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27 March 2018 Singapore enacts transfer pricing documentation requirements and publishes updated transfer pricing guidelines The Singapore Government published, on 22 February 2018, the "Income Tax (Transfer Pricing Documentation) Rules 2018" (the TPD Rules) under the Singapore Income Tax Act (ITA) in the Singapore Government Gazette. The TPD Rules are effective as of 23 February 2018 and apply for the basis period for the Year of Assessment (YA) 2019 and thereafter.1 In addition, on 23 February 2018, the Inland Revenue Authority of Singapore (the IRAS) released the fifth edition of the Singapore transfer pricing guidelines (2018 Singapore TP Guidelines). The changes incorporates the TPD Rules into the guidelines and provides examples and explanations on certain aspects of the TPD Rules. The 2018 Singapore TP Guidelines also provide clearer guidance on comparability analysis and the transactional profit split method. Under section 34F of the ITA, a company, firm or trustee of the trust is required to prepare TP documentation if:
The TPD Rules supplement the above provisions by providing details on the form and content of the TP documentation, and also set out certain scenarios whereby taxpayers will be exempt from preparing TP documentation as referred to in section 34F of the ITA. While the arm's-length principle has been applicable to PEs under the earlier versions of the TP guidelines, the 2018 Singapore TP Guidelines clarify that when a nonresident person carries on a business in Singapore through a PE, the Singapore PE and other PEs of the nonresident person outside Singapore will constitute separate related entities for the purpose of attribution of profits. The 2018 Singapore TP Guidelines improve the guidance on conducting comparability analysis. The guidance is in line with the Organisation for Economic Co-operation and Development's (OECD) Transfer Pricing Guidelines published in July 2017 (2017 OECD TP Guidelines), which had factored relevant outcomes of Actions 8 to 10 of the Base Erosion and Profit Shifting project. The IRAS has provided enhanced guidance on comparability analysis and the importance of intercompany agreements based on the true substance of the contractual terms and conditions. Accordingly, it is recommended that taxpayers prepare contractual agreements as necessary, review the existing contractual agreements, assess whether they reflect the functions performed, assets employed and risks borne by the parties to the agreement and make necessary changes. The 2018 Singapore TP Guidelines take into consideration the guidance provided by the 2017 OECD TP Guidelines on PSM.2 While the fundamental concept regarding why a PSM is adopted remains the same, some additional guidance is provided to the common terms used in applying the method. The IRAS has also clarified that the lack of comparables alone is an insufficient reason to use the PSM as this may lead to a non-arm's length outcome of the functions performed. The IRAS has provided guidance on circumstances under which the IRAS can make transfer pricing adjustments. To aid understanding, it has also included certain examples within the 2018 Singapore TP Guidelines. Understatement of profits or overstatement of deductions will be the main triggering point for the adjustments. It is also clarified that these conditions equally apply when there are overstatements of losses. It has been emphasized that, in comparable circumstances, when independent parties will enter into substantially different commercial or financial relations than those between the taxpayer and its related party, the IRAS will determine the arm's-length price for the actual related party transaction based on the commercial or financial relations of the independent parties. Furthermore, the IRAS will disregard an actual related party transaction or replace it with an alternative transaction only in exceptional circumstances where:
Given the above, it becomes even more important that taxpayers revisit their documentation and ensure that it is robust enough to defend the transfer pricing policies and practices applied. It is also recommended that the commercial rationale of the related party arrangements are assessed and documented. The IRAS has clarified that for any documentation prepared for years prior to YA 2019, taxpayers can apply the group level and entity level documentation provided under the 2018 Singapore TP Guidelines or the IRAS e-Tax guide on Transfer Pricing Guidelines (Fourth Edition) (2017 Singapore TP Guidelines). The IRAS has provided adequate time for taxpayers to take into account the new requirements beginning in the YA 2019, as well as the transition from the previous Guidelines. The IRAS acknowledges a three-tiered documentation structure consisting of: (a) documentation at the group level; (b) documentation at the entity level; and (c) Country-by-Country Reporting. It also understands that taxpayers may have prepared similar TP documentation (for example OECD Master File and Local File) for the purpose of complying with the requirements of other countries. Such documentation may form part of the Singapore TP documentation. However, for the Singapore TP documentation to be considered compliant with the Singapore requirements, it has to meet all the content requirements outlined in the Second Schedule of the TPD Rules. It is important to note that there are certain minor additional content requirements in the Singapore TP Guidelines as compared to the 2017 OECD TP Guidelines. An imposition of the new surcharge and penalty regime will be effective in the YA 2019, when taxpayers do not comply with the arm's-length principle or TP documentation requirements. If a taxpayer's related party transactions are not at arm's-length and the IRAS determines that TP adjustments are required, a 5% surcharge will be imposed on the TP adjustments made. This will apply regardless of whether the TP adjustments result in additional tax liability. If taxpayers do not agree with the IRAS' position, an objection may still be filed against the TP adjustments and the applicable surcharge. The IRAS in general expects that taxpayers review and refresh their TP documentation annually. This will result in preparing documentation for each basis period. However, considering the compliance burden, the IRAS allows taxpayers to use the TP documentation that has been prepared previously, i.e., documentation prepared for the past two YAs immediately preceding the year of preparation (for example YA 2017 and YA 2018 documentation for YA 2019 purposes). To be considered as "qualifying past documentation," the conditions mentioned under the TPD Rules must be met. Taxpayers should take into account the TPD Rules and the Singapore specific content requirements when preparing their TP documentation as failure to comply with the TPD Rules may result in the assessment of penalties. While the TPD Rules provide certain exemptions for taxpayers to prepare TP documentation, taxpayers should nonetheless review their related party transactions to ensure compliance with the arm's-length principle under section 34D of the ITA since the surcharge on transfer pricing adjustments under section 34E of the ITA will still apply. 1 The term "year of assessment" (YA) refers to the year in which income tax is assessed on the company. The basis period for a particular YA for a company is the financial year ending in the year preceding that YA. 2 The guidance contained in the current version of the 2017 OECD TP Guidelines is not final and will be revised in future.
Document ID: 2018-5472 |
