Recently, there has been a greater-than-ever push to ensure that taxpayers’ profitability is consistent with the economic activities conducted and value generated.
A snapshot of recent changes
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.
Expanded Singapore legislation on transfer pricing
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.
Guidance for alignment with the expanded legislation and rules
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.
What the changes in the SITA, the Rules and TPG5 really mean to taxpayers
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.
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