Latest Developments in Singapore Transfer Pricing Requirements

There were significant updates in June 2024 to Singapore's Income Tax (Transfer Pricing Documentation) Rules and Guidelines issued by the Inland Revenue Authority of Singapore (“IRAS”). The amendments and revised IRAS e-Tax Guide Transfer Pricing Guidelines (Seventh Edition) (“STPG 7th Edition”) mark a notable shift in transfer pricing compliance expectations and regulatory clarity.

Details of the major changes are as follows:

1. Financial Transactions:

Interest restriction can no longer be applied as a proxy to the arm’s length principle for domestic related party loans entered into on or after 1 January 2025 between Singapore companies.  

Such loans will now be considered to have adhered to the arm’s length principle where the IRAS indicative margin[1] or the arm’s length methodology[2] is applied to derive the interest rate. Such loans can be exempted from TP documentation (“TPD”) preparation when neither the lender nor the borrower is in the business of borrowing and lending and the IRAS indicative margin is applied. 

IRAS has stressed that TPD requirements are applicable to related party long-term loans, similar to any other related party transaction. Preparation of simplified TP documentation may be considered.

In addition to the above, there is new guidance on base reference rates with the Global IBOR reform.   

Considering the latest changes, taxpayers should review their existing related party financing arrangements (whether cross-border or domestic, risk-bearing or risk-free) and re-assess them to ensure that they are on an arm’s length basis and compliant with TPD requirements.   
 

2. Transfer Pricing Documentation (“TPD”) Requirements:

The primary change to the TPD requirements is the revision of thresholds for exemption from TPD.  For transactions other than the purchase and sale of goods or intercompany loans, the exemption threshold has been increased from SGD 1 million to SGD 2 million effective from the Year of Assessment (“YA”) 2025 onwards.

Moreover, the IRAS has clarified that the date of completion of a Simplified TPD has to be stated in the simplified TPD report as proof that it has been prepared contemporaneously.

The increased exemption thresholds and clarifications on TPD requirements are welcomed. However, the higher threshold does not imply reduced scrutiny by IRAS. On the contrary, scrutiny continues to depend on taxpayers' accountability and self-awareness in substantiating the arm's length nature of related party transactions. Companies are advised to ensure they have sufficient analysis and documentation to support their positions, even when the exemption from TPD applies.

3. Transfer Pricing Audits:

The TP Audit (“TPA”) approach has been strengthened from "inform and discuss" to “inform and assess”. Under the STPG 7^th edition, after the fact-finding exercise, IRAS will proceed to make TP adjustments, impose a surcharge, and issue a closing letter to the taxpayer based on its assessment results. IRAS will no longer discuss with the taxpayer before making the TP adjustment. Taxpayers must file an objection following the IRAS’ Objection and Appeal Process if they do not accept the adjustment.  

IRAS has stated that only contemporaneous information will be considered relevant for TPA purposes. In other words, information or analysis prepared based on hindsight will not be considered.  

Though the objectives of TPA[3] stated in the STPG 7^th edition remains unchanged, taxpayers should expect that IRAS will adopt a more stringent stance during TPAs. This is evidenced by the change in the TPA approach and the emphasis on contemporaneous information.

4. Transfer Pricing adjustments:

• Commercially irrational transactions

In a situation where the recipient entity under a commercially irrational transaction is a Singapore entity, IRAS has clarified that it will subject the income to tax in Singapore. Conversely, when the Singapore entity is the paying entity under a similar transaction, the payment made will be disregarded and not allowed as a tax deduction. 

Disregarding an actual transaction is likely to lead to double taxation for group entities. On one hand, the paying entity cannot claim a tax deduction for the payment, while on the other hand, the receiving entity's income remains subject to taxation. Taxpayers are encouraged to review their related party transactions to ensure they have robust commercial justifications to defend them effectively.

• Capital transactions

In this newly introduced guidance, IRAS will not make any TP adjustment relating to any gain, loss or deduction arising from capital transactions between related parties as long as such gain, loss or deduction is not taxable or deductible under the SITA.  It follows that taxpayers are not required to prepare TPD for such transactions.

