Taxing authority and tax law
Taxing authority: Inland Revenue Authority of Singapore (IRAS)
Tax law: Section 34 D of the 2009 Singapore Income Tax act relates to transfer pricing and empowers the IRAS to make transfer pricing adjustments in cases where a Singapore taxpayer's transfer pricing practices are not consistent with the arm's length principle.
Relevant regulations and rulings
The IRAS issued Transfer Pricing Guidelines on 23 February 2006 (Singapore Transfer Pricing Guidelines). Subsequent to the release of the Singapore Transfer Pricing Guidelines, the IRAS also published circulars/other guidelines on the following topics:
- Transfer pricing consultation process — relates to the IRAS's program to assess whether taxpayers are following the recommendations in the Singapore Transfer Pricing Guidelines (IRAS Circular — Singapore Transfer Pricing Consultation, published on 30 July 2008)
- Procedures for advance pricing agreements (APA Guidelines) — outlines timelines and format for information provided to the IRAS in connection with a taxpayer's request for an APA (IRAS Supplementary Circular — Supplementary Administrative Guidance on Advance Pricing Arrangements, published on 20 October 2008)
- Transfer pricing guidelines for related party loans and related party services (Singapore Loans and Services Guidelines) — further guidance on the application of the arm's length principle to related parties (IRAS Supplementary e–Tax Guide — Transfer Pricing Guidelines for Related Party Loans and Related Party Services, published on 23 February 2009)
OECD Guidelines treatment
The Singapore Transfer Pricing Guidelines and circulars/other guidelines are generally consistent with the OECD Transfer Pricing Guidelines (OECD Guidelines). The principles and transfer pricing methods set out in the OECD Guidelines are acceptable in Singapore.
However, there are certain differences between the OECD Guidelines and the Singapore Loan and Services Guidelines. Specifically, services provided by a Singapore taxpayer in a cost pooling arrangement should not be the "principal activity" of the taxpayer. Services are considered the principal activity of the Singapore service provider if the costs relating to the provision of the service exceed 15% of the Singapore service provider's total expenses in a financial year. Further, cost pooling should only be used for "routine" services as defined by the Singapore Loans and Services Guidelines.
The IRAS does not have a specific preference for any of the five prescribed methods outlined in the OECD Guidelines, with the exception of loan transactions, for which the Singapore Loans and Services Guidelines note that the comparable uncontrolled price method is the preferred method for substantiating the arm's length nature of interest charges. The transfer pricing method that produces the most reliable results should be selected and applied.
Transfer pricing penalties
There are no specific penalties regarding transfer pricing adjustments. Under general tax provisions relating to understatements of income, the penalty range is from 100% to 400% of the tax underpaid. In practice, where a transfer pricing adjustment is made, the general penalty rates are applicable and penalties will most likely be applied if the taxpayer has no or insufficient transfer pricing documentation.
In general, tax penalties can be mitigated if there is reasonable cause for the understatement of income. Good quality transfer pricing documentation is important in mitigating penalties.
Singapore tax law and the Singapore Transfer Pricing Guidelines do not explicitly impose a formal requirement to prepare transfer pricing documentation. The IRAS expects taxpayers to assess their transfer pricing risk and prepare transfer pricing documentation commensurate with that risk. At a minimum, Singapore taxpayers should perform and document a transfer pricing risk assessment regarding their related party dealings. Based on the assessment, the taxpayer should determine whether more detailed transfer pricing documentation should be prepared.
A transfer pricing risk assessment should cover at least the following information:
- A description of the taxpayer's related party transactions, including the amounts of the transactions and their contractual terms
- A high–level functional analysis that describes the key contributors to the relevant transactions, in terms of functions performed, assets developed, assets used and risks assumed
- An outline of the taxpayer's assessment of its tax risk
If a Singapore taxpayer has complex or large transactions, preparation of more detailed transfer pricing documentation may be necessary to substantiate compliance with the arm's length principle. More detailed transfer pricing documentation would usually include:
- Detailed factual information regarding the related party transactions, including the functions performed, assets developed, assets used and risks assumed in relation to the transaction
- An analysis of the applicable industry in which the taxpayer operates
- Selection and application of one of the transfer pricing methods specified in the Singapore Transfer Pricing Guidelines
- An economic analysis that supports the use of the selected method using appropriate benchmarking data and analysis
There is no deadline for the preparation of documentation. However, when a taxpayer believes that it has potential transfer pricing risk, then transfer pricing documentation should be prepared contemporaneously. There is also no submission requirement or deadline. However, documentation should be made available if requested by the IRAS.
Statute of limitations on transfer pricing assessments
The statute of limitations for transfer pricing adjustments is as follows:
- If the year of assessment is 2007 or earlier, the statute of limitations is six years from the end of the year of assessment to which the transfer pricing issue relates.
- If the year of assessment is 2008 or later, the statute of limitations is four years from the end of the year of assessment to which the transfer pricing issue relates.
Singapore corporate taxpayers are required to file tax returns by 30 November of the following year after the applicable financial year. For example, a Singapore corporate taxpayer that had a 31 December 2010 financial year end will be required to file its Singapore corporate tax return by 30 November 2011. The applicable year of assessment in this case is 2011, which corresponds to the financial year ended 31 December 2010.
Return disclosures/related party disclosures
No specified disclosures are required on Form C, Singapore income tax return.
Audit risk/transfer pricing scrutiny
With the recent passing of a specific statutory provision on transfer pricing, and given that the purpose of the Singapore Transfer Pricing Guidelines is to create an awareness of transfer pricing issues, it is likely that over time there will be an increase in the number of tax audits that involve transfer pricing.
In July 2008, the IRAS issued a circular on transfer pricing consultation. The transfer pricing consultation process is intended to assess the level of taxpayers' compliance with the Singapore Transfer Pricing Guidelines and to identify potential areas where the IRAS can further facilitate and advise taxpayers on appropriate transfer pricing practices. The initial phase of the consultation process involves the issuance of a questionnaire regarding certain transfer pricing matters. These questionnaires are (and have been) issued to various taxpayers. Based on the answers to the questionnaire, the IRAS will assess whether a field visit to the taxpayer's business operations and review of the taxpayer's transfer pricing documentation are necessary. Further steps may involve specific guidance from the IRAS to the taxpayer regarding compliance with the arm's length principle. To date, there have been four rounds of the transfer pricing consultation process and it is likely there will be further in the future.
The Loans and Services Guidelines specify that cross border loans must be arm's length by 1 January 2011, so it is likely there will be a particular focus on cross border loans from 2011 onwards.
In general, the likelihood of an annual tax audit is characterized as medium. If an audit is conducted, the likelihood of transfer pricing being reviewed is characterized as medium. The likelihood that the transfer pricing methodology is challenged as part of an audit is characterized as medium.
Unilateral, bilateral and multilateral APAs are available. However, for bilateral and multilateral APAs, there must be a double tax agreement between Singapore and the other involved country or countries. The Singapore Transfer Pricing Guidelines outline the procedures for applying for an APA. Further procedural guidance on the APA process has been provided in the IRAS circular "Supplementary Administrative Guidance on Advance Pricing Arrangements" issued in October 2008. The circular applies to APA requests made after 20 October 2008 and includes guidance on the following:
- Suggested timing for the overall APA process
- The circumstances where the IRAS may reject a taxpayer's APA request
- The nature of taxpayer resources and commitments that should be made when an APA is requested
- That "roll–backs" are limited to bilateral and multilateral APAs
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