 Amendments and 2024 SG TPG Updates indicating:

• Alignment of pricing certain intra-group financing arrangements to market practices and the arm’s length standard;
• IRAS’ firmer attitude towards enforcement of TP compliance requirement;
• IRAS’ continuous effort to provide enhanced administrative concessions to ease compliance burden; and
• IRAS’ clarification of certain existing practices to help taxpayers better understand the appropriate TP approaches and to align Singapore TP practices to global practices.

Summary of the 2024 Amendments and 2024 SG TPG Updates

The major changes are summarised as follows:

• Loans between domestic related parties (domestic loans) entered into or re-financed on or after 1 January 2025 will require arm’s length interest rates, even where the lender and the borrower are not in the business of borrowing and lending. IRAS will also cease to use interest deduction restriction as a proxy to the arm’s length principle for such domestic loans. Taxpayers with such domestic loans may opt to apply the indicative interest margin published by IRAS (and if so, such loans will be exempted from TP documentation) or determine the interest rate through an arm’s length analysis or benchmarking (documentation of such arm’s length analysis would be required).
• For years of assessment (YA) 2026 and after, simplified TP documentation prepared based on declarations confirming that qualifying past TP documentation (QPTPD) is applicable must specify the date on which such declaration was made. Such declaration needs to be made by 30 November of the relevant YA, to be considered contemporaneous.
• For YAs 2026 and onwards, the dollar value thresholds for TP documentation exemptions by transaction category for the following categories of related party transactions have been increased from SGD 1 million to SGD 2 million per transaction category:
  o Provision and receipt of services
  o Income and expense connected with the right to use movable property
  o Leasing of property to and from related parties
  o Provision or receipt of guarantee
  o Any other transaction (in aggregate per transaction category)

In addition, several other key changes made to the Singapore TP Guidelines are summarised as follows:

• Paragraph 5.119: Additional guidance has been provided as to when the use of working capital adjustments may be appropriate and what interest rates may be used for the purpose of making these adjustments.
• Appendix B to Chapter 6: A new FAQ #7 has been added to clarify that the requirement to review and refresh TP documentation annually also applies to long term loan transactions. A new FAQ #8 was also added to provide guidance on whether information provided in subsequent years to supplement previous TP documentation may or may not be considered contemporaneous.
• Paragraph 7.10: IRAS has updated its description of the audit process where it seeks to make a transfer pricing adjustment and imposes a surcharge. Whilst there is no major change to the process and steps, there is a clear change in tone indicating a firmer attitude toward compliance and enforcement.
• Paragraphs 8.10 and 8.11: Clarification on TP documentation and TP adjustments on capital transactions have been provided.
• Paragraph 9.9(c): A clarification on what constitutes a “good compliance record” for the purpose of receiving a partial or full remission of TP surcharge under Section 34E of the ITA has been provided.
• Chapter 11: The requirement for pre-filing meetings prior to submitting Mutual Agreement Procedure (MAP) applications has been removed.
• Paragraph 14.22(d): Additional clarification on the requirement for a “written agreement” to be put in place for expenses to be treated as strict pass-through cost has been provided and IRAS will also consider email correspondences between related parties as “written agreements”.
• Paragraph 14.25: IRAS has provided new examples of some types of expenses which may be treated as strict pass-through cost, subject to the conditions described in Paragraph 14.22.
• Chapter 15: Updates have been made to discuss the changes arising from the 2024 Amendments to the TPD Rules described above concerning the requirement to apply the arm’s length principle to domestic loans and the use of the IRAS indicative interest margin on such loans. Updated guidance has also been provided on the selection of the appropriate risk-free rate in the context of the replacement of interbank offered rates (IBORs) by alternative risk-free rates (RFRs).
• Chapter 18: A new Chapter was added to discuss the considerations for treating government assistance or grants for TP purposes, as well as explanations relating to taxpayers’ treatment of such assistance or grants in pricing related party transactions to be included in TP documentation.

Detailed discussion and Deloitte Singapore’s views

The 2024 Amendments and 2024 SG TPG Updates could be discussed under the following broad themes. We share additional details on these changes and our views on the impact we believe these changes will have on taxpayers in the sections below:

A. Alignment of TP for intra-group financing to market practices and developments

Cessation of interest free basis for domestic loans

Currently, loans extended between domestic related parties are permitted to be interest free, so long as the lender is not in the business of borrowing and lending. The IRAS instead applies interest restriction to the lender, in lieu of applying the arm’s length principle to the loan.

