Is your firm active in Singapore? Then it is important to understand the details of transfer pricing in Singapore! After reading this article, you will understand the applicable requirements as well as the important transfer pricing risks.
Business environment and attitude towards transfer pricing
A territorial taxation system, the ease of doing business, a large pool of bilingual talent, a central location and a highly reliable legal system make Singapore an attractive business hub for Western and Asian MNEs. And with the recent political turmoil in Hong Kong, Singapore seems well-positioned to establish itself as the absolute number one business hub in Asia.
The Inland Revenue Authority of Singapore (IRAS), the local tax authorities, have always been business minded and supportive of foreign investment. Compared to other Asian countries, there has been relatively limited scrutiny on MNEs taxation arrangements including transfer pricing. However, the IRAS fully endorses the various BEPS initiatives and transfer pricing audits and disputes are on the rise. MNEs with business activities in Singapore are therefore advised to carefully analyze their transfer pricing position and risks.
Transfer pricing requirements in Singapore
Arm’s length standard
Controlled transactions must be concluded at arm’s length terms and conditions and this requirement is legislated under Section 34D of the Income Tax Act (ITA), which on October 2017 was significantly expanded for the following reasons:
- To provide clarity on the powers of the IRAS to disregard the form of actual commercial or financial relations between related parties where the substance of a transaction is inconsistent with it. It also allows for the IRAS to make necessary adjustments.
- To treat any amount of income increased under section 34D of the ITA as accruing in or derived from Singapore or received in Singapore from outside Singapore, as the case may be. Since foreign sourced income isn’t subjected to tax in Singapore, this ensures that adjustments made by the IRAS can in fact be taxed.
To illustrate this last point: the IRAS determines that the arm’s length foreign sourced income of Mike Mangos, which has been remitted into Singapore, is far higher than the actual foreign sourced income remitted. The IRAS can make an adjustment to the income of Mike Mangos which then is treated as derived from Singapore (and thus taxable).
Transfer pricing documentation
Section 34F of the ITA regulates the documentation requirements. From 2019 on, companies need to prepare and maintain contemporaneous documentation to proof that controlled transactions are concluded at arm’s length terms and conditions.
Contemporaneous in this case means that the documentation must be prepared no later than the tax return filing date for the financial year in which the transaction takes place. Example: FY 2018 tax returns need to be filed by 30 November 2019, hence, transfer pricing documentation for FY 2018 should be prepared latest by 30 November 2019.
Taxpayers are not required to submit transfer pricing documentation when they file tax returns. However, taxpayers should keep it on file and provide it to the IRAS within 30 days upon request. Transfer pricing documentation needs to be updated at least once every three years. Benchmarks, however, need to be updated annually!
Documentation needs to be prepared in English.
Taxpayers are not required to prepare transfer pricing documentation if the following requirements are met:
- Annual gross revenue from their trade or business for the basis period concerned does not exceed SGD 10m; and
- The entity was not required to prepare transfer pricing documentation under Section 34F of the ITA for the immediate preceding year – YA 2020 would be the first year that this test will be applicable.
In addition to the general exemption, there is a specific exemption from preparing transfer pricing documentation for the following controlled transactions if they do not exceed certain values as indicated in the following table:
Type of controlled transaction
Threshold (SGD) per FY
Purchase of goods from all related parties
Sale of goods to all related parties
Loans owed to all related parties
Loans owed by all related parties
Any other category of controlled transactions including the following:
For the purpose of determining if the threshold is met, each category of related party transactions should be aggregated. For example, all service income received from related parties.
1m per type of transaction
Master File and Local File
The IRAS has not adapted the OECD Master File and Local File documentation requirements. 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 must meet all the local requirements.
Indicative margin for group loans
The IRAS has also put in place an indicative margin for related party loans which taxpayers may apply on an appropriate base reference rate (e.g. LIBOR) to price the interest these loans if obtained or provided from 1 January 2017.
