With a combined GDP of $2.6 trillion and a fast-growing
market covering more than 630 million consumers, Southeast
Asia, which is comprised of Cambodia, Indonesia, Laos,
Malaysia, Myanmar, the Philippines, Singapore, Thailand and
Vietnam, is one of the world's most dynamic regions. In terms
of energy and resources (E&R), the region represents one of
the fastest growing markets of the global energy system, with
energy demands having grown by 60% over the past 15 years. In
its 2040 outlook, the International Energy Agency (IEA)
estimates that Southeast Asia's energy demand will grow by
almost two-thirds, which represents one-tenth of the rise in
global demand for energy.
These factors make Southeast Asia a major destination for
global E&R multinational corporations (MNCs) that compete
with home-grown industries. These established businesses, which
follow distinct operating models coupled with complex transfer
pricing (TP) policies, often draw the attention of the local
revenue authorities. This article highlights some of the major
TP challenges facing the E&R sector in Southeast Asia.
Singapore is a major global energy trading hub and the
world's third largest oil refining center. Energy and
resources firms in Singapore are often awarded incentivised tax
rates (depending on their operating profile and other
conditions) that usually become the focus of other revenue
authorities in the region and elsewhere. This exposes
cross-border, related-party transactions with Singapore to
greater scrutiny. In the past, this has led to TP adjustments
initiated by overseas revenue authorities, and opened several
mutual agreement proceedings (MAPs) with the Inland Revenue
Authority of Singapore (IRAS).
With the introduction of mandatory TP documentation
requirements in 2014, the IRAS now requires all taxpayers
(including incentivised entities) to adhere to the arm's-length
standard and maintain TP documentation, with severe penalties
imposed for non-compliance.
The primary reason for the IRAS to mandate TP requirements
for incentivised companies, including those in the E&R
sector, is to protect Singapore's tax base and ensure that the
country does not lose its fair share of tax. As a result,
advance pricing agreements (APAs) have become common in the
E&R sector, covering profit split pricing models, financing
transactions, and regional headquarters service transactions,
The E&R sector in Malaysia is dominated by the oil and
gas (O&G) industry. There are more than 3,500 O&G
businesses in Malaysia comprising international oil companies,
independents, and both service and manufacturing companies that
support the needs of the O&G value chain both domestically
Many major global machinery and equipment (M&E)
manufacturers have set up a base in Malaysia to complement
home-grown M&E companies, while other Malaysian O&G
companies are focused on key strategic segments such as
drilling, engineering, fabrication, offshore installation, and
operations and maintenance.
The primary TP issues encountered in the O&G industry
involve cost sharing mechanisms when resources are shared
across multiple lines of business in the downstream sector. The
revenue authorities have questioned the methodology applied in
splitting these costs, and the recharge at cost without the
application of a mark-up. While similar mechanisms apply to
upstream businesses, they have received less attention, most
likely due to the joint venture nature of production-sharing
contracts in Malaysia.
The Inland Revenue Board (IRB) has also questioned the
treatment of intangibles and payments for the use of
trademarks/tradenames, most recently in a restructuring where
the intangibles were centralised in Europe.
Malaysia has an active APA regime that was introduced in
2009, with the revenue authority actively encouraging taxpayers
to apply for APAs. Although the Malaysia tax authorities are
largely focused on unilateral APAs, they are encouraging
applications for bilateral/multilateral APAs, and a few
bilateral APAs are under negotiation already.
Indonesia is a net exporter of energy, but its imports of
oil (and oil products) have been rapidly increasing in recent
years. Indonesia is also the world's fourth-largest producer of
coal and a top coal exporter. It is also Southeast Asia's
biggest gas supplier, with exports accounting for roughly 45%
of its production. Therefore, the major E&R players will
generally have their upstream activities located in the
The primary TP issues involving Indonesia have involved the
pricing of resource sales to related parties and intragroup
service charges. Usually, the business models used most
frequently in Southeast Asia involve setting up a regional
headquarters (RHQ) and trading center in Singapore, while
upstream locations like Indonesia function under operational
directions from the Singapore RHQ.