Following the 2024 Amendments and 2024 SG TPG Updates, domestic loans entered into or re-financed on or after 1 January 2025 will require an arm’s length interest rate, even where the lender and the borrower are not in the business of borrowing and lending. IRAS will also cease to use interest restriction in lieu of arm’s length principle for such domestic loans.

To ease compliance burden, taxpayers with such domestic loans may opt to apply the indicative interest margin published by IRAS. Alternatively, taxpayers may also determine an arm’s length interest rate through a proper arm’s length analysis or benchmarking. The option to apply the indicative margin is available to such domestic loans of any principal amount, in contrast with other situations described below, where the indicative margin could only be applied where the principal value of the loan does not exceed SGD 15 million.

Where either the borrower or lender in a domestic loan (entered into or re-financed on or after 1 January 2025) is in the business of borrowing or lending, an arm’s length interest rate is required for the loan, and if the principal value of the loan does not exceed SGD 15 million, the IRAS indicative margin may be applied. This TP treatment is essentially unchanged with the exception that this treatment now applies where either the borrower or lender is in the business of borrowing and lending. In contrast, for domestic loan entered into prior to 1 January 2025, the treatment only applies where the lender is in the business of borrowing and lending.

There are however no changes made by IRAS for pricing cross border related party loan transaction. Taxpayers may continue to choose to apply IRAS indicative margin to cross border related party loans in case the principal amount of such a loan is SGD 15 million or less. Where for such a loan the indicative margin is not applied or where the principal amount of the loan transaction exceeds SGD 15 million, taxpayers need to determine the arm’s length interest rate using existing guidance provided by the IRAS for pricing related party loans (i.e., determine an arm’s length rate based on transfer pricing benchmarking).

Resultant changes to TP documentation requirements

Arising from the above changes, resultant changes to the required TP documentation for loans were made.

For domestic loans extended or refinanced on or after 1 January 2025, where the lender and borrower are not in the business of borrowing and lending, if the indicative interest margin published by IRAS is adopted, such loans will be exempt from TP documentation. On the other hand, if the interest rate for such loans is determined through an arm’s length analysis or benchmarking, TP documentation of such arm’s length analysis would be required.

There is no change to the existing TP documentation requirements for domestic loans entered into before 1 January 2025, as well as cross border related party loans. For these, TP documentation is exempt if the loans are domestic loans where the lender is not in the business of borrowing or lending or if the indicative margin is applied (for loans with principal value not exceeding SGD 15 million), whilst TP documentation would be required in all other cases where an arm’s length interest rate is required.

A summary of the updated TP treatment and TP documentation requirement is presented below:

The key change to move away from the use of interest free loans with interest deduction restriction as a proxy to the arm’s length principle is not totally unexpected, considering that IRAS had acknowledged consistently in the past that such treatment is not in conformity with the arm’s length principle. With the above amendments, all loans (going forward from 1 January 2025) will need to be interest bearing, albeit where qualifying conditions are met, the indicative margin may be applied to ease the administrative burden of determining and documenting the arm’s length interest rate.

With these TP changes on domestic loans, IRAS will be able to make TP adjustments on the lender as well as levy surcharge on such TP adjustments for interest free, domestic related party loans from 1 January 2025. It is important to note that unlike cross border loans, IRAS is able to make TP adjustments and subject the adjustments to Singapore tax as the interest/adjustments on the domestic loans are Singapore sourced income for the lender.

Therefore, taxpayers with substantial domestic related party loans (including interest-free loans) should reassess the appropriateness of their domestic related party financing arrangements and ensure such arrangements follow the updated requirements where necessary, including the necessary documentation compliance requirements.

Guidance on interbank offered rates (IBORs) to new alternative risk-free rates (RFRs)

In recent years, IBORs such as the London IBOR (or “LIBOR”) which were widely used as base reference rates for intercompany financing were replaced by a new type of base reference rate (i.e., RFRs).

The manner in which IBORs and RFRs are derived is fundamentally different—IBORs were derived from essentially quotes submitted by different groups of major banks as to what they would charge for unsecured interbank borrowing across a range of tenors, whereas RFRs would typically be derived from the interest applied on actual overnight deposit and repo transactions.

The 2024 SG TPG Updates clarify that where the base reference rate of a related party loan is changed from an IBOR to an RFR (e.g., from USD LIBOR to the USD Secured Overnight Financing Rate (SOFR)), a spread adjustment should be considered to account for the fundamental economic differences between an IBOR versus what an RFR is.

