In October 2008, The Inland Revenue Authority of Singapore (IRAS) released its supplementary administrative guidance on advance pricing arrangements (APA circular). In addition, IRAS in February 2009 released its transfer pricing guidelines for related-party loans and related-party services (e-tax guide). IRAS also issued its responses to the feedback received on the draft version of the e-tax guide.

In the e-tax guide, IRAS reaffirms its endorsement of the arm's-length principle to determine transfer prices. However, IRAS also recognises that embarking on a comprehensive transfer pricing analysis to demonstrate compliance may not always be practical or administratively expedient. Accordingly, the recently issued e-tax guide provides some flexibility to vary from the arm's-length principle. This latest guidance follows the initial circular on transfer pricing (2006 Transfer Pricing Guidelines) issued by IRAS in February 2006.

Advance pricing arrangements

Section 6 of the 2006 transfer pricing guidelines provides guidance on the applications of an advance pricing arrangement (APA). Following this, IRAS has now issued further guidance in the APA circular. The circular mainly provides guidance on the application process, the timeline and the requirements the APA request should meet. Taxpayers are cautioned that the APA process is lengthy and requires commitment.

A welcome concession from IRAS is that provided certain conditions are met, the bilateral or unilateral APA can be rolled back to a maximum of two years before the period covered by the APA.

A number of taxpayers have concluded APAs (both unilateral and bilateral) in Singapore and negotiations are on going for more. The APA circular seems to confirm IRAS' commitment to help taxpayers who seek certainty on their related-party transactions. In this respect, providing guidance on the appropriate procedures should be helpful for taxpayers.

Related-party loans

For the purposes of the e-tax guide, the definition of a loan is extended to loans (both with or without a written agreement), credit facilities, as well as trade balances that are unsettled for a substantial period of time beyond normal practices.

At the moment, it is common practice for loans made by a domestic entity (that is, a business that is incorporated or registered in Singapore and carrying on a business in Singapore) to another related domestic entity to be interest-free or with an interest charge that is not supported by a transfer pricing analysis. In the past, IRAS acquiesced to this practice, provided that the domestic lender did not claim a tax deduction for interest costs, where the funds were ultimately sourced from a commercial lender.

In the e-tax guide, IRAS indicated that it is prepared to allow the practice to continue indefinitely for loans between two domestic entities, as long as the domestic lender is not in the business of borrowing and lending (for example, not a financial institution or a finance and treasury centre). IRAS will also extend this concession to existing loans between domestic lenders and related offshore borrowers until January 1 2011. From that date onwards, all cross-border loan arrangements will need to reflect arm's-length conditions. It is anticipated that this grace period will allow taxpayers sufficient time to restructure their related-party loans to reflect market conditions. The position of IRAS is that the comparable uncontrolled price (CUP) method is the preferred method to establish the arm's-length interest for related-party loans.

Intra-group services

The e-tax guide provides specific guidance on intra-group services, guidance that has been predominantly absent from previous IRAS transfer pricing circulars. Some of this guidance has strong parallels to that of the OECD guidelines, especially for concepts such as willingness-to-pay, benefits received, direct and indirect charging, allocation keys and rationale thereof and so on. The e-tax guide also suggests that the CUP method and cost plus method are often the most appropriate methods for determining the arm's-length fee for related-party services.

Nevertheless, for entities that provide certain routine support services only to related parties, IRAS is prepared to accept an amount equivalent to all service costs plus a safe harbour mark-up of 5% as "a reasonable arm's-length charge for such services". Annex A of the e-tax guide provides a list of services considered as routine support services. These include accounting, computer support, legal, staffing, training and so on. Although the list will be reviewed and possibly modified from time to time, the e-tax guide is specific that only those services listed in annex A will be accepted as routine support services. The e-tax guide concludes the discussion concerning intra-group services by highlighting that if there is a detailed transfer pricing analysis that supports a mark-up other than the prescribed 5%, this alternative mark-up quantum should be adopted and applied consistently. Furthermore, this mark-up should be regularly reviewed to determine that it continues to reflect arm's-length conditions.

Cost pooling

Cost pooling refers to the situation where related parties enter into an arrangement to centralise the provision of routine support services and share the associated costs accordingly. Provided certain conditions are met, IRAS may allow taxpayers to not incorporate a mark-up element in the amounts charged from a centralised service provider to a related cost pooling party. The main conditions that must be fulfilled are as follows:

• the services are not also provided to unrelated parties;

• the provision of services does not constitute the principal activity of the service provider;

• the services must be limited to the routine support services listed in annex A of the e-tax guide (with respect to this, IRAS is specific that this zero mark-up concession will not extend to cost contribution arrangements for the development of intangibles); and

• there must be sufficient documentation supporting the intent to pool resources between the parties involved, before the provision of any services.

