The Inland Revenue Authority of Singapore (“IRAS”) looks set to bolster its transfer pricing guidelines following a consultation paper released on the 1st September 2014. This is set against the backdrop of the OECD’s Base Erosion and Profit Shifting (“BEPS”) initiative, and is designed to validate Singapore’s commitment in the global fight against aggressive tax planning and avoidance.

The two pertinent points raised in the paper are:

? Contemporaneous transfer pricing documentation requirements;
? Increased disclosure required, including the need to disclose global supply chains.
Contemporaneous documentation

Corporations will be required to prepare transfer pricing documentation ideally prior to or at the time of undertaking the transactions, but at the latest by the time of preparing the relevant tax returns. Taxpayers are not required to submit the transfer pricing documentation with the tax returns, but the documentation must be available upon request by the IRAS. The transfer pricing documentation must also be reviewed periodically to ensure that the economic analysis remains accurate, that the applied review methods selected are still applicable and that the transfer pricing is still in compliance with the arm’s length principle.

Two clear situations where transfer pricing documentation is not required are where:

?The taxpayer is a small/medium-sized company (with revenue of not more than S$100 million, or with no more than 100 employees) with purely domestic transactions with related parties subject to the same Singapore tax rate; and
The taxpayer has applied a safe harbour mark-up of 5% on charges made for routine services provided to related parties.
On the other hand, there are certain high-risk situations that do warrant the preparation of transfer pricing documentation:

The use of transfer pricing strategies that are intended to shift profits to other related parties subject to a more favourable tax treatment;
The taxpayer carries out transactions with overseas related parties that are of large value relative to the other transactions of the taxpayer;
The taxpayer carries out transactions with related parties in low-tax jurisdictions;
The taxpayer has recurring losses or large swings in operating results which may be unusual given its functions and assets and the risks it has assumed;
?The use of intellectual property, proprietary knowledge or other intangibles in the business of the taxpayer;
The taxpayer carries out transactions involving R&D or marketing activities which could lead to the development or enhancement of intangibles; and
There are indications (for example through engagement with tax authorities, country’s audit focus, etc.) that the related party transactions are likely to be subject to transfer pricing audit by tax authorities.
Increased disclosure

The transfer pricing documentation as recommended by the IRAS paper requires information at both group and entity levels. The new developments are as follows.

On the group level information, they include the need for:

Details (including a chart) on the worldwide organisational structure, showing the location and ownership linkages among all related parties;
Group’s lines of business, products and services and industry, economic and regulatory dynamics;
Group’s business models and strategies, including any recent restructuring or M&A;
Drivers of business profit;
Principal business activities; and
Business relationships between all related parties (ownership of intangibles, funding etc.).
At the entity level, they include:

General information on the Singapore taxpayer like ownership structures, charts showing linkages with ultimate parent company;
Clear description of management and reporting lines and countries to whom the Singapore management reports and countries where such individuals maintain their principal office; and
Number of employees in each department.
These requirements are typical for the preparation of transfer pricing documentation in many other countries globally and in the Asia region.
Quantera Global comments

The IRAS is mindful that preparing transfer pricing documentation may result in substantial compliance and administrative costs for taxpayers. However, the documentation requirements are certainly no more stringent or onerous than other jurisdictions in the Asia region, and in many respects they remain not as tough.

With the ongoing BEPS developments at the OECD level, the compliance standards and transfer pricing analysis and documentation requirements in Singapore will continue to increase, and taxpayers will be forced to take tax and transfer pricing compliance in Singapore and the region more seriously as a result. The IRAS may be toughening up on transfer pricing as a means to demonstrate to the OECD that they are abiding by the new no-nonsense approach to tax and transfer pricing issues and as such should not be penalised as a tax haven. However, the most important point for taxpayers in Singapore to note is that these changes are happening, for whatever reason, and that additional work needs to be done, and be seen to have been done. The benefit of being proactive in this respect will be to minimise the risks of challenge and ultimately potential adjustments to the pricing of related party transactions that could give rise to double taxation and certainly a sub-optimal overall effective tax rate.

In assessing how to deal with the impact of the new rules in Singapore, it is essential to consider all sides of the affected related party transactions, not just from the Singapore perspective, because it is often the case that the risks of transfer pricing adjustments are even greater on the other side of the transaction, in countries with more aggressive tax authorities such as Indonesia, Australia, Japan, India, Korea and China.