Transfer pricing - Singapore

• Singapore’s transfer pricing (“TP”) legislations are contained in Sections 34D, 34E and 34F of the Singapore Income Tax Act (“SITA”) and subsidiary legislation comprising the Income Tax (Transfer Pricing Documentation) Rules 2018 and the Income Tax (Transfer Pricing Documentation) (Amendment) Rules 2024 (“TPD Rules”).
• These rules apply to Singapore taxpayers, including Singapore branches of overseas companies, that entered into a related party transaction. The Inland Revenue Authority of Singapore (“IRAS”) first issued its TP Guidelines (TPG) in 2006 with subsequent revisions in 2015, 2016, 2017, 2018, 2021, and most recently, 2024.
• In response to Organisation for Economic Co-operation and Development’s (“OECD”) Base Erosion and Profit Shifting Project, Singapore gazette the Income Tax (International Tax Compliance Agreements) (Country-by-Country Reporting) Regulations 2018 on 5 February 2018.
• The Country-by-Country Reporting (“CbCR”) rules apply to Singapore-resident ultimate parent entities with consolidated group revenue of at least S$1.125b in the preceding financial year. The IRAS released the initial CbCR guidelines in 2016, with updates issued in 2017, 2018 and 2022.

• While the Singapore TPG broadly endorse the principles set out in the OECD TP Guidelines for Multinational Enterprises and Tax Administrations 2022 (“OECD TPG”), the IRAS expects taxpayers to adhere to guidance that is specifically addressed in the Singapore TPG. This includes, but not limited to, the process of advance pricing arrangement and mutual agreement procedure, the use of certain profit level indicators and handle of pass-through cost, indicative margins for related-party loans, year-end true up adjustments, etc.

• The Singapore TPG requires adopting the TP method that is the most appropriate or best suited to the circumstances in ascertaining the arm’s length nature of the related party transactions.
• While the arm's length principle is typically applied on a transaction-by-transaction basis, the IRAS accepts the use of an aggregated approach where transactions are highly interrelated and independent parties in comparable circumstances would typically price such transactions on an aggregate basis.
• The five internationally recognised TP methods are Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus method, Transactional Net Margin Method, and Profit Split Method.  Other methods or a combination thereof may be used if they are justifiable and appropriate.

• Singapore operates a self-assessment regime, placing the responsibility on taxpayers to ensure compliance with TP rules.
• Although submission of TP documentation with tax returns is not required, documentation must be prepared contemporaneously and dated accordingly. "Contemporaneous" means the documentation must be completed no later than the filing due date of the relevant tax return.
• Additionally, Singapore taxpayers must complete the Form for Reporting Related Party Transactions as part of their corporate income tax return if the total value of related party transactions disclosed in their financial statements exceeds S$15 million for the financial year.

• Under Section 34F of the SITA, taxpayers who engage in related party transactions and do not qualify for exemptions under the TPD Rules are required to prepare and maintain contemporaneous TP documentation.
• Although not required to submit the documentation with their tax return, taxpayers must retain it for at least five years and provide it to the IRAS within 30 days upon request.
• The Singapore TP documentation requirements align broadly with the OECD Master File and Local File structure. It should include a group and entity overview, a functional analysis (covering key functions, assets, and risks), a description of related party transactions (unless exempted), an industry analysis, and an economic analysis substantiating the arm's length nature of the transactions.
• Furthermore, must review and update their TP documentation annually. To ease compliance, the TPD Rules allow taxpayers to use past TP documentation for up to two basis years, provided that all prescribed conditions are met.

• There is no requirement to prepare OECD-format Master and Local File. That being said, the content requirements for a Singapore TP documentation are broadly aligned with the content prescribed in Annexes I and II of the OECD TPG. Hence, preparing a OECD Local File does not fully satisfy the requirements under the TPD Rules. 

