The Inland Revenue Authority of Singapore (“IRAS”) released the 5th revision of the Singapore Transfer Pricing Guidelines on 23rd February 2018. These revised guidelines provide the Singapore tax community with further understanding of the implementation of the amended transfer pricing legislation, which came about as a result of the Income Tax (Amendment) Act 2017 and as well as the gazetted Income Tax (Transfer Pricing Documentation) Rules (hereafter referred to as the “TPD Rules 2018”).
1. Ability to Recharacterize Transactions
Further clarification is provided on the circumstances where IRAS may disregard an actual related party transaction. In the exceptional event that taxpayers cannot demonstrate that third parties would enter into similar transactions/arrangements, and cannot support that those transactions are commercially rational, the IRAS will disregard the form of the related party transactions and replace it with an alternative transaction or disregard the transaction, entirely. The expanded Section 34D(1C) suggests that the burden of proof of identifying what the arm’s length condition would be (e.g., what unrelated parties would have done), lies with the taxpayer.
The approach that IRAS can take in making such adjustments is elaborated in paragraphs 5.117 to 5.124 of the Transfer Pricing Guidelines.
The change in the manner in which the arm’s length standard is applied is also consistent with the guidance that the OECD has issued, through the Base Erosion and Profit Shifting (“BEPS”) Action Plans.
2. Substantial Revision in Transfer Pricing Documentation Requirements
There have been substantial revisions to the transfer pricing documentation requirements in Chapter 6 of the revised Guidelines, which has been gazetted as a Rule under Section 7(1) of the Income Tax Act1. Specifically, the IRAS has provided clarity on its general exemption conditions for preparation of transfer pricing documentation.
The new exemption comprises of two conditions, and an entity is required to prepare transfer pricing documentation if either of these conditions are met:
For example, in YA 2020, if the entity’s annual gross revenue does not exceed S$10 million for the current basis period (i.e. it does not meet the first condition), but it was required to prepare transfer pricing documentation for the immediate preceding year in YA2019, the entity would be required to prepare transfer pricing documentation for YA 2020.
Thus, under the new requirements, the Singapore taxpayer is required to first assess if it meets the new general exemption conditions (effective from YA 2019). If it does, then no transfer pricing documentation needs to be prepared. If the entity does not meet the new general exemption conditions, it would need a secondary check to assess if it meets specific exemption conditions. The specific exemptions are largely the same as those provided in the previous addition of the Transfer Pricing Guidelines, although now specifically codified under the TPD Rules 2018.
The second schedule of TPD Rules 2018, which has been published in the Government Gazette, also codifies the information that should be included in the transfer pricing report. TPD Rules 2018, which mirror the Guidelines, require by and large, the same level of information and format published in the last edition of the Transfer Pricing Guidelines. In addition, the latest guidelines have also clarified that transfer pricing documentation in the format of an OECD style Masterfile and Local File, may also be accepted, as long as the required information is documented.
3. Frequency of Updates
While taxpayers have been advised to prepare annual documentation since the 2nd edition of the Guidelines, IRAS has indicated that updates of benchmarking may be accepted once every three years if there were no material changes in the functional analyses. This helps to reduce compliance costs of taxpayers.
In the 5th edition of the Transfer Pricing Guidelines, the IRAS has explicitly defined “Qualifying Past TP Documentation”, which prescribes a list of conditions to be satisfied for such documentation to be accepted across a period of three years.
A “qualifying past TP documentation” is a transfer pricing documentation that was prepared in one or two preceding years (i.e., a transfer pricing documentation prepared in Year 1, can potentially be used for Years 2 and 3). A major update/ new transfer pricing documentation report will then be required for Year 4.
To adopt past transfer pricing documentation as qualifying transfer pricing documentation for Years 2 and 3, subsequent to the preparation of contemporaneous transfer pricing documentation in Year 1, taxpayers are required to prepare an additional “simplified TP documentation” which will essentially serve as a declaration that the conditions/ circumstances for subsequent years are similar to the Year 1, and that the transfer prices are consistent with the arm’s length standard.
Nevertheless, the IRAS has reiterated the need for annual preparation and maintenance of transfer pricing documentation.
4. Penalties and Surcharges
Before the enactment of Section 34F, there was no specific penalty for failure to prepare or provide the transfer pricing documentation. General penalties for non-submission of information may have applied, if required.
However, under the new Section 34F(8), failure to prepare the required transfer pricing documentation constitutes an offence, and the taxpayer is liable to a fine/penalty of up to S$10,000 per offence. More specifically, a taxpayer can be liable to the fine for the following non-compliance:
The date of completing the transfer pricing documentation must be clearly indicated.
In addition to the penalty for failure to prepare or submit transfer pricing documentation in time, the IRAS has also introduced a transfer pricing surcharge, which will be computed as 5% of the adjustment, regardless of whether tax is payable on the adjustments.
The introduction of an explicit penalty for the non-preparation of transfer pricing documentation, as well as the transfer pricing surcharge is a significant development from a transfer pricing enforcement perspective.
The new legislation, TPD Rules 2018 and the Guidelines represent a significant move from the current, practice-based regime to a more rule-based one. Although the requirements of preparing and updating the transfer pricing documentation remain consistent with prior revisions, the introduction of a specific transfer pricing penalty and surcharge raises the cost of non-compliance.
The revised transfer pricing documentation rules and exemptions are somewhat complex and we would strongly advise taxpayers to review their related party transactions to carefully evaluate if transfer pricing documentation is required. The onus ultimately lies on the taxpayer to demonstrate the applicability of the exemption to his circumstances. An incorrect assessment may result in a significant penalty.
In addition, taxpayers have to review their related party transactions and be prepared to demonstrate that third parties would have entered into similar transactions in similar circumstances. Failure to do so can result in an overall re-characterisation of their transactions, by IRAS, which can lead to transfer pricing adjustments.
In light of these
developments, taxpayers have to be prepared for increased transfer pricing
1S93/2018, published on 22 February 2018.