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IYER PRACTICE Singapore Transfer Pricing: What do I need to know?

Singapore

Transfer Pricing

What do I need to

know?

SINGAPORE | HONGKONG

20 YEARS IN PRACTICE

September

2015


Evolving Singapore TP Regime

2

Prior to

2006

•Requires arm’s length principle (ALP)

•Provisions in Singapore Income Tax Act may cover application of ALP

2006

•TP Guidelines published which recommend the maintenance of TP documentation

2008

•TP audits commence (under Transfer Pricing Consultation process)

2009

•ALP legislated under new Section 34D

•TP Guidelines for Related Party Loans and Related Party Services

2015

•Consolidates all circulars on TP, requires contemporaneous documentation and

additional information disclosure

•Provides clarification on additional guidelines


TP BASICS


When is Documentation

required?

• Taxpayers must prepare contemporaneous TP

documentation for all of its related party transactions, unless

exempted

• The Guidelines define contemporaneous TP documentation

as:

“documentation and information that taxpayers have relied

upon to determine the transfer price prior to or at the time

of undertaking the transactions”

• For ease of compliance, the IRAS will also accept as

contemporaneous transfer pricing documentation any

documentation prepared at any time no later than the time of

completing and filing tax return for the financial year in

which the transaction takes place.

TP BA

SIC

S

4


What is a related party?

“any other person who, directly or indirectly, controls that

person, or is controlled, directly or indirectly, by that person, or

where he and that other person, directly or indirectly, are under

the control of a common person”

TP BA

SIC

S

5


When is documentation not

required?

TP BA

SIC

S

6

• Related domestic transaction where the taxpayer transacts with

a related party in Singapore and such local transactions

(excluding related party loans) are subject to the same

Singapore tax rates for both parties.

• Related domestic loans where the lender is not in the business

of borrowing and lending

• Companies using the safe harbour provisions of 5% cost mark-

up for routine services

• Transactions covered by an APA

• Where the transaction falls below certain quantitative

thresholds (see next slide)


Transaction thresholds

TP BA

SIC

S

7

Category of related party transactions Threshold

(S$) per FYE

Purchase of goods from all related parties 15 million

Sale of goods to all related parties 15 million

Loans owed to all related parties 15 million

Loans owed by all related parties 15 million

All other categories of related party transactions.

E.g. Service income, service payment, royalty

income, royalty expense, rental income, rental

expense

For the purpose of determining if the threshold is

met, aggregation should be done for each category

of related party transactions. Eg. All service income

received from related parties is to be aggregated.

1 million per

category of

transactions


Where documentation is not

required, what happens?

TP BA

SIC

S

8

Even though there is no formal requirement to prepare

TP documentation, there are still expectations from IRAS:

• Can IRAS ask you ALP related questions, consult you on TP

or audit you on TP?

Yes

• Will IRAS insist on submission of contemporaneous TP

documentation when it reviews related party transactions,

or conducts TP consultation or audit on you?

No expectation to prepare such documentation so IRAS should

not insist on being provided with these. Taxpayers still need to

prove to IRAS using other records that transactions with related

parties reflect arm’s length conditions.


Where documentation is not

required, what happens?

TP BA

SIC

S

9

• Are record keeping penalties applicable if contemporaneous

TP documentation is not prepared or submitted upon

request?

No expectation to prepare such documentation so IRAS should

not seek to penalize taxpayers for not having contemporaneous

TP documentation. Taxpayers still have to maintain business

records to demonstrate compliance with ALP. If IRAS

determines inadequate business records are maintained to

demonstrate compliance with ALP, IRAS can still impose record

keeping penalties.

• Can IRAS make TP adjustments?

Yes, if found not to be ALP

• Are penalties applicable on TP adjustments made?

Possibly, if taxpayers are considered by IRAS to have

understated profits through improper transfer pricing. Penalties

may not be limited to section 94(2). May be section 95, 96.


DOCUMENTATION

REQUIREMENTS


Group and Entity requirements

IRAS has introduced a new 2-tier approach to preparation of TP

documentation and specified that the TP documentation should

be organised at the Group level and Entity level (similar to OECD

approach).

Group level:

• General information about the group

– management structure with reporting lines and organisational

structure

• Description of Group’s business relevant to the Singapore taxpayer

for the financial year

– global business, nature of global business operations, supply

chain, profit drivers, business models and strategies, business

relationships (service provided, goods sold, development, ownership

or exploitation of intangibles, financial arrangements) among related

parties

• Group’s financial position for the financial year

– financial statements of the group relating to the lines of business

DO

CU

MEN

TA

TIO

N R

EQ

UIR

EM

EN

TS

11


IRAS 2-tier approach

Entity level:

