Fine-tuning the legislation for greater compliance

As part of its increased focus, Singapore introduced expanded TP legislation under the Singapore Income Tax Act (SITA) in October 2017. Accompanying subsidiary legislation (the Rules) and the fifth edition of the TP guidelines (TPG5) were also released in February 2018. While contemporaneous TP documentation has been required in Singapore since 2015, the requirement is formally legislated and corresponding penalties are introduced for non-compliance. The Rules provided additional detail (e.g. requisite content) on the documentation requirements, and the TPG5 was substantially expanded from previous editions for alignment with the SITA and Rules, as well as to provide administrative guidance to taxpayers.

Legislated requirements for TP documentation, surcharges on TP adjustments and specific TP penalties have been introduced to foster adherence and sound TP practices. Together with the power to re-characterise transactions, Singapore has become one of the stricter countries globally on TP enforcement.

In October 2017, legislative requirements concerning TP were strengthened and expanded in section 34 of the SITA. These were followed in February 2018 by the introduction of the Income Tax (Transfer Pricing Documentation) Rules 2018 (rules), which are effective from the year of assessment (YA) 2019, along with the TPG5.

Some of the important developments contained within the expanded section 34 of the SITA are summarised below:

• Arm's-length principle – The expanded legislation continues to endorse the arm's-length principle as the standard to guide related-party transactions and elaborated on the ways by which the tax authority is able to make adjustments;

• Re-characterisation – In a new subsection added to the legislation, the tax authority provided the power to disregard the form of related-party dealings, if it is inconsistent with substance and lacks commercial rationality. Related-party transactions can be re-characterised to those consistent with arm's-length dealings, and taxed accordingly;

• Surcharge – A 5% surcharge on the amount of TP adjustments made (rather than the tax arising from the adjustment) by the Inland Revenue Authority of Singapore (IRAS) is introduced from YA 2019. This means that the surcharge will be payable regardless of whether the taxpayer is in a tax paying position; and

• Transfer pricing documentation – A new section to the SITA formalises the existing requirement for taxpayers to maintain contemporaneous TP documentation. From YA 2019, unless certain exemptions are met, taxpayers are required to prepare and maintain TP documentation for each related-party transaction. Such documentation must be prepared no later than the filing due date and must contain items specified in the Rules. Failure to comply with this and various other provisions for documentation to be considered timely and complete may attract a fine not exceeding SG$10,000 ($7,000).

The rules provide additional guidance on the form and content of TP documentation, as well as specific situations where there may be an exemption from preparing the documentation. There are some noteworthy items in the Rules, as follows:

• The documentation must contain the information specified in the second schedule of the Rules. The information requirements under the Rules have some consistencies with the OECD master file and local file requirements under BEPS Action 13, albeit not identical. The Rules substantially expand the information requirements in new areas such as changes to group structure as well as more granular details for many items;

• The completion date of documentation must be specified, thereby reinforcing the contemporaneous requirement;

• Various exemption criteria under which detailed TP documentation is not required are provided under the Rules. The exemption applies to small operations with gross revenue of less than SG$10 million ($7.3 million), related-party transaction volumes that do not exceed low-value thresholds, situations where the risk of tax revenue leakage is relatively small, and/or in situations where a safe harbour can be applied; and

• The introduction of simplified TP documentation whereby qualifying past TP documentation prepared in the preceding financial year(s) could be used for the present financial year attached with a declaration.

The use of the qualifying past TP documentation is subject to the fulfilment of the following criteria:

• Past TP documentation was prepared in accordance with the latest legislation, Rules and TPG5, and must contain specific information required therein;

• Past TP documentation is properly dated and prepared in English;

• The transaction documented in the past TP documentation is the same as the transaction in the present year;

• The transaction documented in the past TP documentation was undertaken with the same related parties; and

• The following information contained in the past TP documentation remains relevant in the present year:

• Commercial or financial relations between the taxpayers and their related parties;

• Conditions made or imposed between the taxpayers and their related parties;

• TP method applied for the transaction; and

• Arm's-length conditions within the meaning of section 34, including comparability with the conditions/circumstances observed between independent parties.

The key changes in TPG5 seek to align the guidance with the expanded section 34 and the recently introduced Rules, as well as to provide additional clarity on the legislative changes through illustrative examples. In addition, through the TPG5, the IRAS has also provided further clarification on its position in the following areas:

• TP for permanent establishments (PE) is aligned with the authorised OECD approach to attributing profits to a PE as separate and independent enterprises;

• Singapore taxpayers may still have access to the mutual agreement procedure (MAP) when a settlement has been reached with a foreign tax authority. However, resolution would be challenging under such circumstances;

• The transactional profit split method should not be applied where the contribution of at least one party to the transaction can reliably be evaluated through another TP method; and

• Re-financing arrangements should be considered as new loans and the terms and interest rates should be determined based on the arm's-length considerations at the time of the re-financing arrangement.

