On September 1, 2014, the Inland Revenue Authority of Singapore (“IRAS”) initiated a consultation process whereby it has requested comments on proposed changes to the transfer pricing documentation requirements in Singapore.

The key changes proposed by IRAS are as follows:

Requirement to maintain contemporaneous transfer pricing documentation

Section 5 of the IRAS Consultation Circular defines and details “contemporaneous” transfer pricing documentation. IRAS accepts contemporaneous transfer pricing documentation as records prepared prior to or at the time of undertaking the transactions (including up to the time of preparing the relevant tax returns). In addition, the IRAS Consultation Circular states that the “preparation of contemporaneous transfer pricing documentation ensures the integrity of taxpayers’ transfer pricing positions and prevents taxpayers form justifying their positions after the fact.”

Analysis:

This is a significant change in IRAS’s position on the need for contemporaneous transfer pricing documentation. The 2006 Transfer Pricing Guidelines were silent on the preparation of transfer pricing documentation on a contemporaneous basis.

Although transfer pricing documentation does not have to be submitted with the tax return, the IRAS clearly expects that transfer pricing documentation is to be maintained to demonstrate that the related party transactions entered into are consistent with the “arm’s length” standard.

To this end, IRAS has asked for comments regarding potential challenges that taxpayers are likely to face in preparing transfer pricing documentation on a contemporaneous basis.

Taxpayers that may be exempt from maintaining transfer pricing documentation

The IRAS recognizes that preparing transfer pricing documentation may result in substantial compliance and administrative costs for taxpayers. To ease this compliance burden, IRAS has suggested that the following types of taxpayers may not be required to prepare transfer pricing documentation:

SMEs who are engaged in domestic related party transactions where the entities are subject to the same corporate tax rate; and
Where taxpayers apply a mark-up of 5 percent for routine services.
Analysis:

This is a welcome development for taxpayers operating in Singapore. Furthermore, IRAS notes that transfer pricing documentation should be prepared while keeping in mind the potential transfer pricing risks that may arise as a result of the related party transactions. In addition, IRAS has explicitly noted that taxpayers are not expected to incur compliance costs that are disproportionate to the amount of tax revenue at risk or complexity of the transactions.

The IRAS has requested explicit feedback on whether additional circumstances should be included in the above category.

Types of transfer pricing documentation to be maintained

The IRAS has noted that taxpayers are expected to provide documentation at both the group and individual entity level, with the specific information to be presented detailed in Annex A. While this information is similar to what was already required under Annex G of the 2006 Transfer Pricing Guidelines, IRAS is requesting additional information, such as:

Important drivers of business profit, including a list of intangibles and the related parties that legally own them;
Description of the management structure of the Singapore taxpayer, including a description of the individuals to whom the Singapore management reports and the countries in which such individuals maintain their principal offices.
Analysis:

The request for such information is not surprising when one considers the recent global trends as regarding transfer pricing and Base Erosion and Profit Shifting (“BEPS”) championed by the Organization for Economic Cooperation and Development (OECD).

The IRAS has requested comments on whether it would be feasible for taxpayers to provide the information that is required in Annex A.

Conclusion

While the stated objective of the proposed update is to provide more comprehensive guidance on transfer pricing documentation, the extent of the proposed changes suggests a fundamental shift on how the IRAS will view transfer pricing. This is not surprising given the tightening of transfer pricing documentation requirements by other Asian tax authorities (e.g. Malaysia and Indonesia). In addition, this move may also be seen as Singapore’s response to an increasingly challenging transfer pricing compliance environment for tax authorities and taxpayers alike.

Sowmya Varadharajan, is a founding director of IC Advisors Pte Ltd, a transfer pricing consulting firm. Sowmya has more than 12 years of experience assisting clients in designing, supporting and defending various related party transaction structures. Having been trained in the U.S., Sowmya currently focuses her attention on helping clients in the Asia Pacific region address their transfer pricing issues.