The impact of the OECD’s digital tax plans and the pandemic will challenge multinationals’ compliance with Singapore’s TP documentation requirements, particularly tax reporting from internal financial systems. Benchmark analysis is also expected to be more difficult.
“We believe that the new rules will require revision in terms of tax reporting of internal financial systems, and internal governance of tax reporting [will need] to be applied locally,” said Lee Jingyi, TP partner at KPMG Singapore.
“However, there is no immediate impact on TP compliance for taxpayers as BEPS 2.0 implementation is likely to take effect in 2023,” added Jingyi. “Taxpayers may wish to take into account the Multilateral Instrument (MLI) as well as the increased transparency and disclosure requirements.”
Singapore has continuously been taking part in the OECD’s digital tax plans and has lately agreed to implement pillar one and pillar two in line with the Inland Revenue Authority of Singapore’s (IRAS) stance on substance-based activities.
“I would think that most MNEs are currently on a wait and see as of now with the much-anticipated framework due to be released towards the end of this year,” said a senior tax manager at a multinational tech company, regarding the corporate response to the OECD’s digital tax plans.
However, the changes under pillar one and two coming in 2023 could rewrite the corporate approach to reporting country-by-country tax information and filing of TP documents.
The IRAS adopted recommendations under BEPS Action 13 in relation to tier documentation requirements as well as Actions 8 and 10. Singapore’s TP documentation requirements are provided via Section 34F of the Singapore Income, the 2018 Income Tax Rules, and the Fifth Edition of the TP Guidelines. The IRAS is also expected to publish an update of TP guidance shortly.
“In Singapore, TP documentation is more than just a tick in a box. IRAS relies on it to understand the local operations. Hence articulating the relevant facts and making sure that the details are up to date are critical,” said Jingyi. This makes the reporting process sensitive to the OECD’s digital tax changes.
Taxpayers are required to prepare their TP documentation from the year of assessment (YA) and should disclose the documentation for all material over the threshold provided. The files must be given to the tax authority within thirty days from the date requested.
The IRAS does provide exemptions for low-risk circumstances such as related-party transactions below a specific materiality threshold and domestic related-party transactions between taxpayers subject to the same tax rate. The information provided to the IRAS should contain group-level and individual information and resemble the OECD master file and local file requirements.
Complicating TP in Singapore
In March this year, the IRAS released an e-tax guide to provide further clarity on centralised activities in MNE groups. The guidance is in line with the TP guidelines published by the tax authority and the global TP rules released by the OECD.
“This move indicates IRAS’s increased focus on the centralised models and interest to scrutinise more complex TP models,” said Felicia Chia, head of TP and partner at KPMG Singapore.
“The commonly used cost-plus approach is not the only ‘answer’ with respect to centralised activities at the headquarter or regional headquarter level,” added Chia. “Remuneration for the headquarters should take into consideration the degrees and intensity of centralised activities and be commensurate with the functions performed, risks assumed, and assets utilised.”
The additional compliance required by the IRAS means it is a crucial time for taxpayers with centralised activities in Singapore to assess TP models and policies and evaluate whether any risk emerges from inconsistency with the tax authority’s guidance.
“Instead of an annual practice at the year-end, such assessment and evaluation on the TP front should be carried out on an ongoing basis, to align the intra-group pricing with the business goals of the enterprises,” said Chia.
“This guideline helps to offer clarity to companies who are headquartered in Singapore and provide some certainty in making sure that their current TP policies are in line with Singapore’s views,” said the senior tax manager. “However, the guidance released is from Singapore’s perspective and the onus is on the taxpayer to seek certainty through advanced pricing arrangements (APAs) or the methodology for assessing procurement systems (MAPs), where applicable,” added the manager.
Over time, the IRAS has increased its focus on intercompany transactions between regional headquarters and subsidiaries – a trend likely to continue, according to Chia.
However, additional TP documentation compliance combined with the global pandemic has caused significant challenges for MNEs.
For example, when a Singapore group entity is loss-making or suffering low profitability, it needs to prepare a comprehensive analysis to substantiate the impact of COVID-19 on its industry and demonstrate the losses incurred are in line with the level of risk assumed.
While the IRAS has published specific guidance on the issue – in line with the OECD rules – certain deviations can be noted, such as the treatment of government support subsidies in the computation of the transfer price, according to Chia.
Another challenge relates to the preparation of the benchmarking analysis, caused by access to limited data.
“Due to the significant changes in economic circumstances, it has become more important for tax professionals to have an in-depth understanding of the whole industry and economic conditions to substantiate the robustness of any comparability analysis; a simple roll-forward of previous benchmarking set might not serve this purpose,” added Chia.
Multinationals are also expected to face difficulty in implementing additional TP policies since they need to monitor returns of group entities through the TP policy and perform year-end adjustments.
“MNEs are seeking solutions to streamline compliance processes, to automate tasks where possible, and to gain additional insights from day-to-day data,” said Chia.
“A wise move would be to engage the government early on to lobby concerns that MNEs would likely face with the OECD’s new framework and to ensure that proper TP documentation is maintained and kept current,” said the senior tax manager.
The IRAS’ latest TP guidance update has provided further clarity for MNEs in dealing with the pandemic and multinationals’ centralised activities in Singapore, but more TP requirements will need significant preparation. Companies will need to engage early with their documentation as Singapore’s complex TP requirements will challenge their tax reporting and benchmarking analysis.
