BDO Transfer Pricing News

On 14 June 2024, after a hiatus of almost three years, the Inland Revenue Authority of Singapore (IRAS) released the 7^th Edition Singapore Transfer Pricing Guidelines. The long-awaited guidelines introduce changes to Singapore transfer pricing documentation compliance requirements, tightens transfer pricing enforcement and audit guidance, simplifies the mutual agreement procedure (MAP) process, and provides additional guidance in other areas.

1. Changes to the mandatory TPD compliance requirements

Effective from year of assessment (YA) 2026, (that is, financial year 2025), the amendments to the Income Tax (Transfer Pricing Documentation) Rules 2018 (enacted on 7 June 2024) are as follows:

1. Increased exemption threshold from SGD 1 million to SGD 2 million

The current exemption threshold of SGD 1 million will increase to SGD 2 million for the following inbound and outbound related-party transactions:

• Service fees
• Royalties/license fees
• Guarantee fees
• Any other transactions except for purchases, sales, and loans

The SGD 15 million threshold remains applicable for related-party purchases, sales, and loans.

BDO insight

The increase in the exemption threshold is part of IRAS’s effort to reduce taxpayers’ compliance burden and benefits taxpayers with smaller amounts of related-party transactions. As an example, under the old rules, Company A, which had gross revenue exceeding SGD 10 million and related-party service income of SGD 1.5 million, would have been required to prepare mandatory transfer pricing documentation under Section 34F of the Income Tax Act 1947 (ITA). With effect from FY 2025, Company A would be exempt from the transfer pricing documentation requirement.

While the higher exemption threshold is a welcome change, taxpayers must remember that, regardless of the documentation requirement, the onus is on them to substantiate the arm’s length nature of their related-party pricing. In this context, taxpayers that are exempt from full-blown transfer pricing documentation requirements should still ensure they have adequate transfer pricing analysis on hand, in case of inquiry by IRAS.

2. Removal of interest restriction simplified approach for related-party domestic loans

Taxpayers can no longer rely on interest restriction as a proxy to arm’s length pricing for domestic related-party loans entered into from 1 January 2025 onwards.

Instead, taxpayers may rely on the indicative margin as a safe harbour for domestic related-party loans where neither party is in the business of borrowing and lending money. Unlike the SGD 15 million threshold for cross-border loans, above which the indicative margin cannot be relied upon, there is no threshold restriction on domestic loans. When taxpayers do not wish to rely on the indicative margin, taxpayers must undertake an analysis to determine what the arm’s-length interest rates should be.

BDO insight

Interest restriction was first introduced as a proxy to arm’s length pricing in 2009, to relieve taxpayers of the compliance costs involved in undertaking loan interest rates analysis. Since then, IRAS has adopted a stricter stance in the enforcement of the arm’s-length principle, including enforcing surcharges and penalties for noncompliance under Section 34E of the ITA.

The use of the proxy approach for related-party domestic loans cannot address the understatement of interest income in certain scenarios, including if the lender does not incur interest expense. Similarly, excessive interest expense also cannot be addressed through the proxy approach if the borrower is not subject to interest adjustment. In the event of noncompliance, the transfer pricing adjustments made under the Section 14(1)(a) interest restriction as proxy approach could also differ from transfer pricing adjustments made under the Section 34D/arm’s length principle approach.

Removing the proxy approach for related-party domestic loans aligns the arm’s-length principle requirement with related-party overseas loans. Notwithstanding this, we observe that IRAS remains committed to managing the compliance burden for taxpayers and has extended the safe harbour indicative margin to related-party domestic loans without any threshold limit.

3. Declaration date required for Simplified TPD

To ease taxpayers’ compliance burden, IRAS generally allows taxpayers to leverage the transfer pricing documentation report prepared for the first year as Qualifying Past TPD (QTPD) to prepare simplified documentation for the next two years, subject to certain conditions being met. From FY 2025 onwards, taxpayers must date the simplified TPD prepared (that is, specify the date on which the declaration for QTPD is made) as part of the conditions for using the first year’s documentation as QTPD.

