Transfer pricing in Singapore

Inland Revenue Authority of Singapore (“IRAS”) endorses the arm’s length principle as the standard to guide transfer pricing. It is an internationally accepted standard adopted for transfer pricing between related parties. The Singapore Transfer Pricing Guidelines are generally consistent with the Organisation for Economic Co-operation and Development (“OECD”) guidelines. 

Where the pricing of related party transactions is not at arm’s length and results in a reduced profit for the Singapore tax payer, IRAS may adjust and tax the profit of the Singapore tax payer under section 34D of the Singapore Income Tax Act. 

A 3-step approach is used to apply the arm’s length principle in related party transactions: 

Step 1 – Conduct a comparability analysis 

Step 2 – Identify the appropriate transfer pricing method and tested party Other than profit split method, the use of the other transfer pricing methods would require a decision on which party to apply pricing analysis. This party is known as the tested party. 

Step 3 – Determine the arm’s length results 

IRAS is prepared to accept use of ranges, such as an interquartile range to determine an arm’s length range provided that the comparables are reliable. 

Mutual Agreement Procedures (MAP) 

MAP is to provide an amicable way which competent authorities may eliminate double taxation. In a MAP, IRAS would apply its best efforts in eliminating double taxation. A request for MAP is generally accepted by IRAS if , a) it is within the time specific in the DTA b) there is double taxation c) full cooperation is extended by tax payers. 

Advance Pricing Agreements (APA) 

An APA allows a taxpayer to determine a set criteria to ascertain transfer prices of specific transaction for a specific time frame. IRAS makes APA facility available to tax payers who are engaged in cross border related party transactions. Thereby, allowing certainty and an effective way of resolving transfer pricing issues. 

The provisions stated in Singapore tax treaties and Income Tax Act enables requests from tax payers for APAs and to enter such agreements which include unilateral and bilateral APAs. 

Transfer pricing for related party loans and services 

The IRAS has issued transfer pricing guidelines for related party loans and services in 2009. 

Related Party Loans 

The comparable uncontrolled price (“CUP”) method is the preferred method for determining the arm’s length pricing for interest for related party loans. To determine the arm’s length interest rate, some factors to consider include: 

a) the nature and purpose of the loan, market conditions at the time the loan was granted, 

b) the principal amount, 

c) Tenure and terms of the loan, 

d) Interest rate prevailing at the sites of the lender and borrower for comparable loans between unrelated parties 

It is suggested that suitable reference rates, such as the Singapore Interbank Bank Offered Rate (“SIBOR”) , the London Interbank Offered Rate (“LIBOR’), prime rates offered by banks or specific rates quoted by banks. 

Related Party Services 

IRAS is prepared to accept the charging of the routine support services at cost plus 5% mark up provided that the following routine support services are only provided to related parties such as accounting and auditing services, general administrative services and staffing and recruiting services.

If there is a cost-pooling agreement, IRAS is prepared to accept that services are charged at no mark-up provided that the following criteria are met; 

a) The services are not provided to any unrelated party; 

b) The provision of the services is not principal activity of the service provider, If the cost of providing the services does not exceed 15% of the total expenses of the service provider for that year, the services will not be treated as the principal activity;

c) Documentation showing that the parties intended to enter into the cost pooling arrangement before the provision of the services. 

Documentation 

The objective of maintaining documentation is to make sure that taxpayers exercised reasonable efforts to ensure that its transfer prices are consistent with the arm’s length. This is to facilitate reviews by IRAS on taxpayers’ transfer pricing analyses and assist in resolving any transfer pricing issues that may arises. 

a) By keeping adequate documentation, the taxpayer has further discharged its burden of proof that it has compiled with the arm’s length principal to put the tax payer in a better stead to defend its transfer pricing analysis and prevent transfer pricing adjustments arising from reviews conducted by IRAS;

b) In considering taxpayers’ application for Mutual Agreement Procedures (MAP), IRAS would assess the quality of taxpayers’ documentation. Taxpayers who have not prepared adequate documentation may realize their application for MAP rejected or transfer pricing issue would be difficult to resolve.

There is no deadline for the preparation of documentation. The documentation should be readily available should IRAS requests for further clarifications. 

Penalties 

Understatement of income penalties range of up to four times of tax underpaid and fines applies. Mitigating factors for penalties includes good transfer pricing basis and documentation. 

IRAS believes in consultation and cooperation with taxpayers as a mutually beneficial way to assist taxpayers with its compliance.