It has been further clarified by the IRAS that when transitioning existing related party IBOR-based loans to RFR-based loans, taxpayers are to apply the guidance issued by the relevant governing bodies for the relevant IBOR/RFR pairs. For example, when transitioning an existing related party SOR-based or SIBOR-based loan to a SORA-based loan, the related parties to that loan are to apply the guidance issued by the Singapore Steering Committee for SOR & SIBOR Transition to SORA (SC-STS), the Association of Banks in Singapore, and the Monetary Authority of Singapore. Where taxpayers made changes to their existing related party IBOR-based loans in response to the IBOR reform and in accordance with the relevant guidance (for example guidance issued by SC-STS for SOR/SIBOR transition to SORA), it has been clarified that IRAS will consider such changes as arm’s length. However, where the changes go beyond those expected under the IBOR reform and the relevant guidance, IRAS may consider such additional changes could be classified as re-financing of the existing loan transaction, and if so, such a transitioned loan could be considered as a new loan and may need to be completely re-priced in accordance with the arm’s length principle based on comparable data at the time of such transitioning.

Review and refresh of long-term loan transactions

It is a common practice that when an arm’s length analysis is performed for a loan transaction at the outset of the loan transaction (and documented accordingly), and the loan extends to a number of years, there is no further review undertaken on the appropriateness of the initial analysis and documentation in subsequent years.

In the 2024 SG TP Updates, the IRAS now clarifies that such loans will require annual reviews, no different from other types of related party transactions. In particular, it is essential to review the facts and circumstances relating to the loan parties, including changes to the economic environment, borrower’s financial situation, collaterals etc, which may or may not have an impact on the interest rate agreed at the time when the loan was originally made.

To ease compliance, a taxpayer can prepare simplified TP documentation to document that the initial conditions remain valid, and that the interest rate and arm’s length conclusions remain relevant.

B. IRAS’ stricter stance towards enforcement of TP compliance requirements

Requirement for qualifying past TP documentation declarations to be dated

Prior to the 2024 Amendments, to reduce taxpayers’ compliance burden, taxpayers with transactions subject to mandatory TP documentation requirements under Section 34F of the ITA were allowed the option to rely on TP documentation prepared for a prior financial year, to satisfy current year TP documentation requirements, provided certain conditions were met:

• Previously prepared TP documentation had to meet the definition of QPTPD set out in Rule 3 of the TPD Rules; and
• The taxpayer had to prepare a declaration containing the previously prepared TP documentation and confirm that it meets the definition of qualifying past TP documentation (this declaration, together with the QPTPD is referred to as “Simplified TP Documentation”).

The 2024 Amendments continue to avail the option of using qualifying past TP documentation, but now require the declaration made to also indicate the date on which the declaration is made. If the declaration is not made and dated on or before 30 November of the relevant YA, taxpayer would not be considered to have met with the contemporaneous documentation requirement for that YA.

This requirement for dating is not new—the requirement for contemporaneous TP documentation to be dated when it is completed has existed since the TPD Rules were first published back in February 2018. The 2024 Amendments simply clarify that this requirement applies to all forms of TP documentation allowed under the TPD Rules, including Simplified TP Documentation.

Further, in the 2024 SG TPG Updates, it has also now been clarified that for the previously prepared TP documentation to be QPTPD, it must have been prepared contemporaneously (i.e., by 30 November of the relevant year).

TP audit process—firmer stance on adjustments and surcharge

In August 2021 when the Sixth Edition of the Singapore TP Guidelines were released, IRAS amended Section 7 which described “Transfer Pricing Consultation” with the new term “Transfer Pricing Audit”, reflecting the increased assertiveness adopted by IRAS in practice, in its review and audit of transfer pricing arrangements with each passing year.

In this Seventh Edition of the Singapore TP Guidelines (Para 7.10), the IRAS states that where it is ascertained that a taxpayer’s related party transaction is non-arm’s length, the IRAS will “consider making” (instead of “propose” in the previous version of the Guidelines) an adjustment, and “once an adjustment is made, IRAS will impose a surcharge under Section 34E accordingly” (no mention of surcharge was made in this paragraph in the previous version of the Guidelines).

