Transfer Pricing IRAS Requirements – Transfer Pricing Documentation

Transfer Pricing - The New Focus

In today’s globalized economy, businesses are increasingly engaging in cross-border transactions with related parties. While these transactions facilitate operational efficiency and strategic alignment, they also attract the scrutiny of tax authorities worldwide. In Singapore, the Inland Revenue Authority of Singapore (IRAS) enforces stringent transfer pricing (TP) regulations to ensure that intercompany transactions are priced reasonably and in compliance with the arm’s length principle. This article explores the intricacies of IRAS's TP documentation requirements, highlights the risks of non-compliance, and emphasizes the crucial role of professional consultants in navigating this complex landscape.

What is Transfer Pricing All About? Singapore and Beyond

Transfer pricing refers to the pricing of goods, services, or intangible assets transferred between related entities within a multinational company. This includes sales of goods to related parties, the business of borrowing and lending to subsidiaries, related party loans, or even service fees for related companies.

The core principle governing transfer pricing is the arm’s length principle, which stipulates that transactions between related parties should be priced as if they were between independent entities under similar circumstances.

Globally, transfer pricing is governed by guidelines set forth by the Organisation for Economic Co-operation and Development (OECD). These guidelines serve as a benchmark for countries to develop their own TP regulations, ensuring consistency and fairness in international taxation. Singapore, as a member of the OECD's Inclusive Framework on Base Erosion and Profit Shifting (BEPS), aligns its transfer pricing (TP) regulations with OECD standards, thereby fostering a transparent and equitable tax environment.

In Singapore, the Income Tax Act mandates that all related party transactions be conducted at arm’s length. The IRAS enforces this mandate through comprehensive TP documentation requirements, which businesses must adhere to, depending on their size and nature of transactions.

Confused? Transfer pricing is a general term used to describe the pricing of transactions between related companies (often in different jurisdictions). This may involve goods, services, or related parties loan. The pricing will affect the taxable profits of each company, and if the price is not determined at a fair and justifiable price (arm’s length principle; an important transfer pricing rule), there may be an unfair allocation of taxable income.

Transfer Pricing IRAS Requirements – Who Needs Transfer Pricing Documentation?

Under Section 34F of the Income Tax Act, businesses in Singapore are required to prepare contemporaneous Transfer pricing documentation if they meet any of the following conditions:

• Gross Revenue Threshold: The business derives gross revenue exceeding SGD 10 million for the basis period concerned.

• Prior Documentation Requirement: TP documentation was required to be prepared for the basis period immediately preceding the current one.

Contemporaneous transfer pricing documentation means that the TP documentation must be prepared and available at the time of filing the Income Tax Return, typically by November 30 of the assessment year. While businesses are not required to submit the documentation with their tax returns, they must provide it to the IRAS within 30 days upon request.

The documentation should include:

• Group-Level Information: An overview of the group's business operations relevant to the Singapore entity.

• Entity-Level Information: Detailed information on the Singapore entity's business operations and intercompany transactions, including functional analysis and economic analysis to support the transfer prices applied.

It's important to note that certain transactions may have exemptions from transfer pricing documentation requirements, such as:

• Domestic Transactions: Related party transactions conducted within Singapore, provided they are subject to the same tax rate and do not involve loans.

• Low-Value-Added Services: Transactions involving services that are of a routine or administrative nature, subject to a safe harbour mark-up of 5%.

However, even if exempt, businesses are encouraged to maintain TP documentation to mitigate potential risks and demonstrate compliance if audited.

Non-Compliance and TP Risks

Non-compliance with TP documentation requirements can lead to significant risks and consequences for businesses. The IRAS has the authority to make TP adjustments if related party transactions are not conducted at arm’s length. Such audit adjustments can result in:

• Increased Tax Liabilities: Adjustments may lead to higher taxable income, thereby increasing the tax burden.

• 5% Surcharge: Effective from the Year of Assessment 2019, a 5% surcharge is imposed on the amount of TP adjustment, regardless of whether additional tax is payable.

• Penalties: Businesses may face fines up to SGD 10,000 for failing to comply with TP documentation requirements.

Moreover, non-compliance can attract heightened scrutiny from tax authorities in other jurisdictions, potentially leading to double taxation and reputational damage.

A notable example is the Singtel case, where the Australian Taxation Office found that Singtel's Australian subsidiary had not adhered to arm’s length principles in its intercompany loan dealings, resulting in a substantial tax bill.

Common Examples of Transactions within the Scope

One common type of transaction within the scope of transfer pricing regulations in Singapore involves the sale of goods between related entities. For instance, consider a Singapore-based subsidiary of a multinational electronics group that manufactures components and sells them to its parent company in Germany. This cross-border sale of tangible goods between related parties must adhere to the arm’s length principle, meaning the pricing should reflect what independent entities would charge under similar circumstances. To support this, the company must justify its pricing structure through transfer pricing documentation that includes a functional analysis, comparable market data, and a clear explanation of the pricing strategy employed.

