On 23 February 2018, the Inland Revenue Authority of Singapore ("IRAS") published the fifth edition of its Transfer Pricing Guidelines (the "2018 TP Guidelines"). The Income Tax (Transfer Pricing Documentation) Rules 2018 (the "TPD Rules") which were made on 21 February 2018 came into effect on the same day as the 2018 TP Guidelines were published.

Together with the updated transfer pricing provisions introduced in the Income Tax Act (the "ITA") in October 2017, the 2018 TP Guidelines and TPD Rules aim to maintain the broad alignment of Singapore's transfer pricing regime with the principles outlined in the 2017 OECD Transfer Pricing Guidelines. The new rules also significantly develop the circumstances, process and guidance by which documentation should be prepared and maintained in order to demonstrate that a transfer pricing analysis had been prepared. New powers are also granted to IRAS to define and enforce the arm's length principle - and penalise taxpayers that are not deemed to be in compliance.

The combined changes are likely to entail an increased compliance burden for many taxpayers and signal the intent of IRAS to continue and make more robust its focus on transfer pricing enforcement. We highlight the key changes below.

1. Introduction of Mandatory Transfer Pricing Documentation Requirements

Taxpayers with annual revenues of more than S$10 million are now required under the ITA to prepare contemporaneous transfer pricing documentation ("TPD") from YA 2019 onwards, subject to a range of exemptions. Failure to prepare, retain and furnish such TPD is an offence and is punishable by a fine. Additionally, the introduction of the 5% surcharge on transfer pricing adjustments in the ITA heightens the potential consequences of not being able to substantiate a transfer pricing policy position with a sound analysis.

The TPD Rules have expanded the categories of information required in the TPD to include detailed information on intangible assets and group financing arrangements, as well as requiring a more detailed comparability and functional analysis to be prepared. In addition, the TPD Rules have updated the conditions which exempt the taxpayer from TPD requirements. However, these exemptions are likely to be relatively immaterial for many multinational corporations.

To ease the compliance burden where possible, where the facts, circumstances and transactions are the same (applied on a per transaction basis), the TPD Rules permit taxpayers to rely on qualifying past TPD prepared in either the prior basis period or the period before that basis period ("QPTPD") to justify the arm's length nature of their related party transactions. This essentially provides taxpayers the option of refreshing their TPD and financial analysis once every three years.

However, relying on QPTPD requires fulfilment of several conditions that may be difficult to meet in practice. These conditions include the requirement that there are no changes to the arm's length conditions of the transaction and the commercial or financial relations between the related parties. Reliance on QPTPD and outdated financial analysis may also raise the risk of queries or audits by tax authorities where related counterparties are situated.

2. Adjustments and Surcharges

The amendments to the ITA clarify the scope of IRAS' powers to make adjustments to transactions that it deems are not conducted at arm's length. Where such an adjustment results in an increase in the income of a Singapore taxpayer, the additional income is treated as accruing in or derived from Singapore, or received in Singapore from outside Singapore. The 2018 TP Guidelines appear to suggest that the remittance of some of the adjusted income in question will result in the entire amount of the adjustment as being treated as received in Singapore, and therefore subject to income tax. It remains to be seen whether IRAS will issue further clarification of the tax treatment of such income and adjustments.

The 2018 TP Guidelines also provide that IRAS may disregard or completely recharacterise related party transactions in exceptional circumstances. Such course of action is likely to be reserved for egregious circumstances where such transactions would not happen between third parties.

The amendments to the ITA have also introduced a discretionary 5% surcharge on transfer pricing adjustments passed by IRAS with effect from YA 2019. In our view, this represents IRAS' intent to bolster enforcement of the arm's length principle. As the surcharge is imposed on the amount adjusted, this results in a higher effective rate of tax for taxpayers.

3. Added Detail on Comparability Analysis

The 2018 TP Guidelines significantly expand the existing guidance on comparability analysis and the identification and delineation of related party transactions. This is broadly in line with the BEPS 8-10 framework (now placed within the 2017 OECD Transfer Pricing Guidelines), and is significant as it indicates that IRAS now expects more detailed analysis to substantiate the arm's length nature of taxpayers' related party transactions.

A noteworthy addition in this regard is the new emphasis on contractual agreements as the starting point of delineating a given transaction. It is therefore imperative that taxpayers ensure their documentation aligns with the conduct of related parties in their transactions, and that they are documented properly both in TPD and in the legal agreements.

4. Additional changes

The 2018 TP Guidelines provide additional guidance on the use of the profit split method. In particular, the Guidelines reaffirm the 'best method' rule by emphasising that the profit split method should not be used by default where no comparable companies can be identified. The 2018 TP Guidelines also provide guidance on the application of the arm's length principle for refinancing, and the need to determine an arm's length interest rate with each refinancing.

Finally, the 2018 TP Guidelines provide more specific timelines and clarifications pertaining to the Advance Pricing Arrangement ("APA") and Mutual Agreement Procedures ("MAP"). These added timelines are a positive change that should provide taxpayers with certainty should they wish to avail themselves of these dispute resolution facilities. The imposition of the timelines also mean that taxpayers would need to follow the prescribed timeline to avoid rejection of an application. Additionally, the 2018 TP Guidelines also include a requirement for taxpayers to submit financial forecasts of the covered transaction for the covered period. This requirement may prove unrealistic given the volatility and absence of future prices and the nature of certain industries.

Conclusion

The legislating of certain transfer pricing obligations means that the taxpayers are required to prepare the stipulated documentation in the prescribed form. Failure to do so can result in penalties and an inability to defend a tax position.

Our transfer pricing team can assist in preparing or reviewing documentation to ensure that your compliance obligations are met and can provide input on likely audit risks and defence strategies in the event your documentation is scrutinised.

Taxpayers should also make sure that their legal documentation meets the enhanced transfer pricing documentation requirements. This means that supporting information such as contracts, invoices and supporting memoranda detailing key business and commercial activities should be reviewed for accuracy and completeness. Our team can assist in reviewing and collating such information so that taxpayers are prepared to respond to the authorities.

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