Likewise, instead of the previous Guidelines’ mention that “[t]he taxpayer will have the opportunity to respond to IRAS’ proposal and discuss how to resolve the issue, before IRAS makes the adjustment”, the latest Guidelines now states that “[i]f the taxpayer does not agree with the IRAS’ adjustment and wishes to object to the corresponding notice of assessment, it must follow the IRAS’ Objection and Appeal Process to resolve the issue with IRAS”.

Whilst there is no major change to the process and steps, there is a clear shift in language and tone, and this reflects the firmer attitude towards compliance and enforcement that has already been observed in actual audits/reviews by the IRAS, where we have also observed that a discussion on surcharges is now part and parcel of the audit and adjustment discussion.

Taxpayers should note IRAS’ increasing stringency on TP reviews, adjustments and surcharges, and take necessary steps and prepare adequate documentation to mitigate the risk of adjustment, surcharges and penalties in relation to its related party transactions.

Expansion of conditions to be met for surcharge remission

One of the conditions to be met for a taxpayer to qualify for a partial or full remission of the Section 34E surcharge (i.e., arising from an upward Section 34D adjustment) is to have a “good compliance record of prompt submission of tax returns and payment of tax by the due dates” for the current and immediate two preceding YAs.

The definition of “good compliance record” has been expanded in the Seventh Edition of the Singapore TP Guidelines to now also include no history of surcharges and penalties being imposed, remitted, or compounded.

With this more stringent change, once a taxpayer has been subject to any surcharge or penalties in prior TP audits or reviews, it would be difficult for the taxpayer to seek remission for surcharges in subsequent years when it is subject to IRAS review or audits.

C. Enhanced administrative concessions to ease compliance burden

While taking a firmer stance on enforcement of compliance with TP requirements, the IRAS has in the 2024 Amendments and 2024 SG TPG Updates also enhanced certain rules and concessions to alleviate compliance burden.

Increase in dollar value thresholds for exemption from mandatory TP documentation

To exempt small taxpayers and smaller transactions from the compliance burden of preparing TP documentation, Singapore’s mandatory TP documentation requirements apply only to taxpayers who (i) have surpassed a gross revenue threshold in a given financial year (both past and present), and (ii) have related party transactions that do not meet any of the transactional exemption criteria described in Rule 4 of the TPD Rules.

Rule 4(h) is a dollar-value-based exemption criterion which, in response to feedback, has been increased in the 2024 Amendments with the inclusion of Rule 4(i), applicable to related party transactions undertaken in the basis period on or after YA 2026, providing taxpayers with greater relief from TP compliance for less significant related party transactions.

From YA 2026 and onwards, the following categories of transactions will be subject to higher dollar value thresholds when assessing their eligibility for exemption from TP documentation, providing relief from compliance burden and costs to a larger proportion of taxpayers with smaller related party transactions:

Notwithstanding the increase in threshold, the requirement for all related party transactions to be conducted at arm’s length remains and taxpayers should continue to assess the extent of TP documentation to prepare for a particular transaction, based on the tax at risk and complexity of the transaction.

Evidence to support strict pass-through cost treatment

In the Sixth Edition (and earlier editions) of the Singapore TP Guidelines, IRAS required four conditions (in paragraph 14.22) to be met before the costs of a group service provider can be treated as pass-through costs and passed on to group service recipients at cost, without mark-up (i.e., strict pass-through cost treatment).

One of the four conditions required a “written agreement” between the service provider and its related parties, for the latter to assume the liabilities relating to the acquired services.

The 2024 SG TP Updates now allow email correspondences to be considered as “written agreements” for purposes of meeting the conditions for strict pass-through cost treatment, which should simplify compliance requirements. Notwithstanding, taxpayers should still be mindful of record keeping requirements and maintain proper records of such emails pertaining to pass-through cost.

The 2024 SG TP Updates also included a few new examples, illustrating the type of expenses and circumstances which qualify for strict pass-through cost treatment. One example of particular interest involves third party software license costs incurred by taxpayer in relation to centralised procurement of such licenses from third parties, on behalf of its related parties. Through this example, the IRAS has clarified that the same principles and conditions for strict pass-through cost treatment may also be similarly applied to non-service transactions.

Requirement for pre-filing meetings for MAP applications formally removed

The requirement for taxpayers to conduct pre-filing meetings with the IRAS prior to submitting MAP applications has been removed. Taxpayers may now submit MAP applications directly to the IRAS for IRAS’ evaluation, potentially shortening and simplifying the MAP process.

