On 12 January 2017, the Inland Revenue Authority of Singapore ('IRAS') released the fourth edition of the Singapore Transfer Pricing Guidelines. The revised guidelines make explicit reference to the Base Erosion and Profit Shifting ("BEPS") Action Plans 8 – 10 Aligning Transfer Pricing Outcomes with Value Creation and Action Plan 13 Transfer Pricing Documentation, thereby demonstrating compliance with international transfer pricing standards.

The continued revision of the Singapore Transfer Pricing Guidelines also highlights the IRAS' focus on transfer pricing analyses and documentation to ensure that Singapore based corporate taxpayers are engaged in related party transactions in a manner compliant with the arm's length standard.

The key changes made in the Singapore Transfer Pricing Guidelines (4th edition) can be summarised as follows:

  1. Aligning transfer pricing outcomes with value creation

    In line with Action Plan 8 -10, the IRAS has explicitly noted that profits should be taxed where the real economic activities generating the profits are performed and where value is created. This has been a growing concern for tax authorities globally and is one of the cornerstones of the BEPS project. In recent years, foreign tax authorities such as the Australian Tax Office, have also scrutinised transactions entered by Australian taxpayers with Singapore counterparties along the same lines (i.e., is there true economic value being created in Singapore to justify the profits being booked).

    In addition, a more robust risk analysis is now required to demonstrate not only that an entity is contractually bearing risks, but also that the entity has the capacity and capability, from both a financial and operational perspective, to assume and manage the specific economically significant risks. To reflect the importance of risk in the functional analysis process, the IRAS has provided additional guidance and examples on risk analysis.

    These changes suggest that a more robust function, asset and risk ("FAR") analysis may need to be prepared in respect of Singapore's operations. Furthermore, in line with Action Plan 8 – 10, we would also recommend that a value chain analyses is carried in respect of the transactions that involves related parties in Singapore.
  2. Safe harbour provisions for intercompany loan transactions

    In an effort to reduce transfer pricing compliance costs, the IRAS has now introduced an administrative practice whereby a safe harbour interest margin can be applied for cross-border intercompany loans provided or received by a Singapore taxpayer. This is with effect from 1 January 2017, which suggests that this safe harbour provision may not apply to any loans provided or received in prior years. The interest margin, which will be published on an annual basis, can be applied on all new loans, which are below the S$15 million threshold. It should be noted that the interest rate margin needs to be applied on the selected interbank rate (i.e., LIBOR / SIBOR) in the case of floating interest rate arrangements or the swap rate in the case of fixed interest rate arrangements. In the event that a taxpayer chooses not to apply the safe harbour interest rate margin, then a transfer pricing analysis will need to be carried out to support the arm's length interest rate.

    This administrative practice is beneficial for Singapore taxpayers as it eliminates the need to prepare transfer pricing analysis. However, the interest rate margin may not be accepted by or may not be in compliance with the transfer pricing rules in foreign jurisdictions. Thus, we suggest that Singapore taxpayers adopt a holistic position, keeping in mind the transfer pricing provisions of Singapore as well as foreign jurisdictions, in terms of how the safe harbour is to be applied on intercompany loan transactions

    Paragraph 13.30 of the Transfer Pricing Guidelines suggests that with respect to loans, the IRAS will apply the threshold to each related party, individually and not in aggregate. This will make it easier to qualify for the administrative exemption explained above.
  3. Enhanced guidance on Mutual Agreement Procedures ("MAPs") and Advance Pricing Arrangements ("APAs")

    With respect to APAs, previously IRAS had indicated that the number of roll-back years will generally not exceed two financial years. The IRAS has now clarified that, depending on the facts and circumstances of each request, it may exercise its discretion to vary the number of roll-back years. Reference has also been made to Action Plan 5 - Countering Harmful Tax Practices More Effectively, taking into Account Transparency and Substance – to outline the framework by which IRAS will exchange information on unilateral APAs with foreign jurisdictions.

    Similar clarifications have also been provided for MAPs. For example, IRAS aims to resolve a MAP case within 24 months from receiving the taxpayer's complete application and it is open to considering a refund of any interest and/or penalties that may have already been imposed in a transfer pricing audit during the MAP discussions. The IRAS has also noted that any negotiation between the IRAS and the foreign competent authority may be challenging if the taxpayer has already chosen to accept the transfer pricing audit settlement with the foreign competent authority.

    Thus, with respect to both APA and MAP applications, taxpayers need to understand the procedures and limitations that such negotiations may place on both the IRAS as well as the foreign competent authorities before deciding to proceed with such strategies.

The release of Singapore Transfer Pricing Guidelines (4th edition) shows IRAS' continued focus and attention on transfer pricing and highlights the need for Singapore based corporate taxpayers to adhere to the arm's length standard. It also demonstrates IRAS' commitment to address the global issue of BEPS.

With the global implementation of the BEPS Action Plans, transfer pricing continues to receive attention across multiple jurisdictions. It is likely that many of Singapore's trading partners will be reviewing and repositioning their transfer pricing provisions in line with the global standards this year. The changes that are likely to take place will require multinational corporations to holistically review and document the related party transactions entered into by them in a consistent manner.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.