In many cases, the revenue authorities in Indonesia will use
the comparable uncontrolled price (CUP) method, and consider
prices from local commodities indexes as a proxy (which may
lead to disputes with taxpayers).
Adjustments from indexed prices have also come under
challenge from the revenue authorities. The payment of service
charges to RHQ are scrutinised routinely, and disallowed unless
direct benefits to the payor can be demonstrated. However, the
fact that Indonesia has an active APA regime, and the fact that
there has been a steady increase in the number of APA
applications over the past two years, may provide solace to
taxpayers and reduce litigation with the revenue
The Philippines and Thailand
The revenue authorities in these two countries lack an
industry-focused approach, and therefore their TP issues are
quite generic. The number of TP audits in both countries is
significantly increasing, and with Thailand introducing TP
regulations effective from the 2019 financial year, the number
is expected to rise further.
Loss-making entities and entities with low profitability are
frequently the subject of inquiries by the revenue authorities.
The transactional net margin method (TNMM) is often adopted by
tax authorities to test the adequacy of profits from a local TP
perspective. Local comparable companies are used for
benchmarking, and regional comparables are not accepted.
Intragroup service fee payments are commonly challenged by the
tax authorities, and taxpayers are required to establish the
benefits received from such services.
Companies in the O&G sector in Vietnam are always
required to be incorporated as a joint venture with a
government enterprise, and their revenue transactions are
exempt from local TP regulations. The major TP issues that
arise involve the service charges paid by the Vietnamese entity
(if any) to its group companies. These are usually in the
nature of technical fees or management fees. The tax
authorities routinely challenge those service charges, and
taxpayers are frequently denied deductions.
The Southeast Asia outlook
It is apparent that transfer pricing issues are still
evolving in most Southeast Asian countries. However, countries
like Indonesia, Malaysia and Singapore, which are major E&R
activity hubs in the region, offer more stability and reduced
chances of litigation though their active APA regimes.
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Tel: +65 6216 3181
Jee Chang See is a partner who leads the transfer
pricing practice in Deloitte Singapore. He has more
than 20 years of experience in taxation, and previously
worked for the Inland Revenue Authority of Singapore
(IRAS) for more than 10 years.
At the IRAS, Jee Chang was tax director of the tax
policy and international tax division, where he served
as Singapore's competent authority, responsible for the
negotiation of advance pricing arrangements, the
settlement of TP disputes, and conducting tax treaty
negotiations. He led the IRAS team responsible for
formulating the policy and technical considerations for
implementing a TP regime in Singapore. In that role, he
was vitally involved in developing the Singapore TP
guidelines that were issued in 2006. Finally, he served
as the key technical resource person in the IRAS with
regard to TP matters.
Jee Chang now serves major MNE clients, many of
which are Singapore-based regional headquarters.
Jee Chang has been nominated as a leading Singapore
tax advisor by International Tax Review, as well as the
Euromoney/Legal Media guide to the world's leading tax
Jee Chang is a chartered accountant with the
Institute of Singapore Chartered Accountants, and an
accredited tax advisor with the Singapore Institute of
Accredited Tax Practitioners.
Tel: +65 6216 3369
Avik Bose is a director in Deloitte Singapore. He
has over 15 years of experience in Big Four accounting
firms in transfer pricing and various aspects of
taxation. He has been involved in advising leading
multinationals in automobiles, aerospace, shipping, IT,
oil and gas, pharmaceuticals, real estate, financial
services, and consumer goods.
Avik's experience includes TP planning structures
for various types of business models, supply/value
chain realignments, IP valuation, structuring and
pricing intercompany financial transactions, and
planning and executing global documentation projects
for taxpayers in various industries. Avik has
represented his clients before revenue authorities in
several MAP and APA cases and in tax courts.
Avik is a frequent presenter at TP forums and has
written articles for international tax publications. He
has conducted training sessions on the latest TP issues
with revenue authorities in the region.
Avik is a chartered accountant by profession and has
a masters degree in commerce.