If required, IRAS may seek clarification or further information from the taxpayer after they have reviewed the application. This change also does not preclude the taxpayer from initiating a discussion with the IRAS prior to submitting the MAP application, providing flexibility to taxpayers should they prefer such an approach.

D. Other significant clarifications

Apart from the key changes described above, IRAS also provided several significant clarifications to TP issues commonly faced by Singapore taxpayers.

Working capital adjustments

IRAS supplemented guidance provided in the 2022 Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) regarding working capital adjustments by including in the 2024 SG TPG Updates when working capital adjustments should be made and which interest rate should be used when making such adjustments.

Conceptually, working capital adjustments may be performed to eliminate the impact of financing cost on the profitability of selected comparables for utilising levels of working capital that are different from the tested party.

Such adjustment should only be performed when it can be made accurately and if it improves the reliability of the comparables selected when applying the resale price, cost-plus, or transactional net margin method (TNMM).

A parameter which significantly impacts the magnitude of the working capital adjustments made is the interest rate. IRAS’ clarifications in the 2024 SG TPG Updates have provided examples of suitable interest rates which may be used, bearing in mind that the overarching principle in the choice of interest rate employed should be one that is applicable to a commercial enterprise operating in the same market as the tested party. To this end, IRAS provided some examples of interest rate which a taxpayer may consider:

• An interest rate actually incurred by the tested party
• Interest rates from banks, bond yields, industrial yield curves, or from the International Monetary Fund where appropriate
• Interest rate based on an appropriate base reference rate plus a margin where the IRAS indicative margin may be applicable if it is similarly applied to a related party loan

However, if taxpayers are not certain whether the interest rate selected is one that is applicable to a commercial enterprise operating in the same market as the tested party, as a reference test, taxpayers may consider checking whether the selected rate reasonably matches up to the tested party’s actual cost of funding.

The impact of working capital adjustments on benchmarking results is directly correlated with the magnitude of the interest rate applied and could be significant, relative to the pre-adjusted interquartile range of benchmarked results established.

Therefore, in light of the new IRAS guidance, taxpayers should evaluate whether working capital adjustments are necessary and whether their current approach is aligned with IRAS’ requirements, and whether changes to the current approach are necessary to mitigate potential disagreement with IRAS on such adjustments, given that IRAS has now published its formal view of this matter.

TP for capital transactions

Broadly, under Section 34D of the ITA, the IRAS may make TP adjustments to the effect of (i) increasing income, (ii) reducing deductions, or (iii) reducing losses of a given taxpayer for having engaged in transactions which are not conducted at arm’s length. The conventional view is hence that the arm’s length requirement under Section 34D (and therefore surcharges under Section 34E as well) do not apply to capital transactions as they normally would to revenue transactions.

It is also not entirely clear whether a capital transaction which did not meet the exemption criteria described in Rule 4 of the TPD Rules needed to be analysed and documented.

It is thus a welcome addition to the 2024 Singapore TP Guidelines that IRAS has clarified that “IRAS will not make any transfer pricing adjustment relating to any gain, loss or deduction arising from capital transactions” and that “taxpayers are not required to prepare TP documentation for such capital transactions for Singapore’s tax purpose.”

At the same time, the IRAS clarified that for the acquisition or sale of fixed assets (capital) for the purposes of determining the allowance to be given as well balancing allowances for Singapore tax purposes, while the IRAS is not precluded from applying the arm’s length standard to ensure that the sale price determined is arm’s length, it would seek to apply the method prescribed (namely the open market price) under the relevant sections in the ITA instead of the arm’s length principle. IRAS also clarified that preparation of TP documentation is not required in such cases involving fixed assets for Singapore tax purposes.

Treatment of government assistance for TP purposes

The 2024 SG TPG Updates include a new Section 18 discussing the treatment of government assistance for TP purposes. This section is an expansion of the guidance provided by IRAS on the TP treatment of government assistance provided during COVID-19 (e.g., Jobs Support Scheme), which is currently published on the IRAS’ website.

The guidance provided asks taxpayers to identify the type of government assistance received and depending on the nature of the assistance received, assess whether it is a feature of the market which comparable companies are operating in (i.e., affecting all market participants as a whole), or a specific benefit which a commercially rational entity would have retained to its own benefit.

If a particular type of government assistance would have benefitted all market participants similarly, one may argue that the usual manner of performing comparability analysis and applying the appropriate TP method would have adequately accounted for the impact of such government assistance without needing to make specific adjustments for it. In undertaking such analysis, it is also important to assess and observe what independent parties would do in similar situations.