Another significant category is related party financing arrangements, such as intercompany loans. Imagine a scenario where a Singapore holding company provides a long-term loan to its wholly-owned subsidiary in Indonesia to fund business expansion. Since this financial transaction involves related parties, the IRAS will examine whether the interest rate applied to the loan is consistent with market conditions. Consideration are given to evaluate alternative risk-free rates or in Singapore, the Singapore Interbank Offered Rates (SIBOR), will be a good reference point in determining arm's length interest rates. The business must demonstrate that the terms of the cross border loan—including the interest rate, duration, and repayment conditions—mirror what an independent lender would agree to with a similarly positioned borrower. Transfer pricing documentation, in this case, should include detailed loan agreements, credit risk assessments, and interest rate benchmarking to ensure compliance with relevant regulations. With Singapore being a financing hub, intercompany financing arrangements are highly popular. This raises the importance of having financing TP policies to ensure intercompany financings such as cross-border loans, long-term related-party loans, or term loans within a network of firms are in compliance with the guidance on transfer pricing.

The third broad category encompasses service fee income charged between related entities. A good example is a Singapore-based regional headquarters that provides administrative, legal, IT, or HR support to its overseas subsidiaries. These shared services are typically charged back to the service recipients through a service fee arrangement. For such transactions, it is essential to determine whether the services provide tangible and measurable benefits to the recipients and whether the fees charged are in line with what a third-party service provider would have charged in the open market. Documentation should clearly outline the nature of the services, how the costs are allocated, and why the pricing is consistent with arm’s length standards.

What a Good Consultant Can Help You with Your TP Matters

Navigating the complexities of transfer pricing regulations requires expertise and a strategic approach. Most tax and corporate service providers offer invaluable assistance in several key areas:

• Preparation of Transfer Pricing Framework: Most companies understand the importance of having good transfer pricing policies. However, knowing the significance and implementing it are two widely different commitments. With large firms having multiple international-related transactions, an external consultant will play a useful role in consolidating risk areas and designing a general framework.

• Documentation Preparation: Crafting comprehensive and compliant TP documentation that aligns with IRAS requirements and reflects the arm’s length nature of intercompany transactions. The contemporaneous preparation enables each client to utilize it as a form of internal monitoring, sounding the alarm in areas with higher risks.

• Functional Analysis: Conducting detailed transfer pricing analysis based on functions performed, assets used, and risks assumed by each party to determine appropriate transfer pricing methods.

• Benchmarking Studies: Identifying and applying comparable data to substantiate transfer prices, ensuring they are within acceptable ranges. The eventual results will still largely depend on the framework, mainly on how each price is derived. Depending on the complexity, additional transfer pricing studies, such as a two-pronged methodology, may be included during the preparation of transfer pricing documentation.

• Risk Assessment: Evaluating existing TP policies to identify potential risks and recommending adjustments to mitigate exposure.

• Audit Support: Representing the business during IRAS audits, providing necessary documentation, and addressing queries to facilitate a smooth audit process.

Engaging a seasoned TP consultant not only ensures compliance with regulatory requirements but also enhances the overall efficiency and profitability of the business. Their expertise can lead to optimized tax positions, reduced audit risks, and improved intercompany pricing strategies.

How OakTree Can Help in Your Journey

At OakTree, we understand the intricacies of transfer pricing and the challenges businesses face in maintaining compliance with these regulations. Our team of experienced professionals offers tailored TP solutions that cater to the unique needs of each client.

Our services include:

• Transfer Pricing Framework Implementation: Every business faces its own unique challenges. The existing Transfer Pricing Framework internally may be weakly designed, lack formal procedures, or may err on the side of non-compliance or high risk. We assist companies in setting their framework correctly, ensuring compliance from the outset, thereby mitigating any transfer pricing risk.  

• Comprehensive TP Documentation: We prepare detailed and compliant TP documentation that meets IRAS requirements and withstands scrutiny during audits. A comprehensive TP Documentation is more than just an IRAS requirement; it serves as an important document for Transfer Pricing defense during audits.

• Strategic TP Planning: Transfer pricing is a complicated subject, often involving knowledge of international tax. We assist clients in devising and implementing efficient strategies while remaining compliant with regulatory requirements.

• Ongoing Support: Transfer Pricing is an ever-evolving field. With changing business models, shifting market conditions, and unavoidable price fluctuations, it is, therefore, critical to continuously monitor and update one’s TP policies. At OakTree, we work with you to ensure your TP strategies, policies, and documentation are relevant and up-to-date. We also assist clients with routine support services such as maintaining detailed records, updating functional profiles, and monitoring changing market risks that result in additional transfer pricing requirements.

By partnering with OakTree, businesses can navigate the complexities of transfer pricing with confidence, ensuring compliance, optimizing tax positions, and fostering sustainable growth.

Conclusion

Transfer pricing is a critical aspect of international business operations, and adherence to IRAS's documentation requirements is paramount. Non-compliance can lead to significant financial and reputational risks. IRAS, including foreign tax authorities, are imposing stiffening administrative procedures such as having stricter audit procedures for transfer pricing. This raises the level of compliance needed, and companies should focus more on control functions.

Engaging a professional TP consultant can provide the expertise and extensive resources necessary to navigate this complex landscape effectively. At OakTree, we are dedicated to helping businesses achieve transfer pricing compliance and optimize their tax strategies. Reach out to us today to embark on a journey towards seamless transfer pricing management.

DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.