The IRAS adopts a risk-based approach to audit selection, often supported by data analytics and, at times, informant tip-offs. Common risk factors for TP reviews include:

• Significant cross-border or domestic transactions with related parties that enjoy preferential tax treatment.
• Recurring losses or substantial fluctuations in profitability inconsistent with the taxpayer’s risk profile.
• Inconsistent application of stated TP policies. 
• Transactions involving intangibles or intellectual property development, enhancement, maintenance, protection, or exploitation.
• Documentation or analysis that disregards guidance outlined in the Singapore TPG. 

Failure to comply with TP documentation requirements under Section 34F(8) of the SITA can result in penalties of up to S$10,000.The following are instances of non-compliance:

• Failing to complete TP documentation by the time of the making of the tax return;
• Not preparing TP documentation based on the content requirements under the TPD Rules;
• Failing to retain the TP documentation for a period of 5 years
• Not submitting the TP documentation within 30 days of a written request by the IRAS; or
• Providing any documentation or information that the taxpayer knows to be false or misleading.

Additionally, unless certain conditions are met and at the discretion of IRAS, a 5% surcharge will be imposed under Section 34E of SITA on any TP adjustment made by IRAS under Section 34D of SITA or on a self-initiated adjustment voluntarily disclosed by taxpayer that increases the amount of income, reduces the amount of deduction/allowance or reduces the amount of loss. This surcharge is applicable regardless of whether additional tax is payable as a result of the adjustments and must be paid within one month from the issuance of the surcharge notice. 

• On 24 May 2019, the Inland Revenue Authority of Singapore (the IRAS) released the TP guidelines for commodity marketing and trading activities (e-Tax Guide), which provide guidance on how to analyze the economic value of commodity marketing and trading activities (commodity marketing/ trading activities) in Singapore.
• The e-Tax Guide outlines the various factors that may affect the transfer pricing for these activities, discusses appropriate TP methods that may be applied and highlights the benefits and common roles of conducting commodity marketing/trading activities in Singapore.

• From 1 January 2020 onwards, overseas digital service providers with a yearly global turnover of more than S$ 1 million that sell more than S$ 100,000 worth of digital services to customers in Singapore in a 12-month period are required to register for GST and charge GST.

• In 2018, it was the first time Singapore has rewritten its TP provisions since it initially legislated the arm’s length principle under section 34D of the Act, marking a new era for TP enforcement and administration.
• The seriousness of the government in enforcing the arm’s length principle in Singapore was also clearly signaled through the legislation of TPD requirements and the tenfold increase (from up to $1,000 to up to $10,000) in penalties and 5% surcharge.
• It is expected that taxpayers increasingly consider their TP compliance requirements through putting in place robust tax and TP policies, appropriate TPD, and relevant supporting documentation.

• With the background of operational disruption and the consequential impact on their financial performance due to COVID-19, Singapore companies engaging in cross-border trade will still need to justify their inter-company pricing arrangements and justify the arm’s length nature of their pricing policy in their transfer pricing documentation through these stressful periods.
• It would be prudent for MNCs to review their policies and re-align their pricing arrangements, to the extent necessary, to consider the impact that such slowdown may have.
• To minimize risks and get a fair sense of the appropriateness of pricing arrangements with affiliates, it would be imperative for companies to move from an entity-level analysis to a transaction-by-transaction analysis. At such times, adopting an aggregated / entity level analysis of multiple transactions could create significant transfer pricing risks for taxpayers, leading to transfer pricing adjustments and consequential penalties. This is because overall profitability may be impacted by several factors including fall in demand, inefficiencies in operations, significant bad debts, forex losses, etc., none of which have anything to do with faulty transfer pricing policies.
• When engaging in TP analysis, necessary adjustments to account for the slowdown period should be made.
• In cases where it is not possible to carry out adjustments, or adjustments do not reflect the true impact of a business slowdown, it is desirable to document, in detail, the factors that led to business losses/insufficient profits as well as, to the extent possible, a quantification of the potential impact on account of such factors.