Transfer Pricing Guidelines Issued By IRAS - Deloitte

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Corporate Tax News 16 March 2006
Transfer Pricing Guidelines Issued By IRAS
The Inland Revenue Authority of Singapore (IRAS) published Transfer Pricing Guidelines
(the Guidelines) on 23 February 2006. The Guidelines represent the first time IRAS has
published its interpretation of the provisions of the Singapore Income Tax Act affecting the
pricing of cross-border related party dealings.
The Guidelines have a continuing emphasis on assisting Singapore companies to avoid
double taxation. IRAS has adopted the arm’s length principle and accepted the definition of
the arm’s length principle endorsed by the Organisation for Economic Co-operation and
Development (OECD) (although Singapore is not a member of the OECD). This aligns
Singapore’s transfer pricing rules with the standard adopted in the transfer pricing rules of
most jurisdictions and should assist Singapore companies in minimising double taxation. In
addition, IRAS has prescribed in detail the procedures and documentation requirements for
requests to invoke mutual agreement procedures and requests for advance pricing
arrangements and outlined the guiding principles applying to both processes.
The Guidelines include detailed chapters on the application of the arm’s length principle,
documentation requirements, advance pricing arrangements and requests to invoke mutual
agreement procedures under Singapore’s double taxation agreements.
Arm’s Length Principle
Transfer pricing refers to the consideration provided for transfers of goods, services and
property between related parties. The arm’s length principle holds that transactions
between related parties should be conducted on similar terms to those that would have
been agreed had those parties been dealing independently from one another in otherwise
similar circumstances.
IRAS has endorsed the arm’s length principle and the Guidelines state that the arm’s length
principle will be used to assess the various provisions of Singapore’s tax law (including the
Singapore Income Tax Act and its double tax agreements) that apply to cross-border related
party dealings. IRAS has noted that by adopting the same principle applied in most tax
jurisdictions, the potential for double taxation of Singapore companies should be reduced.
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IRAS has recommended a three-step approach to applying the arm’s length principle, which
involves:
• Step 1 – Conduct a comparability analysis;
• Step 2 – Identify the appropriate transfer pricing method and tested party; and
• Step 3 – Determine the arm’s length results.
Pricing Methods
The Guidelines outline and discuss five commonly used transfer pricing methods and advise
that a taxpayer can select any of the five methods, or a modified version of any of those
methods. The five methods are:
• The traditional transaction methods:
o The comparable uncontrolled price method;
o The resale price method; and
o The cost plus method.
• The transactional profit methods:
o The profit split method; and
o The transaction net margin method.
The Guidelines state that the method that should be applied is the method that produces
the most reliable results, taking into account the quality of available comparable data and
the degree of accuracy of any adjustments required.
Documentation
The Guidelines advise taxpayers to exert reasonable efforts to undertake a sound transfer
pricing analysis to ascertain that transfer prices comply with the arm’s length principle. The
Guidelines state that the objective of preparing transfer pricing documentation is to enable
the taxpayer “to readily demonstrate that it has exerted reasonable efforts to ensure that its
transfer prices are consistent with the arm’s length principle.”
The Guidelines state that taxpayers are only required to prepare or obtain documents
necessary to allow a reasonable assessment of whether they have complied with the arm’s
length principle. In this regard, companies should evaluate the substantiality and
complexity of the related party transactions they are involved in as well as the costs of
compliance arising from documentation. Companies are not expected to go to such lengths
that the compliance costs arising from the preparation of documentation are
disproportionate to the amount of tax revenue at risk, or to the complexity of the
transactions. A guide to the type of information that would be helpful in substantiating
compliance with the arm’s length principle is provided in the Guidelines.
Transfer pricing documentation will not be required to be submitted when annual tax
returns are filed. Documentation should be kept by companies and submitted to IRAS on
request. The Guidelines recommend maintaining transfer pricing documentation in line with
the record-keeping requirements of the Singapore Income Tax Act, which currently require
companies to maintain records for seven years from the relevant year of assessment.
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Mutual Agreement Procedures (“MAP”)
Singapore has an extensive network of over 50 comprehensive double taxation agreements
(DTAs) between Singapore and other tax jurisdictions. All of Singapore’s DTAs provide for a
MAP to resolve instances of double taxation. A MAP involves the nominated representatives
(referred to in the DTAs as “competent authorities”) of both jurisdictions under a relevant
DTA, meeting to reduce or eliminate the extent of double taxation encountered by a
taxpayer in one or both jurisdictions. IRAS acts as the competent authority of Singapore for
the purposes of MAP discussions.