If taxpayers choose to apply the indicative margin for their related party loans, they do not have to prepare transfer pricing documentation for these loans. Such loans will also be excluded when determining the safe harbor loan threshold of SGD 15m as indicated in the table above.
The IRAS has indicated the following indicative margins for related party loans not exceeding SGD 15m obtained or provided during the period:
- from 1 January 2017 to 31 December 2017: + 250 bps (i.e. 2.50%);
- from 1 January 2018 to 31 December 2018: + 175 bps (i.e. 1.75%)
What penalties do you risk when not complying with the rules?
If a taxpayer fails to prepare transfer pricing documentation this qualifies as an offense and means the taxpayer is liable to penalty of up to SGD 10k for each non-compliance offense.
In addition, the following consequences could arise:
- If the company is subject to a transfer pricing review or audit by the IRAS, the lack of contemporaneous documentation will increase the risk of transfer pricing adjustments (based on Section 34D ITA). From YA 2019, a 5% surcharge on the amount of increase in income, or reduction in deduction, allowance or losses can be imposed by the IRAS;
- The company can be denied year-end pricing adjustments made to the financial accounts if no supporting documentation is available at the time of making these adjustments. More specifically, if the pricing adjustments give rise to reduction of income for the company, the reduction will not be accorded a tax deduction for Singapore tax purposes. Any upward adjustment (increase of income for the company) will however, be brought to tax; or
- If the taxpayers suffer double taxation arising from any TP audit by IRAS or foreign tax authorities, IRAS may not support the taxpayers in Mutual Agreement Procedure discussions to resolve the double taxation. IRAS may also not accept any application of Advance Pricing Arrangement from the taxpayers.
Important risk areas in Singapore
In principle, every MNE with controlled transactions involving Singapore is at risk. But an MNE runs extra risk of an audit if one of the following situations applies:
- Financial transactions
- Management fees
- Strong deviations in profit and loss histories
- Reporting a low EBIT compared to the industry’s average
- Reporting a low EBIT compared to comparable enterprises
- The risk can be considered lower in case the documentation thresholds are not met.
Do you want to be sure about your transfer pricing in Singapore?
Do you want to be sure that your transfer pricing policy is compliant with regulations in Singapore? Does your firm have inter-company transactions and do you want to be sure you charge the right prices?
…Then you have come to the right place.
We are Transfer Pricing Asia, a boutique transfer pricing firm based in Asia. We assist multi-nationals en medium sized businesses with all matters related to transfer pricing.
Other relevant regulations and rulings
Taxing authority: Inland Revenue Authority of Singapore (IRAS)
Tax law: Singapore Income Tax Act
On 16 June 2016, the Ministry of Finance (Singapore) announced that it will join the framework for the global implementation of the OECD BEPS project. As part of the proposed implementation of Action 13, Singapore will implement Country by Country Reporting for financial years beginning on 1 January 2017 for Singapore-headquartered multinational enterprises with revenues exceeding SGD1.125 billion (EUR 750 million).
On 4 January 2016, the IRAS issued the third edition of its transfer pricing guidelines to provide further clarity of the cost-plus method, MAPs and APAs.
On 6 January 2015, the IRAS issued the second edition of its transfer pricing guidelines (2015 Singapore Transfer Pricing Guidelines). It consolidates four previous e-tax guides.
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.
Transfer pricing guidelines for related-party loans and related-party services, published 23 February 2009
Transfer pricing consultation, published 30 July 2008
Supplementary administrative guidance on APAs, published 20 October 2008
Transfer pricing guidelines, published 23 February 2006
The 2016 Singapore Transfer Pricing Guidelines are generally consistent with the OECD Guidelines. The principles and transfer pricing methods set out in the OECD Guidelines are acceptable in Singapore.
However, there are a few differences between the OECD Guidelines and the 2016 Singapore Transfer Pricing Guidelines. In particular, if related parties have a cost-pooling arrangement.