BDO insight

To be considered contemporaneous, IRAS requires that the first year transfer pricing documentation  be completed and dated by the filing due date of the Income Tax Return for the fiscal year in which the transactions took place. This change is an enhanced enforcement effort by the IRAS to ensure that taxpayers conduct the annual review of their related-party transactions in a timely manner, similar to the preparation of the TPD. In this way, taxpayers can pick up on any non-compliant transfer pricing arrangements and make the necessary adjustments to the income tax return before the filing due date.

2. Tightening transfer pricing enforcement

Transfer pricing audits are carried out by IRAS to review taxpayers’ transfer pricing and their documentation. In the 7^th edition of the guidelines, IRAS has made the following changes to the audit process and clarified their audit examination criteria.

1. TPA process

Under the 6^th edition of the guidelines, if IRAS considers that the a taxpayer’s transfer pricing is not arm’s length, it will inform the taxpayer and discuss proposed transfer pricing adjustments before making the assessments. Under the 7^th edition of the guidelines, the audit process has been changed so that IRAS would first make the adjustments, impose surcharges, and issue the assessment; if a taxpayer disagrees with IRAS’s adjustments, it must file an objection following IRAS’s Objection and Appeal Process to seek resolution.

A new set of “Frequently Asked Questions” (FAQs) has also been added to the 7^th edition of the guidelines to clarify that during a transfer pricing audit, if taxpayers furnish additional details or analysis to support or explain the position taken in the fiscal year under audit and the additional details or analysis are based on events after the fiscal year, or conducted with hindsight, they may not be considered contemporaneous.

BDO insight

The 7^th edition of the guidelines reflects IRAS’s increasingly hard-line approach to transfer pricing enforcement. The revised transfer pricing audit process no longer allows taxpayers to respond and defend their transfer pricing positions before an assessment is made. It is important to note that taxpayers are required to pay additional taxes applicable on the transfer pricing adjustments first, within one month of receiving their tax bills, even if they disagree with the assessment. These unexpected tax expenses might affect cash flow for some taxpayers.

With a more rigorous transfer pricing audit process, it is extremely important that taxpayers ensure that their documentation is thoroughly prepared with robust analysis early on to support the positions taken in the respective fiscal years. It would be difficult to revise earlier positions taken based on analysis from subsequent events or hindsight. This would expose taxpayers to the risk of additional penalties for noncompliance. BDO reiterates the importance of having well-prepared documentation as the first line of defence, to avoid escalating IRAS’s routine questions into formal transfer pricing audits. It is important that taxpayers conduct the diligence upfront to support their transfer pricing positions. 

2. TP adjustments

In the 7th edition of the guidelines, IRAS clarifies that transfer pricing adjustments will be made to both understated taxable profits as well as overstated losses from non-arm’s-length related-party transactions. The 6^th edition of the guidelines had been silent on overstated losses. In addition, IRAS clarifies that they can also apply the arm’s length principle to the sale or transfer of fixed assets and effect the transfer pricing adjustments (if any) through the calculation of capital allowances and balancing adjustments. Lastly, IRAS introduces an additional condition that taxpayers must meet to be considered for remission of surcharges imposed on transfer pricing adjustments under a good compliance record. The condition is that taxpayers must not have a history of imposed or remitted/compounded surcharges and penalties for the current and the two immediately preceding years of assessment.

BDO insight

IRAS has clarified the expanded ambit of transfer pricing enforcement in the 7^th edition of the guidelines, including on capital transactions and sale or transfer of fixed assets (including intellectual property rights, machinery, and plant). Even though these capital transactions are still exempt from documentation requirements, taxpayers must ensure they are conducted at arm’s length. IRAS also mentions in the 7^th edition that separate guidance will be provided on the application of the arm’s length principle to capital transactions for purposes of Singapore’s domestic top-up tax, indicating that further alignment with Pillar Two is in the works.

We expect greater enforcement activity from IRAS and audit adjustments made for non-arm’s-length transfer pricing. With stricter conditions to qualify for remission of the surcharge, it would be prudent for taxpayers to take a proactive approach to ensure transfer pricing compliance upfront.