Where a taxpayer is subject to a transfer pricing adjustment in a foreign jurisdiction which
has a DTA with Singapore in respect of transactions with a related Singapore taxpayer, the
taxpayer can request IRAS to invoke the MAP process to reduce or eliminate the double
taxation arising from the transfer pricing adjustment.
The Guidelines state that IRAS will generally accept a taxpayer’s request for MAP if:
a) The taxpayer has complied with the time limit specified in the applicable DTA for
presenting the MAP request; and
b) Double taxation is almost certain (i.e., double taxation should not be just a possibility,
such as the mere occurrence of audit or examinations); and
c) The taxpayer is willing and able to render full co-operation throughout the process. In
this aspect, IRAS will, amongst other things, evaluate taxpayer’s quality of
documentation.
The Guidelines also explain the steps involved in the MAP process, the information required
in formal MAP requests and give undertakings on the timing and content of responses
provided to companies by IRAS.
Advance Pricing Arrangements (APAs)
APAs are agreements between taxpayers and tax authorities in one or more jurisdictions
regarding the transfer pricing practices to be adopted for a prospective period. APAs specify
the transfer pricing arrangements that will be considered to be consistent with tax rules in
the jurisdiction of the tax authorities that are party to the APA. APAs can be either
unilateral (involving a single tax authority) or bilateral (involving two tax authorities).
The Guidelines state that IRAS will make APAs available on both a unilateral and bilateral
basis to Singapore companies. Requests for APAs will generally be accepted “if there is a
genuine motive to obtain certainty for the avoidance of double taxation and the request
relates to specific current or future transactions that are not hypothetical.”
The duration of an APA should be for the periods where the critical assumptions and
commercial factors that have a significant impact on the validity of the APA are expected to
remain unchanged. The Guidelines state a period of 3-5 years based on IRAS experience to
date. The Guidelines also state that APAs may be applied to prior years (known as “rollback”
of the APA) where the criteria mentioned above apply.
The Guidelines explain the steps involved in the APA process, the information required in
formal APA requests and submissions and give undertakings on the timing and content of
responses provided to companies by IRAS.
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Deloitte View – Action Required
Our view is that the release of the Guidelines represents a major shift in the stance taken
by IRAS on transfer pricing issues. IRAS has provided certainty of its interpretation of the
transfer pricing provisions of Singapore’s tax law and has given a clear indication of its
willingness to assist Singapore companies to avoid double taxation.
We recommend that companies assess whether their existing transfer pricing arrangements
warrant the preparation of transfer pricing documentation. This will involve evaluating the
substantiality and complexity of related party dealings and the benchmarking support
available to demonstrate compliance with the arm’s length principle. If transfer pricing
documentation is considered necessary, the three-step process outlined by IRAS should be
followed to demonstrate the application of an accepted transfer pricing method.
In addition, Singapore companies should consider whether an APA might be appropriate for
all or part of their related party dealings. The availability of bilateral APAs represents a
significant opportunity for Singapore companies and this option should be considered in
situations with substantial exposure to transfer pricing adjustments. With the growing
attention paid to transfer pricing by authorities around the region, we expect the application
of APAs to grow quickly.
Deloitte’s transfer pricing specialists are highly experienced in advising on transfer pricing
matters including transfer pricing documentation, APAs and tax audits/investigations of
transfer pricing matters. Our Singapore Transfer Pricing team can be contacted directly if
you have any queries about the Guidelines or would like to discuss the development of an
effective response.
If you need any clarifications, your contacts at Deloitte Singapore are:
Transfer Pricing
Linda Foo
Tel: +65 6530 5562
Email: lfoo@deloitte.com
David Bell
Tel: +65 6216 3185
Email: davbell@deloitte.com
Cassandra Soon
Tel: +65 6216 3129
Email: casoon@deloitte.com
Corporate Tax Services
Ajit Prabhu
Tel: +65 6530 5522
Email: aprabhu@deloitte.com
Linda Foo
Tel: +65 6530 5562
Email: lfoo@deloitte.com
Sum Yee Loong
Tel: +65 6530 5538
Email: ysum@deloitte.com
Chan Huang Chay
Tel: +65 6530 5536
Email: hchan@deloitte.com
Low Hwee Chua
Tel: +65 6216 3290
Email: hwlow@deloitte.com
Steve Towers
Tel: +65 216 3277
Email: stowers@deloitte.com
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International Assignment Services
Jill Lim
Tel: +65 6530 5519
Email: jilim@deloitte.com
Indirect Tax Services
Nigel Mellor
Tel: +65 6530 5523
Email: nimellor@deloitte.com
Mike Vaughan
Tel: +65 6216 3256
Email: mcvaughan@deloitte.com
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