Transfer pricing requirements
While there is no legislation specifically dedicated to transfer pricing in Singapore, two provisions in the Singapore Income Tax Act (SITA) are relevant to transfer pricing and these have been used by the Inland Revenue Authority of Singapore (IRAS) to adjust transfer prices.
First, section 33 of the SITA allows the IRAS to disregard or vary an arrangement if its purpose, whether directly or indirectly, is to:
alter the incidence of tax payable or otherwise payable
relieve any person from liability to pay tax or to make a return
reduce or avoid any liability imposed or would have been imposed
The power to vary or disregard arrangements allows the IRAS to make appropriate adjustments including the re-computation of gains or profits to counter any tax advantage obtained. However, section 33 will not apply if the arrangement was carried out for bona fide commercial reasons and did not have, as one of its main purposes, the avoidance or reduction of tax. In determining whether there is tax avoidance, some of the items the IRAS look out for include:
the imposition of various transactions to fit within the provisions of the law to obtain a reduction in tax or even complete exemption
artificiality
transfer prices
In addition to the foregoing, section 53(2A) of the SITA allows the IRAS to assess a non-resident person and charge any tax due to a resident person if:
in a business carried on between a non-resident and a resident person
it appears that owing to the close connection between two, or the substantial control exercised by the non-resident person, the course of business is so arranged that the resident person derives no profits or less than expected ordinary profits.
Where the profits of the non-resident person cannot be readily ascertained, the IRAS has the power to charge the non-resident (in the name of the resident person) on a fair and reasonable percentage of the turnover of the business done.
In addition, Singapore has entered into 51 comprehensive and seven limited double tax treaties with a number of countries worldwide. In many of these treaties, there are provisions under the "Associated Enterprises" article that contain language similar to that of the arm's-length principle found in article 9 of the OECD Model Tax Convention. For example, in the Singapore-Japan Double Tax Treaty, article 9 states that where
conditions are made or imposed between the two controlled enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
Note that under section 49(1) of the SITA, if the Singapore minister of finance, by order, declares that arrangements have been made with another country with a view to affording relief from double taxation, and that it is expedient that those arrangements should have effect, then the arrangements shall have effect notwithstanding anything in written law. Therefore, a tax treaty containing the arm's-length principle obtains legal force under a statutory order. Hence, transactions of Singapore taxpayers with related parties in relevant treaty partner countries are to be conducted in accordance to the arm's-length principle.
Legislation and treaties aside, the IRAS has advised taxpayers to follow the arm's-length principle and the OECD Transfer Pricing Guidelines when determining their transfer prices. In adjusting transfer prices, IRAS officials have been known to refer to the OECD Guidelines for rationale and justification.
Penalties
Singapore does not have penalties specific to transfer pricing. However, general tax penalties may also be applicable for transfer pricing adjustments. In such situations, the IRAS has the power to impose penalties from 100% of the tax undercharged (for an incorrect return) to 400% of the tax undercharged (for serious fraudulent tax evasion), as well as possibly, an imprisonment term. However, in practice, tax penalties of greater than 300% are very uncommon.
Audit activity
IRAS queries and audit activity, in relation to related-party dealings, mainly target the following types of transactions:
provision of intra-group services from Singapore-based regional headquarters to subsidiaries in the region
(to a lesser extent,) sales or purchases of products
Upon commencement of a query, the IRAS will normally request information relating to (where relevant):
the allocation rationale and allocation methodology for intra-group service costs, and the associated mark-up (if any) on these costs
the benefits received (especially when the Singapore taxpayer is the recipient and payee for the services)
the method used to determine transfer prices
differences in pricing when compared to the prices charged or paid to uncontrolled parties
At this stage, transfer pricing challenges on transactions involving intellectual property, interest payments, guarantee fees, and financial sector trading are less common.
Recent trends
Of late, there has been increasing focus on transfer pricing from the authorities. This can be likely attributed to two main reasons.
First, many of Singapore's larger trading partners and Asian neighbours have significantly toughened their transfer pricing requirements in recent years. Other than trading partners such as the US, Japan, and Australia, who traditionally have strict transfer pricing requirements, new Asian converts to transfer pricing include China, India, Thailand, Malaysia, and more recently Taiwan. There are arguments that such developments may have caused Singapore taxpayers with cross-border transactions to err on the side of caution-by imputing more income into countries with stricter transfer pricing requirements and penalties. This potentially lowers Singapore's tax revenues.
Second, there is a view among some in authority that detailed transfer pricing guidelines will provide more certainty to large multinationals who are considering relocating part of their operations to Singapore. Greater certainty of income (and returns) should then facilitate the investment decision into Singapore. In addition, many large potential investors have also enquired on whether advance pricing agreements (APAs) are possible. While this is currently possible, the APA process in Singapore is generally perceived to be somewhat circumscribed by the lack of detailed transfer pricing guidance. It is therefore hoped that once such guidance is in place, it will be possible for APA guidelines to follow.
The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG in Singapore. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Biographies |
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Geoffrey Soh is the partner-in-charge of KPMG in Singapore's transfer pricing practice. He has 15 years of professional experience. Before joining KPMG, he worked in a Canadian university and the public sector in the areas of economic forecasting and policy development. Since 1994, Soh has been working with many clients in the private sector. He transferred from KPMG in Canada's Vancouver office to KPMG in Singapore's transfer pricing practice in 2003. He has managed over 120 international transfer pricing engagements, including those for clients in the financial, information technology, telecommunications and consumer goods sectors. Soh has a strong knowledge of transfer pricing legislation in North America and other Pacific Rim countries. He has contributed a number of articles on Singapore and Canadian transfer pricing developments in professional publications. He is recommended for transfer pricing in Singapore in the 2005 edition of International Tax Review's World Tax guide. He is a graduate of the University of Alberta, Canada (MA, Economics) and the University of Calgary, Canada (BA Honours, Economics). |
