IRAS published the 7th edition of the e-tax guide on Transfer Pricing Regulations
Singapore is among the world's most competitive economies, being a highincome economy built on a businessfriendly regulatory environment and strong investments in infrastructure, education, healthcare, and public services. Transfer pricing in this region was formally introduced in 2006 with the very first Transfer Pricing Guidelines (TPG) aimed at applying the arm's length principle when transacting with related parties, maintaining Transfer Pricing Documentation (TPD), etc.
Internal Revenue Authority of Singapore (IRAS) endorses the arm's length principle, an internationally endorsed standard, to guide the pricing of transactions between related parties. IRAS subscribes to the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created. A proper application of transfer pricing rules will ensure this outcome.
Against this background, the IRAS released the 7th edition of its TPG. The notable changes and implications arising due to the updates are discussed below:
- New exemption threshold for Related Party Transactions: The thresholds for transactions for TPD have increased from SGD 1 million to SGD 2 million for transactions relating to services, guarantees, Royalties/license fees, leases and other arrangements. However, the thresholds for intra-group sales and purchases have been retained at SGD 15 million. This change is aimed at an attempt to reduce the compliance burden of smaller transactions. However, the IRAS would expect taxpayers to be able to demonstrate the arm's length nature of pricing arrangements.
- Simplified Transfer Pricing Documentation: The contemporaneous TPD requirements apply similarly to simplified TPD. Therefore, to be considered contemporaneous, simplified TPD should also be completed by the tax filing due date to prove its contemporaneous nature. The taxpayers should therefore, be aware of IRAS' focus on TPD prepared contemporaneously, which is usually scrutinized during routine tax queries.
- Guidance on Working Capital: Taxpayers can make working capital adjustments to improve the reliability of the comparable analysis and IRAS has provided guidance on when working capital adjustments should be made. Additionally, it has provided guidance on which interest rate should be used when making such adjustments. This guidance helps taxpayers navigate working capital adjustment more effectively. It should be made when the reliability of the comparables selected is improved and can be made accurately.
- Transfer Pricing Adjustment on Capital Transactions: IRAS has clarified it will not make any transfer pricing adjustment relating to any gain, loss or deduction arising from capital transactions between related parties that are not taxable or deductible under the Income-tax Act. Furthermore, it highlights that Taxpayers are not required to prepare TPD for such Capital transactions for Singapore's tax purposes. However, if the sale or transfer of fixed assets between related parties is not undertaken at arm's length, IRAS may adjust to reflect the open market price and determine the relevant capital allowance or balancing adjustment accordingly. Therefore, it is imperative for taxpayers to ensure relevant analyses are undertaken and documents for the same are maintained.
- New exemption rule for Related Party domestic loans: Loans between domestic related parties entered on or before 1 January 2025 are exempt from TPD if neither the lender nor the borrower is in the business of borrowing and lending and the IRAS indicative margin is applied. Alternatively, if the interest rate for such loans is determined through an arm's length analysis or benchmarking, TPD of such arm's length analysis would be required. Interest restrictions rules in the hands of the related party lender will no longer apply. This new rule would imply that compared to related party domestic loans entered into before 1 January 2025, taxpayers now need to prepare contemporaneous TPD for related party domestic loans. Taxpayers using Singapore as a funding hub may be required to re-look their intragroup TP model.
- Review and refresh of long-term loan transactions: The IRAS has clarified that taxpayers would need to perform an annual review and refresh their TPD on long-term loans with related parties. Certain facts and circumstances, such as a change in the economic environment, the value of the collateral, borrower's financial status and credit standing, etc., may affect the agreed interest rate, terms and conditions of the long-term loan. These changes may affect the arm's length rate of the loan or part of the loan considered to have equity characteristics. This change acts as a crucial reminder to taxpayers that an arm's length analysis for a long-term loan can only be relied upon throughout the tenor of the loan if there are no changes to the terms and conditions of such loans. Going forward, IRAS may focus on TP audit in great detail for loan transactions.
- Update on guidance on strict pass-through costs: IRAS’ overall position on strict pass-through costs remains unchanged. However, they have updated Section 14.22 of the 7th edition to include e-mail correspondence as a "written agreement" between related parties. This update has been a welcoming one, demonstrating IRAS' recognition of the operational challenges that taxpayers face in complying with strict pass-through costs. This further helps to reduce the administrative burden of the taxpayers.
- Remission for Surcharge: The IRAS has provided additional guidance on conditions for the remission of 5% TP adjustments surcharge. IRAS provided clarification on the condition of having good compliance records in the current Year of Assessment (YA) and the two immediately preceding YAs, including the requirement that taxpayers should also have "no history of surcharges and penalties being imposed or remitted/compounded". This clarification highlights the importance of taxpayers focusing on overall tax compliance and governance to avoid any adverse outcome from non-compliance. Taxpayers should be prepared for strict audit scrutiny, with more cases expected to receive TP adjustments and surcharges from IRAS.
- Stringent Mutual Agreement Procedure (MAP) process: The IRAS has updated the MAP process in the 7th edition to remove (i) notification of intent and (ii) pre-filing meeting as compulsory steps from the previous MAP process. Taxpayers have the option to initiate a discussion with IRAS before submitting the MAP application. The new MAP process appears to be more stringent, with an added evaluation step by IRAS before accepting the MAP application. This implies that IRAS may require more information from taxpayers for evaluation before indicating if the application is accepted.
Key Takeaways
This latest update in the e-tax guide is a welcome addition to the regulations that will provide much-needed certainty. The updates show the IRAS' transfer pricing compliance program and position regarding various transfer pricing matters. It signifies the IRAS' recognition of practical challenges.