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Singapore Transfer Pricing Updates

The updated Singapore Income Tax (Transfer Pricing Documentation) (Amendment) Rules were published on 7 June 2024, and followed by the Seventh Edition of the Transfer Pricing Guidelines (“TPG”) on 14 June 2024.

In this newsflash, we will highlight the salient changes in the 7th Edition of the TPG.

Transfer Pricing Audit Process and Adequacy of Transfer Pricing Documentation

For the contemporaneous nature of information submitted as part of a Transfer Pricing Audit, the TPG clarifies that analysis conducted with hindsight generally will not be considered contemporaneous in nature.

The Inland Revenue Authority of Singapore (“IRAS”) has clarified that the 5 % surcharge for non-compliance with the arm’s length principle will apply once the adjustment is made (through a notice of assessment). Taxpayers who wish to object to the IRAS’s adjustment must follow the IRAS’s objection and appeal process. This differs from IRAS’s previous approach of ‘inform and discuss’ before making any transfer pricing adjustment.

The TPG also places an added emphasis on the quality and adequacy of Transfer Pricing Documentation during a Transfer Pricing Audit. In other words, the IRAS will assess whether the taxpayer’s Transfer Pricing Documentation is adequate. As such, taxpayers should review and ensure that the Transfer Pricing Documentation prepared meets the standards as stipulated in the Transfer Pricing Documentation Rules.

Additional Conditions for Reduction in 5 % Surcharge

Section 34E of the Singapore Income Tax Act 1947 (“SITA”) applies a 5 % surcharge to the total value of transfer pricing adjustments initiated by the IRAS if the IRAS does not consider the transactions to be at arm’s length.

The previous edition of the TPG outlines certain conditions where the IRAS may fully or partially reduce the surcharge. In the new edition of the TPG, the IRAS provided additional clarification on the condition of having “good compliance records” in the current year of assessment (“YA”), and the two immediate preceding YAs, to include the requirement that taxpayers also have no history of surcharges and penalties being imposed, remitted or compounded.

Guidance on Transactions Disregarded by the IRAS

In the previous TPG, IRAS specified circumstances in which they would disregard a related party transaction. In the new TPG, IRAS has provided clarification through an enhanced illustration using the same commercially irrational transaction that, IRAS will not disregard the income of a taxpayer in Singapore in the absence of an Advance Pricing Arrangement (“APA”) or a Mutual Agreement Procedure (“MAP”). However, if the paying company is a taxpayer in Singapore, the IRAS will disregard the payment, thus making it non-deductible.

New Exemption Threshold for Certain Related Party Transactions

The IRAS has raised the threshold for which certain transactions are exempted from contemporaneous Transfer Pricing Documentation from SGD 1 million to SGD 2 million, i.e., for service fee income/expenses, royalty income/expenses, guarantee income/expenses, etc., taking effect from YA 2026 onwards.

It should be noted that whilst the increase in the exemption threshold is to reduce the compliance burden of the taxpayer, it does not exempt taxpayers from overall compliance with the arm’s length principle; and taxpayers are expected to be able to substantiate the arm’s length nature of their related party transactions upon request.

New Exemption Conditions for Related Party Domestic Loans

Domestic related party loans entered into on or after 1 January 2025 are exempt from the preparation of contemporaneous transfer pricing documentation if the following conditions are met:

Neither the lender nor the borrower is in the business of borrowing and lending money (taxpayers should note that the previous condition only required that the lender is not in the business of borrowing and lending money); and
The indicative margin is applied in accordance with the administrative practice (the threshold of SGD 15 million for the purpose of applying the indicative margin does not apply to related party domestic loans where neither party is in the business of borrowing and lending money).

As such, taxpayers who enter into domestic related party loans on or after 1 January 2025 will need to prepare contemporaneous transfer pricing documentation if the indicative margin (as published on the IRAS website) is not applied.

With this, IRAS recognizes that the approach of interest restriction is less relevant to achieving an arm’s length outcome for domestic related party loan transactions where the lender is not in the business or borrowing or lending money.

For domestic related party loan transactions entered into on or after 1 January 2025, where either party is in the business or lending and borrowing, the interest rate applied on such loans should be determined based on the arm’s length principle. Where the loan does not exceed SGD 15 million, the IRAS indicative margin may be applied to determine the interest rate.

Additional Guidance on Strict Pass-Through Costs

The IRAS has clarified that it requires that the costs of acquired services are the legal or contractual liabilities of the related parties benefitting from the services, as demonstrated by a “written agreement” with the related parties. “Written agreement” can include email correspondence between the group service provider and its related parties.

New Guidance on Base Reference Rates, and Review of Long Term Related Party Loans

When changing from a related party Interbank offered rates based (“IBOR-based”) loan to an alternate risk-free rate based (“RFR-based”) loan, the following should be included in the Transfer Pricing Documentation:

The basis of the changes and an explanation of how it is consistent with the IBOR reform, relevant guidance and the arm’s length principle;
An explanation of whether a spread adjustment is necessary;
The bias for determining the spread adjustment;
Where the changes made go beyond those expected under IBOR reform and the relevant guidance, the IRAS will deem that a new loan arrangement has been entered into; and taxpayers must establish new arm’s length terms and interest rate for the new loan;
Taxpayers are also expected to review their existing related party financing arrangements and reassess the arm’s length basis and transfer pricing documentation compliance to comply with the new Transfer Pricing rules and guidelines.

Removal of Pre-filing Phase under the MAP

The new TPG removes the steps related to the pre-filing phase of an MAP, i.e., the notification of intent and pre-filing meeting.

Notwithstanding the simplification of the MAP process, the new MAP process adds an “evaluation” step by the IRAS before accepting an MAP application. The IRAS may require more information from taxpayers for evaluation before indicating if the application is accepted.

Guidance in Relation to Government Assistance

The new TPG includes a section with guidance on determining how benefits from government assistance should be treated for transfer pricing purposes.

The guidance aligns with previous guidance from the IRAS and provides insight on how the IRAS would consider the receipt of government assistance in a related party transaction, the relevant comparability analysis for arriving at the arm’s length price, and how the comparability analysis should be conducted when government assistance is received.

Guidance on Capital Transactions

The new TPG clarifies that transfer pricing adjustments would not apply to gains, losses, or deductions from capital transactions that are not taxable or deductible under the SITA; and as such no Transfer Pricing Documentation is required for these transactions.

However, if the sale or transfer of fixed assets is not conducted at arm’s length, the IRAS may apply the arm’s length principle to determine the allowance and balancing adjustment following specific provision in the SITA.

Key Takeaway

The updates to the TPG demonstrates that IRAS recognizes the practical challenges and administrative burden that taxpayers face when preparing transfer pricing documentation. The new TPG aims to reduce the compliance burden for taxpayers while continuing to emphasize an expectation for robust transfer pricing compliance. This is also highlighted by IRAS’ more stringent stand on TP audits and MAP evaluation process.

Given this, taxpayers should take this opportunity to review their current transfer pricing documentation and evaluate if improvements are necessary to proactively manage any potential risks.

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