Incorporating the concept of arm's-length conditions represents a substantial shift in how the Singapore tax authority might evaluate and enforce the arm's-length principle in practice. In the past, the form and structure of related-party transactions have been mostly accepted at face value with the key TP focus area being the pricing itself.

Going forward, the IRAS might apply a more holistic perspective and seek to understand the commercial purpose of each transaction. The foregoing might be particularly relevant for financing arrangements, as well as complex supply chain structures for commercial businesses.

With the various legislative changes and substantial revisions to the TP guidance, it is now more important than ever that taxpayers proactively prepare contemporaneous TP documentation, giving due consideration to the commerciality of their related-party transactions.

The introduction of qualifying past TP documentation may relieve taxpayers' burden to prepare documentation on a yearly basis. However, given the potential importance of surcharge applicable on the TP adjustments made by the Singapore tax authority, it is even more crucial for taxpayers to ensure that these documents are sufficient and robust to support the TP outcomes and profitability of taxpayers.

There has been increased scrutiny on taxpayers' related-party transactions as well as an increase in the number of disputes observed in the past few years, and it is expected that this trend will continue. More in-depth and stringent TP audits by the Singapore tax authority are anticipated. The Singapore tax authority has also communicated that it is closely monitoring taxpayers' TP compliance efforts as well as regional and international developments in this space. It is expected the TPG5 will be revised on a periodic basis as a response to these developments, and the next edition of the guidelines is expected in early 2019.

Geoffrey K Soh

Head of transfer pricing (TP) KPMG in Singapore 16 Raffles Quay #22-00 Hong Leong Building Singapore, 048581 +65 6213 3035 geoffreysoh@kpmg.com.sg Geoffrey K Soh is the head of TP with KPMG in Singapore. He has over 23 years of professional experience, including more than 20 years of experience in providing TP services. Before joining KPMG in Singapore, Geoff worked for over five years in KPMG in Canada's Vancouver TP practice. He transferred to Singapore in 2003, to develop KPMG's TP practices in the region. Geoff has managed more than 2,000 international engagements, encompassing the compliance, planning, audit defence, and dispute resolution aspects of TP. He has helped clients in transactions relating to transfer of products, risks, services, intellectual property, funds, and guarantees. In addition, he has led a number of advance pricing agreements (APAs) involving tax authorities from Asia, Europe, and the Americas. Under his leadership, KPMG in Singapore was also recognised as the Singapore Transfer Pricing Firm of Year 2018 and appeared in the World Transfer Pricing Guide for 2018. His viewpoints and articles on TP issues can be found in industry publications such as CCH, International Tax Review, and accounting industry publications in Canada and Singapore.

Felicia Chia

Partner KPMG in Singapore 16 Raffles Quay #22-00 Hong Leong Building Singapore, 048581 +65 6213 2525 fchia@kpmg.com.sg Felicia Chia is a partner in the transfer pricing (TP) practice of KPMG in Singapore and the financial services TP lead in Singapore. She has more than 14 years of experience in providing TP services to multinational clients in Singapore, the US, and the Asia Pacific region. Felicia's experience includes advising on TP planning and documentation projects to determine proper arm's-length compensation for tangible property, intangibles, and inter-company services. In addition, she has assisted in the preparation of cost allocation studies for global/regional headquarters, as well as audit defence assistance and conducting TP risk analyses. She has also been involved in the negotiation and implementation of unilateral and bilateral advanced pricing agreements (APAs) and mutual agreement procedures (MAPs). Felicia has also led several value chain management projects and advised clients on how to comply with OECD BEPS guidance. Felicia is a regular speaker on global TP and has published a number of articles in connection with TP issues. She was recognised as a leading adviser in Singapore in the inaugural 2015, 2016 and 2017 editions of International Tax Review's Women in Tax Leaders guide.

Jingyi Lee

Director KPMG in Singapore 16 Raffles Quay #22-00 Hong Leong Building Singapore, 048581 +65 6213 3785 jingyilee@kpmg.com.sg Jingyi Lee is a director in the transfer pricing (TP) practice with KPMG in Singapore who is in her 10th year of providing TP services to multinational clients. Her project experience covers a range of projects such as TP planning and documentation projects, audit defence, advance pricing agreements (APAs), mutual agreement procedures (MAPs), and restructuring projects. Jingyi is a key member of the team assisting clients with TP audit defence and dispute resolution in KPMG in Singapore and has extensive experience in dealing with the tax authority in Singapore. Jingyi also has experience assisting clients with negotiating unilateral and bilateral APAs, and MAPs. Her APA and MAP experience spans cases involving Singapore, Canada, China, Japan, Korea and Sweden. Jingyi is an accredited tax adviser under the Singapore Institute of Accredited Tax Professionals and is also a chartered accountant with the Institute of Singapore Chartered Accountants. She has also led TP training sessions with the Singapore Tax Academy.