The e-tax guide reiterates full adoption of the arm's-length standard by IRAS and its preference for taxpayers to perform rigorous transfer pricing analysis, in accordance with its previous guidance. However, considering the large number of multinationals that have their regional headquarters and support centres based in Singapore, IRAS is taking a pragmatic approach and appears to be willing to concede to certain flexibilities to facilitate compliance.

While observers note that IRAS' intention is commendable, other than for domestic loans, the announced concessions are unlikely to excuse taxpayers from performing a transfer pricing analysis and from maintaining appropriate documentation. For example, with respect to intra-group services, there may still be a need for documentation detailing the nature of services performed, the service recipients, the allocation keys used and rationale thereof and so on. For cost pooling, appropriate documentation is required before the provision of the services. A number of services are also outside the safe harbour coverage, and it will be interesting to see if IRAS will continue to facilitate compliance by expanding the qualifying list of routine support services in time to come.

Geoffrey Soh
		KPMG in Singapore 16 Raffles Quay # 22-00 Hong Leong Building Singapore 048581 Tel: +65 6213 3035 Fax: +65 6220 9419 Email: geoffreysoh@kpmg.com.sg Geoffrey Soh is the partner in charge of global transfer pricing services for KPMG in Singapore. He has 19 years of professional experience, including 11 years providing transfer pricing advice to clients. Before joining KPMG in Singapore, Soh worked for over five years in KPMG in Canada's transfer pricing practice. He transferred to Singapore in 2003 to develop KPMG's transfer pricing practices in the region. Soh has managed over 450 international transfer pricing engagements for multinational clients. His projects have encompassed compliance, tax planning, audit defence, and advance pricing arrangement and dispute resolution aspects of transfer pricing. He has also led the transfer pricing work in a number of tax efficient supply chain restructuring projects. Soh has presented at a number of regional transfer pricing conferences and has published articles on Singapore and Canadian transfer pricing developments. He has been recommended by the International Tax Review's World Tax guide for transfer pricing in Singapore. Soh holds a master's degree in economics from the University of Alberta, Canada.

Iwan Hoo
		KPMG in Singapore 16 Raffles Quay # 22-00 Hong Leong Building Singapore 048581 Tel: +65 6213 2810 Fax: +65 6220 9419 Email: iwanhoo@kpmg.com.sg Iwan Hoo is a senior manager in KPMG's global transfer pricing services group in Singapore. Before this, he was with the KPMG global transfer pricing services group in the Netherlands and with the international tax group of another firm in Amsterdam, the Netherlands and Jakarta, Indonesia for more than 10 years. Hoo has been involved in the valuations of intellectual property and oil and gas fields, the setting up licensing and financing structures, and designing tax efficient supply chain structures. Other transfer experience includes projects in the financial services, chemical and pharmaceutical, hospitality, general trading, automotive and other industries. Hoo has concluded an advance pricing agreements with the Dutch tax authorities. He graduated from the University of Leiden in the Netherlands with a qualification in tax law.

Ziad Rahman
		KPMG in Singapore 16 Raffles Quay # 22-00 Hong Leong Building Singapore 048581 Tel: +65 6213 2784 Fax: +65 6220 9419 Email: ziadrahman@kpmg.com.sg Ziad Rahman is a senior manager in KPMG's global transfer pricing services group in Singapore. Before joining KPMG Singapore, Rahman has worked at the Australian Taxation Office providing economic and transfer pricing advice to the competent authority. Rahman has experience in supply chain restructurings with the relocation of risk and services, development of regional headquarter entities, and various industry sectors such as technology, information and communications, energy and resources, manufacturing, automotive, pharmaceutical, logistics and distribution services. Rahman has been involved in the negotiation and implementation of numerous unilateral and bilateral advance pricing arrangements as well as audit defence, tax planning, and establishing transfer pricing efficient arrangements from both the practitioners' and tax authority's perspectives. Rahman has also spoken at various technical training seminars on transfer pricing and has provided training as part of the OECD outreach program. He holds a BA of economics, a masters in business systems, and an MBA from Monash University, Australia.