What the new advanced ruling means for related party transactions
The latest IRAS advanced ruling illustrates how related parties should be identified for transfer pricing purposes.
On 4 January 2021, the Inland Authority of Singapore (IRAS) published an advanced ruling summary affirming control as the key underlying principle in identifying related parties in arrangements.
The Singapore Financial Reporting Standard (FRS) [SFRS 24] defines related parties in a corporate context and is aligned to the principles under the International FRS (IAS 24). An entity is related to another if, among other circumstances, it is a parent, subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity; or it is controlled, jointly controlled, significantly influenced or managed by a person who is a related party.
From a Singapore corporate tax perspective, Section 13(16) of the Singapore Income Tax Act (SITA) has defined a related party as follows:
A related party, in relation to a person, means 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.
The IRAS follows this definition in identifying related party transactions and has provided in the Singapore Transfer Pricing Guidelines (TPG), that two persons are related to each other if:
(a) Either person, directly or indirectly, controls the other person; or
(b) Both persons are, directly or indirectly, controlled by a common person
The key underlying principle for identifying related party transactions for tax purpose is by reference to the ability to exercise control. The accounting definition of related parties is broader than the definition set out in section 13(16) of the SITA for tax purposes, there will therefore be situations where two parties may be considered related parties for accounting purposes but not for tax purposes.
The concept of control, within the meaning of section 24 of the SITA, was considered in the Income Tax Board of Review (the Board) in GCC v The Comptroller of Income Tax  SGITBR 1. Where certain requirements are met, section 24 allows a seller of any property to make an election with the effect that the seller will not be subject to any balancing allowance or charge that may arise from the sale of the property.
Put simply, Section 24 applies where either the buyer or seller has control of the other, or where both the seller and the buyer are controlled by another. In this case, the Board, in the context of the meaning of section 24, takes the view that the relationship and level of control between the seller and buyer must be a close relationship with a high degree of control. The Board cited the sale between two subsidiaries that were wholly owned by the same parent company as an obvious example for this purpose.
The taxpayer in this case appealed against the Board’s decision to the High Court (BZZ v Comptroller of Income Tax  SGHC 252), which on the facts of the case and in the context of section 24 of the SITA dismissed the appeal. In arriving at its decision, the High Court observed that “substantial influence is not control. Influence persuades, but control wields its dominance as an absolute authority”.
The IRAS advanced ruling: facts of the case and the ruling
The case presented to the IRAS concerned a Singapore company (Co. A) who is a wholly owned subsidiary of a foreign company (Co. B). Co. B is in turn, a joint-venture company owned by three shareholders incorporated outside Singapore. Each of these shareholders (Co. X, Co. Y and Co. Z) each owned more than 30% but less than 40% of ordinary shares in Co. A. Each ordinary share carries one vote per share. Each of the shareholders (i.e., Co. X, Co. Y and Co. Z) of Co. B is independent from the other. They are unrelated parties and do not have common directors or significant common shareholders. None of them also controls the other and they are not under the common control of another person.
Neither Co. A nor Co. B is a subsidiary of the shareholders. Neither Co. A nor Co. B is and will be consolidated in the financial statements of the shareholders under the relevant accounting standard that is equivalent to SFRS 110 (which provides the principles of accounting consolidation).
Also, none of the shareholders is able to exercise control over Co. A or Co. B, through either the relevant Board or Shareholder resolutions.
The IRAS ruled that Co. A is not regarded as a related party to either Co. X, Co. Y or Co. Z for the purposes of sections 34D, 34F and 13(16) of the SITA.
The IRAS advanced ruling serves to illustrate how it identifies related parties for transfer pricing and corporate income tax purpose in Singapore, which is determined primarily based on one party’s ability to exercise control, be this through share ownership, board participation or other avenues (e.g., as a creditor or financier). It illustrates that the IRAS also looks at the accounting treatment applied for this purpose among other factors. While the principles for interpreting the definition of related parties have been clear, this ruling provides a concrete example of how these principles are generally applied by the IRAS.
The fact pattern for this case indicates that none of the shareholders (i.e., Co. X, Co. Y and Co. Z, which are unrelated parties) of Co. B has sufficient shareholding levels and other forms of control to ultimately exercise control over Co. A.
However, there may be commercial arrangements where the facts may not be as clear as the case ruled by the IRAS. For instance, taxpayers may find themselves in unique situations in joint ventures or cases where parties to an arrangement have varying degree of ability to exercise control through voting rights, veto rights, representation in board, management or forms of financial instruments (e.g., convertible bonds). In such cases, the assessment of whether a party to the arrangement has the ability to control may not be so straight-forward. A careful evaluation of the effective shareholder structure and whether implicit control is present in these cases will be needed.
With the tightening of transfer pricing legislation and administration in Singapore, organisations need to have a clear view of whether their transactions are considered as related party transactions so as to meet tax reporting and compliance requirements.
In addition, taxpayers will also need to consider how the above considerations interact with how a counterparty jurisdiction defines related parties to ensure that the tax and compliance requirements in both territories are met. Different jurisdictions may define related parties differently. Where there are differences, the impact arising from these gaps should be assessed.
The co-authors of this article are Chai Sui Fun, EY Asean International Tax Policy and Controversy Leader from Ernst & Young Solutions LLP and Vivienne Ong, Director, International Tax and Transaction Services from Ernst & Young Corporate Advisors Pte Ltd.
 Advanced Ruling Summary No. 1/2021