However, where the sale or transfer of fixed assets between related parties is not conducted at arm’s length, IRAS may determine the allowance and balancing adjustment according to the open-market price as provided under the SITA.  

The modifications and clarifications provided in the STPG 7th edition do not signify a change in IRAS' approach or practices but rather serve to reaffirm and elaborate on existing guidelines. 
 

5. Remission of surcharge 

TP adjustments are subject to a surcharge of 5%. However, IRAS may remit the surcharge wholly or in part, for a good cause. The STPG 7^th edition now clarifies that the condition of having good compliance record for the current YA and immediate two preceding YAs are in terms of:

• Prompt submission of tax returns and payment of taxes by the due dates; and
• No history of surcharges and penalties being imposed or remitted/compounded.

This clarification aligns with other revisions aimed at emphasising the importance of TP compliance.

6. Mutual Agreement Procedure (“MAP”) process 

A Singapore tax resident taxpayer which has suffered double taxation arising from TP adjustments made by IRAS or a foreign tax authority can choose to resolve the issue through legal remedies, and/or the MAP process. Under the STPG 7^th edition, the MAP process has been simplified from 5 steps to 4 steps. Once the taxpayer decides on the MAP route, they can proceed to submit their MAP application to IRAS. IRAS will then evaluate the case and contact the taxpayer for more information when necessary. There is no longer a requirement for taxpayers to notify IRAS in writing, participate in a pre-filing meeting with IRAS to explain the circumstances leading to TP adjustments.

The simplification of the application process is a positive development and is expected to facilitate quicker resolution of double taxation issues.

7. Other changes 

• Additional guidance on the making of working capital adjustments

IRAS has clarified that working capital adjustments may be made when it improves the reliability of the comparables. There is also guidance on determining the appropriate interest rate to be used in the adjustment. 

• Updated guidance on strict pass-through costs

IRAS has clarified that the legal contractual liabilities condition could be met even if the group service provider is legally or contractually obligated to pay for the services. This is acceptable provided that there is a written agreement, which can include email correspondence between the group service provider and its related parties, whether in a single email to all related parties or separate emails to each related party. 

This practical approach demonstrates IRAS' acknowledgment of commercial arrangements and aims to simplify compliance with a more pragmatic approach.

• New guidance to cover government assistance

Benefits from government assistance to businesses may have TP implications. Taxpayers are advised to document the relevant details in their TPD and explain how the receipt of specific government assistance has been considered in their comparability analysis.

This new guidance serves as a good reminder that all economically relevant characteristics in a related party transaction must be considered when conducting comparability analysis. 

Key Takeaways

These changes underscore IRAS' commitment to reinforcing compliance with stringent TP standards. Despite the relaxation of documentation thresholds, IRAS maintains a clear stance that compliance with the arm’s length principle is non-negotiable. Companies exempt from TPD must self-assess to meet these higher compliance standards.

The shift towards emphasising contemporaneous compliance over retrospective analysis encourages proactive adherence to market realities at the time of the transaction. This proactive approach fosters a culture of self-awareness and robust documentation, which are essential for transparent and accountable tax reporting practices.

In conclusion, these updates reflect IRAS' dedication to providing guidance and support to equip taxpayers with the tools necessary to navigate these changes effectively, ensuring compliance and mitigating the risk of audits or adjustments.

Companies are advised to approach TPD preparation with utmost seriousness. It is crucial to ensure robust documentation and detailed analyses that accurately reflect the factual circumstances of transactions. IRAS' emphasis that additional information will not be accepted if prepared with hindsight underscores the importance of contemporaneousness and thoroughness in documentation.

Engaging a competent TP consultant is essential, especially when facing enquiries from IRAS, as TPAs typically commence with information collection. The quality of information provided, the ability to anticipate IRAS’ approach to TP adjustments, and the effectiveness of arguments presented during the assessment stage significantly impact the outcome. Expertise in TP matters not only ensures compliance but also enables companies to effectively manage risks associated with TP compliance and audits. 

RSM, known for its extensive global reach and technical expertise, is well-positioned to help businesses proactively navigate TP requirements.