TRANSFER PRICING IN SINGAPORE: PENALTIES, THRESHOLDS AND OTHER NEW REQUIREMENTS
Earlier this month, the Inland Revenue Authority of Singapore (IRAS) released revised transfer pricing guidelines, providing a better defined view of how the IRAS will handle transfer pricing matters.
IRAS has explicitly noted that the arm’s length principle should be applied on a transaction-by-transaction basis, which suggests that each transaction should be analyzed on a stand-alone basis
These guidelines call for taxpayers to prepare and maintain contemporary transfer pricing documentation. In addition, they specify thresholds for related-party transactions that need to be covered by pertinent transfer pricing documentation.
These guidelines consolidate the previous guidance that has been previously provided by IRAS. But there are several new concepts and positions that have been put forth that finance, tax and others in the company must know.
These include a focus on stand-alone analysis as opposed to aggregate analysis, guidance on economic analysis and benchmarking, introduction of a penalty regime, and negotiating a mutual agreement procedure.
Need for Transaction Specific Analysis
IRAS has explicitly noted that the arm’s length principle should be applied on a transaction-by-transaction basis, which suggests that each transaction (including those involving tangible or intangible property, services and intercompany financing) should be analyzed on a stand-alone basis.
This will increase the onus on the taxpayer to avoid analysis on an aggregate basis. IRAS’ intention of requiring transaction-specific analyses is also evident in the examples that IRAS has provided in the transfer pricing guidelines.
That said, IRAS promises to remain pragmatic. “Where individual transactions are highly inter-related and it can be demonstrated that independent parties in comparable circumstances would typically price the individual transactions on an aggregate basis, taxpayers may consider evaluating the transactions on an aggregate basis,” it says.
”IRAS welcomes taxpayers to discuss their concerns and difficulties in applying the arm’s length principle,” it adds. “IRAS believes that such consultation and cooperation between taxpayers and IRAS is a mutually beneficial and pragmatic way to assist taxpayers in complying with the arm’s length principle.”
Thresholds for Related Party Transactions
In order to reduce the compliance burden for Singapore taxpayers, IRAS provided thresholds for a range of related-party transactions. Taxpayers will have to review their related party transaction values to determine if they meet the thresholds.
Transactions that do not meet the threshold values have to be supported by way of transfer pricing documentation, consistent with the documentation requirements in the revised guidelines.
The thresholds in Singapore dollars for each category of related party transaction is generally S$15 million per financial year, including transactions for purchase of goods, sale of goods, and loans owed to and loans owed by all related parties.
For other categories such as service income, service payment, royalty income, royalty expense, rental income and rental expense, the threshold is set at a much lower S$1 million per financial year.
Aggregation should be done for each category of related-party transactions, IRAS makes clear. “For example, all service income received from related parties is to be aggregated.”
Preparation and Maintenance of Transfer Pricing Documentation
The revised transfer pricing guidelines requires Singapore taxpayers to maintain contemporaneous documentation on a going forward basis. In addition, the detailed information that is required to be maintained as part of the transfer pricing documentation consists of information at the entity level as well as the group level.