• General information on the Singapore taxpayer as at the end of the

financial year

- management structure and organization structure

• Description of the Singapore taxpayers business for the financial

year

- business operations details including related party transactions

information, functional analysis and economic analysis,

contract/agreement showing terms of transaction, global business,

nature of global business operations, business models and

strategies including any changes compared to previous years

• TP analysis/benchmarking

- choice of TP methods and reasons for choice, segment financial

accounts

DO

CU

MEN

TA

TIO

N R

EQ

UIR

EM

EN

TS

12


SPECIFIC TRANSACTIONS


Related Party Loans

SPEC

IFIC

TR

AN

SA

CTIO

NS

14

Types of Loans Status of taxpayer

which is a lender

Application of arm’s

length principle

Related

Domestic Loans

Where taxpayer is not in

the business of

borrowing and lending

To restrict interest

deduction as a proxy to

the arm’s length

principle

Where taxpayer is in the

business of borrowing

and lending (e.g. Banks

or other financial

institutions, finance and

treasury centres)

To determine the

interest rate based on

arm’s length principle

Related Cross-

Border Loans

Where or not taxpayer is

in the business of

borrowing and lending

To determine the

interest rate based on

arm’s length principle


Related Party Services

The Guidelines states that a 5% profit is accepted where:

a. prescribed routine services in Guidelines are provided;

b. such services are not also rendered to unrelated parties; and

c. all costs relating to the services performed are taken into

account in computing the 5% mark-up.

A higher profit is generally expected in the case of services not

provided in the list of prescribed routine services, unless

otherwise supported by TP studies.

SPEC

IFIC

TR

AN

SA

CTIO

NS

15


Prescribed routine services

Accounting and auditing

Accounts receivable and accounts payable

Budgeting

Computer support

Database administration

Employee benefits

General administration

Legal services

Payroll

Corporate communications

Staffing and recruiting

Tax

Training and employee development

SPEC

IFIC

TR

AN

SA

CTIO

NS

16


Related Party Services

IRAS recommends the following approach to determine an

appropriate charge for the services:

a. Comparability analysis

b. Determine the appropriate transfer pricing method

c. Determine the relevant cost base (direct or indirect)

Conditions to be satisfied in order to pass on costs of acquired

services to related party without a mark-up are provided.

Other guidance / concession

- List of factors that the “benefits test” needs to consider

- Administrative concession relating to cost pooling

SPEC

IFIC

TR

AN

SA

CTIO

NS

17


Attribution of profits to

Permanent Establishments (PEs)

No further attribution to profits to PE is required when the

following conditions are met:

a. Taxpayer receives an arm’s length remuneration from its

related party that is commensurate with the functions

performed, assets used and risk assumed by the taxpayer.

b. The remuneration paid by the foreign related party to the

taxpayer is supported by adequate transfer pricing

documentation to demonstrate compliance with the arm’s

length principle; and

c. The foreign related party does not perform any functions,

used any assets or assumed any risks in Singapore, other than

those arising from activities carried out by the taxpayer.

SPEC

IFIC

TR

AN

SA

CTIO

NS

18


WHAT TO DO NEXT?


When do these rules take effect?

WH

AT TO

D

O N

EXT?

20

• New guidelines do not vary significantly from the 2006 edition,

hence no effective date for new guidelines.

• Requirements to prepare TP documentation for all open tax

years without delay. For financial year 2014, the documentation

should be completed by 30 November 2015.


Why should you care?

WH

AT TO

D

O N

EXT?

21

• IRAS might make a large, unanticipated TP adjustment that has

material impact on profitability

• IRAS may impose a penalty for missing or inadequate

contemporaneous TP documentation, thereby raising internal

questions about adequacy of tax controls

• IRAS may impose 100%/200% penalties for negligence on TP

adjustment


How can we help?

WH

AT TO

D

O N

EXT?

22

• Prepare contemporaneous TP documentation before return filed

(30 November 2015)

• Use documentation preparation as opportunity to critically

review TP methods

• Improve TP methods and reduce TP risk as appropriate

• Quantify TP risk and advise management as appropriate

• Put in place TP review process to periodically track business

changes that affect validity of TP methods

• Update comparables on a regular basis


Services:

• International & Domestic Tax

• Company Formation & Administration

• Trusts & Foundations

• Immigration & HR

• Regulatory & Compliance

• Accounting & Financial Reporting

The insight

to be your

trusted

adviser

23


Disclaimer: This presentation of slides is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances

involved. Accordingly, readers should seek appropriate professional advice regarding any particular problems that they encounter, and this presentation should not be relied on as

a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this presentation is accurate, Iyer Practice accepts no

responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

Contact Us

Sunil Iyer

Email [email protected]

Phone +65 6532 5746

Mobile +65 9699 0961

80 Raffles Place

#26-01 UOB Plaza 1

Singapore 048624

Unit 29E, 29/F Admiralty Centre Tower 1

18 Harcourt Road, Admiralty

Hong Kong

Sanjay Iyer


Phone +852 2529 9952

Mobile +852 9355 3495

80 Raffles Place

#26-01 UOB Plaza 1

Singapore 048624

Shanker Iyer


Phone +65 6532 5746

Mobile +65 9760 6488

CO

NTA

CT U

S

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