Transfer pricing continues to be a critical issue for both tax authorities and taxpayers alike and 2015 is likely to see a continuation of the key trends that started to emerge in 2013 and 2014.

Transfer pricing rules serve to allocate income earned by a Group among those countries in which the Group does business. Under the principles of transfer pricing, taxpayers are expected to evaluate the allocation of functions, risks and assets between the various Group companies in determining the arm's length price that should be applied to related party transactions.

Increasingly, due to tax planning that is primarily focused on minimising effective tax rates, multinationals are being accused of being able to use and/or misapply these transfer pricing rules and principles to essentially separate income from the economic activities that produce that income and to shift it into low-tax environments.

Tax authorities both globally and regionally are therefore focusing on transfer pricing as a key focus issue.

Global Updates

Globally, the Base Erosion and Profit Shifting ("BEPS") Action Plan continues to make strides on transfer pricing issues.

The BEPS Action Plan was commissioned by the G20 in February 2013 to provide governments with clear international solutions for fighting corporate tax planning strategies that "exploit gaps and loopholes of the current system to artificially shift profits to locations" where they are subject to more favourable tax treatment. Specifically, the Organisation of Economic Development and Cooperation ("OECD") was tasked with identifying 15 key areas and develop a plan to mitigate the artificial shift of profits.

It is interesting to note that a third of these actions are directly related to transfer pricing. Furthermore, within each action plan, additional position papers have been introduced to provide much needed clarity on key issues that continue to exist within transfer pricing. While the intentions of the OECD are noble, these additional discussion papers often end-up raising more questions.

Towards the end of December 2014, the OECD issued the following six draft discussion papers on:

  • Revisions to Chapter I of the Transfer Pricing Guidelines (Including risk, recharacterisation and special measures)
  • Action 4 (Interest deductions and other financial payments)
  • Action 14 (Make dispute resolution mechanisms more effective) of the BEPS Action Plan
  • Two new elements of the OECD International VAT/GST Guidelines
  • The transfer pricing aspects of cross-border commodity transactions
  • The use of profit splits in the context of global value chains as part of the work on BEPS Action 10

Public comments in respect of the above discussion drafts are due in early 2015. It is clear that the OECD is expecting the international tax community to continue to keep abreast of the various papers and provide comments. It should be noted that comments are due typically within six to eight weeks of the drafts being issued by the OECD.

The changes to be introduced by the OECD remain as suggestions that local tax authorities may choose to adopt as local legislation. In other words, despite the changes that the OECD has made to Chapter 5 of the Transfer Pricing Guidelines, individual tax authorities may still resist changing the transfer pricing documentation requirements in their respective jurisdictions. However, the possibility that certain tax authorities may not embrace the OECD's initiatives may limit the overall efficacy of BEPS. The OECD and G20 recognise this limitation and hence, are committed to developing a multilateral instrument to enable jurisdictions that wish to do so to implement measures developed in the course of the work on BEPS.

Regional Updates

There have been significant developments in the Asia Pacific region as well. We shall discuss these updates in this section.


The Australian transfer pricing regime had recently undergone a substantial over-haul and the Australian Tax Office ("ATO") had significantly strengthened the transfer pricing regime.

The revised Australian transfer pricing transfer pricing rules which apply to years beginning on or after 29 June 2013 introduced transfer pricing documentation requirements as a pre-requisite for establishing a reasonably arguable position ("RAP") with respect to its related party transactions.

These documentation rules would have put a substantial burden on small and medium sized enterprises. To alleviate this burden, in December 2014, a simplified documentation regime was introduced. Taxpayers who meet the eligibility criteria under the "Simplified transfer pricing record keeping" regime will be exempted from transfer documentation requirements.

Hong Kong

In January 2015, Hong Kong's Inland Revenue Department (IRD) concluded a bilateral advance pricing arrangement (APA) with Japan. This is the second bilateral APA that Hong Kong has concluded, the first being the bilateral APA with the Netherlands which was concluded in September 2014. It should be noted that the second bilateral APA was concluded within four months after the first, which shows significant commitment on the part of the IRD on promoting its bilateral APA regime.

Currently, the IRD has two dedicated officials leading the APA programme. Given that the existence of a double tax avoidance agreement ("DTA") is a precursor to applying for a bilateral APA, Hong Kong has been rapidly expanding its DTA network. Over the past four years, the number of DTAs signed by Hong Kong has increased from nil before 2010 to 32 currently. In addition, Hong Kong is in the process of negotiating 13 comprehensive DTAs with countries such as Germany, India and Russia.


