Winds of change on the horizon for transfer pricingSingapore is one of the latest countries to review its approach to transfer pricing in light of the OECD’s Base Erosion and Profit Shifting initiative.
Multi-national companies need to monitor the changing transfer pricing landscape carefullyin light of both ongoing international efforts to prevent artificial profit shifting through transfer pricing activities, as well as a multitude of changes being announced in respect of existinglocal transfer pricing guidelines.
Singapore, for example, is planning to bring its guidance on transfer pricing documentation
into line with the recommendations of Action 13 of the OECD’s Base Erosion and Profit
Shifting (BEPS) Action Plan, announced in September 2014 to facilitate better transfer pricing
compliance. The release of a public consultation paper on transfer pricing sends a strong
signal that Singapore supports the BEPS initiative and is seeking to align local rules.
The proposed new guidelines require taxpayers to prepare and keep contemporaneous
documentation to support the pricing of transactions undertaken with related parties. Under
the proposed guidelines, the Inland Revenue Authority of Singapore (IRAS) has indicated that
it accepts contemporaneous transfer pricing documentation as records prepared prior to or at
the time of undertaking transactions, and including up to the time of preparing the relevant
Transfer pricing documentation required
The proposed guidelines require companies to prepare documentation at the group level as well as entity level. At group level the documentation is aimed at providing a good overview of the group’s businesses, including the group’s worldwide organisational structure, nature of global business operations and overall transfer pricing policies. This broadly includes providing a description or details in relation to the group’s products and services, main geographic markets and competitors, industry dynamics, key drivers of business profits and group transfer pricing policies. At entity level the documentation should provide sufficient details of the company’s business and transactions with its related parties. This broadly includesinformation on ownership and management structure, details of transactions with related parties, legal contracts and relevant economic analysis and benchmarking performed.
Transfer pricing risks may be considered high where, for example, transfer pricing strategies are aimed at shifting profits to more favourable tax jurisdictions, the value of cross-border transactions is large relative to other transactions by the same company, operating results are not in line with industry norms or where there is intellectual property or intangibles in use in the business.
The proposed guidelines introduce two situations where companies are exempt from having to prepare transfer pricing documentation. The first is where the company applies the Singapore safe harbour mark-up of 5% for routine services. The second is where the company is a small and medium enterprise (with annual sales turnover of less than SGD100m or with less than 200 employees) engaged in local transactions with a related party that is subject to the same tax rate on its income.
Implications of inadequate documentation
The proposed guidelines state that companies are not expected to incur compliance costs that are disproportionate to the amount of tax revenue at risk or the complexity of the transactions. Where transfer pricing documentation is found to be inadequate, a company may be subject to adverse consequences such as upward transfer pricing adjustments, denial of support by IRAS in Mutual Agreement Procedures (MAP) discussions or non-acceptance of any Advance Pricing Agreement (APA) it makes.
IRAS is likely to be mindful of increasing the compliance burden on companies and will no doubt take their feedback into consideration in seeking the right balance. Indeed, it remains to be seen if IRAS intends for the proposed requirements on contemporaneous transfer pricing documentation to remain as guidelines or to introduce new legislation. Nevertheless, there are a number of things that companies can start doing so that they are not caught out.
Foremost among these is assessing the quantum and extent of related party transactions being
undertaken and determining whether they meet the safe harbour thresholds for exemption from transfer pricing documentation and, if not, whether the current documentation in place is adequate given the new proposed guidelines. Next, companies would be advised to start identifying any high-risk related party transactions that they may have and conduct the relevant economic analyses in order to ensure relevant transfer pricing documentation can be put in place before the tax filing deadline.
For more information, contact:
Lam Fong Kiew
Nexia TS, Singapore
T +65 6597 7293
Nexia TS, Singapore
T +65 6536 1312