The 2024 SG TPG Updates acknowledge practical challenges in obtaining sufficient data to make such an assessment. Therefore, unless otherwise demonstrated, taxpayers should assume that a commercially rational independent party would not have shared government benefits it has received and accordingly exclude them from the computation of the transfer price or assessment of arm’s length profit.

A taxpayer should prepare documentation that supports the position taken, including the details of the government assistance it has received, the accounting treatment applied, its assessment of the impact of assistance and how it has been treated for TP purposes.

Provision of additional information not contained in initial TP documentation prepared

Taxpayers are required to prepare and maintain TP documentation, in support of their related party pricing, within the contemporaneous timeline (i.e., by 30 November of the relevant YA).

The 2024 SG TPG Updates clarify that additional details or analysis conducted by the taxpayer in a subsequent year to supplement information contained in the TP documentation prepared previously could be regarded as contemporaneous information for that prior year only if those details do not relate to subsequent developments or events occurring after the prior year when the previous TP report was prepared. Details or analysis relating to events or circumstances occurring after the prior year would not be considered contemporaneous for that prior year.

Conclusions

As with the previous amendments to the Singapore TP Guidelines and TPD Rules, the latest 2024 Amendments and 2024 SG TPG Updates reflect a continuation of the development of the Singapore TP regime, comprising changes made to certain existing TP treatment, formal and additional guidance on specific technical issues, clearer messaging on IRAS’ expectations on compliance requirements and enforcement, as well as extension of certain concession and compliance relief.

The requirement to now price a domestic loan with an arm’s length interest from 1 January 2025 onwards will impact many taxpayers, as the use of interest free loans is a widespread practice. Taxpayers with such loans should review and consider its group financing approach accordingly, and take immediate action in preparation for the new TP treatment starting with effect from 1 January 2025. It should be noted that unlike cross border loans, IRAS will be able to subject any TP adjustment on such domestic loans to Singapore tax and impose a surcharge.

Given the IRAS’ ongoing focus on TP compliance, taxpayers should also take heed of the clarifications on various aspects of contemporaneous TP documentation requirements clarified in the 2024 SG TPG Updates, particularly the requirement of dating the declaration for Simplified TP Documentation, the need for review of the features and circumstances of loan transactions in subsequent years of the loan, as well as the clarification that a past documentation must have been prepared contemporaneously to be considered as a QPTPD. Where any of these aspects are relevant to a taxpayer, we envisage that the IRAS will now assess the taxpayer’s compliance with documentation requirements based on these clarified positions in the new guidelines.

Taxpayers should also note the firmer tone and stance with regards to IRAS’ enforcement of the arm’s length principle, through increased reviews, audits and adjustments, as well as the imposition of penalties and surcharges. As mentioned, the increased stringency is already observed in practice, and the 2024 SG TPG Updates merely reflect such IRAS’ posture towards stricter compliance and adherence to the arm’s length principle.

It is also important to note a taxpayer subjected to surcharges and penalties would be precluded from being eligible for remission of surcharges in future years, under the newly clarified conditions for remission of surcharges (what constitutes “good compliance record”).

Taxpayer should hence ensure its TP documentation and process are robust and that they continue to be fit for purpose in the current TP environment, in anticipation of IRAS’ TP reviews and audits, and to mitigate the risk of being subject to adjustments, penalties and surcharges in potential disputes with IRAS.

In meeting with the increasing compliance requirement and heightening scrutiny from IRAS, taxpayers should also seek to rely on the various, increased scope of compliance relief provided in the 2024 SG TP Updates, including the application of the indicative margin for loans, the higher threshold for exemption from TP documentation, and the clarification on documentary evidence required for strict pass-through costs, to mitigate compliance costs and risks, where applicable.

Lastly, with the guidance on government assistance formally included in the latest guidelines, we envisage that the TP treatment of such items would now need to be addressed and documented in accordance with the new guidance. Before the guidance was first published on the IRAS website, there was some uncertainty on the TP treatment of government assistance. Though the guidance as it first appeared on the IRAS website during the COVID-19 pandemic was then largely applied to COVID-19 government assistance (such as Job Support Scheme etc), the same principles would be applicable to other government assistance. A taxpayer in receipt of such items should ensure that its TP policy and treatment, as well as documentation are in accordance with this new guidance.

For further information, please contact Daniel Ho, See Jee Chang, Avik Bose, and Noel Tan.