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
to Recharacterize Transactions
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 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.
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
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.
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
Nevertheless, the IRAS
has reiterated the need for annual preparation and maintenance of transfer
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
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
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
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
In light of these
developments, taxpayers have to be prepared for increased transfer pricing
1S93/2018, published on 22 February