3. Streamlining the MAP process

The MAP is a facility through which IRAS and relevant foreign competent authorities resolve tax and transfer pricing disputes. Earlier, the MAP process included five steps:

• Notification of intent
• Prefiling meeting
• Submission of MAP application
• Review and negotiation
• Implementation

Under the 7^th edition of the guidelines, IRAS has done away with the need for a prefiling meeting;  the MAP process will include four steps: submission of the MAP application, IRAS evaluation, review and negotiation, and implementation.

BDO insight

Based on the Organization of Economic Cooperation and Development (OECD) FY 2022 MAP statistics, Singapore’s total average time for resolving MAP transfer pricing cases was 21.2 months from receipt of the taxpayer’s complete application, lower than the average of 28.9 months and within BEPS Action 14 Minimum Standard’s recommendation of 24 months.

This change in the MAP process reflects IRAS’s commitment to better its dispute resolution capabilities by expediting the initial stages of the MAP process, potentially allowing more cases to be managed more efficiently. This is in line with the new OECD Assessment Methodology^[1] released in January 2023, which introduces stricter monitoring and more granular data collection on MAP cases, and we expect increased international scrutiny of dispute resolution time frames.

4. Transfer pricing guidance in additional areas

The 7^th edition of the guidelines incorporates additional guidance in the following areas:

1. Working capital adjustments

For the first time, the 7^th edition includes a new FAQ on the making of working capital adjustments during a comparability analysis. The FAQ provides that working capital adjustments are acceptable when they improve the reliability of the comparability analysis and can be made reasonably and accurately. Guidance is also provided on the interest rates used for making working capital adjustments.

2. Financial transactions

With the transition from Interbank Offered Rates (IBOR) to risk-free rates (RFR) as base reference interest rates, IRAS had since 2022 published its indicative margins based on the RFRs as base reference rates. The 7^th edition of the guidelines additionally includes high-level guidance on converting legacy IBOR loans into RFR loans. With respect to documentation on long-term loans, the 7th edition clarifies that they must be reviewed annually to assess if there has been a change to the economic circumstances that may affect the loan’s interest rate and terms, or that may make it more similar to equity. Minimally, simplified documentation needs to be prepared.

3. Strict pass-through costs

There are certain conditions that need to be met before a group service provider, which has arranged and paid for, on behalf of its related parties, services acquired from other service providers, may pass on the costs of the acquired services to its related parties without a mark-up. One condition is that the costs of the acquired services must be the legal or contractual liabilities of the related parties. To meet this condition, IRAS expects the service provider to have a written agreement with its related parties for the latter to assume the contractual liabilities of the acquired services. In the 7^th edition of the, to make it easier for taxpayers to meet this condition, IRAS has clarified that the written agreement may be in the form of email correspondence.

4. Government assistance 

In its COVID-19 Support Measures and Tax Guidance, IRAS clarified how benefits from government assistance should be treated for transfer pricing purposes. Specifically, IRAS stated its expectation that taxpayers were to retain the benefit from government assistance payments, unless there was evidence that independent parties would have passed on or shared the benefits with another party. A new section in the 7^th edition of the guidelines reaffirms this position.

BDO insight

IRAS has consolidated and incorporated various pieces of transfer pricing guidance since the 6^th edition of the TPG into the 7^th edition TPG. The additional guidance provided on other topics is welcome, given that they address several areas that required clarification. With the 7^th edition, the IRAS has built upon the earlier transfer pricing guidance to offer Singapore taxpayers more certainty on navigating the arm’s-length principle. Whilst we appreciate the clarity of IRAS’s tax administration, we also observe the distinctly firmer hand on transfer pricing enforcement. Taxpayers must pay heed to the new and clarified guidance, review current transfer pricing positions, and make the necessary alignments to adhere to IRAS’s standard.  

Like many other tax authorities, IRAS has not yet stated Singapore’s position on the adoption of Amount B under Pillar One of the OECD’s BEPS 2.0 initiative. The adoption of Amount B is targeted at simplifying and streamlining the application of the arm’s-length principle. While IRAS contemplates Amount B adoption, they continue their best efforts to align current transfer pricing guidance with the latest BEPS 2.0 implementation, providing the necessary clarity to aid taxpayers in compliance, while consciously exploring ways to lighten the compliance burden for Singapore taxpayers.

Elis Tan
BDO in Singapore