Arising from Budget 2015 in India, there were direct changes to the Indian transfer pricing regime.

As one may recall, with effect from 2012, the Indian transfer pricing regulations was expanded to cover domestic related party transactions. This was an outcome of a Supreme Court ruling for Glaxo SmithKline Asia. Specifically, taxpayers engaged in domestic related party transactions in excess of Rs 5 crore were required to prepare detailed transfer pricing documentation.

The recently announced Finance Bill proposed amendments to the provisions of section 92BA of the Income Tax Act to increase the threshold limit for applicability of transfer pricing regulations to specified domestic transactions from Rs 5 crore to Rs 20 crore. This is a welcome change for taxpayers operating domestically in India, as it will reduce the transfer pricing compliance burden significantly.


On 12 January 2015, the Ministry of Finance issued Regulation No.7/ PMK.03/2015 (PMK-7) that addresses Advance Pricing Agreements (APA). As PMK-07 is a Ministry of Finance Regulation, the contents of PMK- 07 overwrites some aspects of the Directorate General of Taxation (DGT) release on APAs, including PER-69. The regulation will take effect on 12 April 2015.

Some of the changes introduced by PMK-7 are:

  • Application of APA is limited to taxpayers who have been operating and conducting business in Indonesia for at least 3 years before entering in to the APA process
  • Increase in pre-filing requirements which includes reasons for entering into the APA
  • Taxpayers to submit the APA application before the start of the fiscal year under the APA otherwise the number of years covered will be reduced by one year
  • Unilateral APAs are valid for 3 fiscal years while a Bilateral APA will be valid for 4 years

It is expected that more detailed guidance will be expected from the DGT on how APAs should be negotiated.


On 13 January 2015, the Bureau of Internal Revenue ("BIR") released a Revenue Memorandum Circular No. 3-2015 that details the key priority programs from a tax perspective, to help achieve the revenue target of 1.72 trillion pesos (approximately S$54 billion). Specifically, the BIR has identified 27 programs, which includes, transfer pricing, to help the Bureau achieve this target.

Priority Program 26, which details the transfer pricing program, seeks to complement the transfer pricing guidelines which were finalised by the BIR in 2013. The transfer pricing program will also include Commercial Database Subscription for Transfer Pricing Studies and the crafting/ finalisation of related guidance on transfer pricing particularly on:

  • Advance pricing agreements
  • Transfer pricing documentation
  • Transfer pricing risk assessment

The likely reliance on a commercial database is welcome news for taxpayers undertaking benchmarking studies in support of their Philippine operations as the current alternative, which is the manual review of financial statements, is a very tedious, time-consuming process. Furthermore, providing additional guidance on transfer pricing documentation as well as transfer pricing risk assessment should provide clarity to taxpayers on how to prepare for transfer pricing scrutiny in the Philippines. However, many taxpayers are sceptical whether the BIR can pull off its 27-point strategy to achieve such an aggressive collection target without imposing measures that will disadvantage taxpayers. In light of this Revenue Memorandum Circular, local tax bureaus are expected to align their activities and other undertakings with the overall BIR's priority program to contribute to the aggressive revenue target.


On 6 January 2015, the Inland Revenue Authority of Singapore strengthened its transfer pricing regime by revising its transfer pricing guidelines. The most overarching effect of this revision is the introduction of contemporaneous transfer pricing documentation requirements. In line with the revised transfer pricing guidelines, Singapore based corporate taxpayers who do not meet the administrative exemptions or the stipulated thresholds are required to prepare and maintain detailed transfer pricing documentation. Such documentation must be updated annually and dated. For additional information on the Singapore transfer pricing regime, and how it may impact you, please refer to our newsletter titled Singapore Transfer Pricing Guidelines: Recent Updates.

Concluding Remarks

All in all, 2015 is likely to be a watershed year in terms of transfer pricing – the finalisation of the various BEPS deliverables will result in a substantial change in mind-set on transfer pricing scrutiny by tax authorities and how transfer pricing can be used as an effective tax optimiser. At a regional level, we are likely to see further strengthening on transfer pricing regimes.

We strongly advise companies to ensure that their related party transactions can be well supported.

Originally published March 26, 2015.

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