Update on Singapore Transfer Pricing Guidelines 

The Inland Revenue Authority of Singapore (“IRAS”) released a specific transfer pricing (“TP”) guidance for multinational enterprise (“MNE”) groups with centralised activities in Singapore via its publication of a dedicated e-Tax Guide on 19 March 2021. This guidance provides an explicit context to the establishment of headquarter (“HQ”) entities in Singapore, outlining the business and commercial reasons to establish HQ entities in Singapore. Being consistent with the Organisation for Economic Co-operation and Development (“OECD”)’s Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”), this e-Tax Guide reiterates the following concepts:

1. Given the varying degree of centralised activities in MNE groups, profits should be taxed where (economic) value is created. Economic value should also be reflected in the determination of the arm’s length transfer price. The IRAS notes that transfer pricing documentation (“TPD”) should outline how economic value is generated in the MNE Group as a whole, and how this can impact the HQ’s activities, by detailing the relevant contributions that the HQ makes to its related parties.
2. A functional analysis is key to accurately delineate the commercial and financial relations of centralised activities in MNE Groups. There is a need to outline the actual functions performed by the HQ as well as the economic significance of these functions, which, in turn, will define contributions to economic value for its related parties.
3. A robust Risk analysis, including the ability to control risks, and having the financial capacity to assume risks, is also pertinent.

The IRAS notes that the role of the HQ can range from that of a simple service provider (e.g., providing administrative/technical financial services, etc.), to a more complex one, i.e., acting as a principal in distribution, manufacturing, and research and development activities. The remuneration of the HQ across this spectrum will vary based on the intensity of the function, asset and risk profile, and the IRAS has given various examples in the e-Tax Guide.

A detailed case study has been included in the e-Tax Guide to help taxpayers understand how the concepts detailed by the IRAS in this e-Tax Guide, i.e., read in connection with other guidance provided by the IRAS, should be implemented from a TP perspective.  

Though this e-Tax Guide is focussed on MNE groups with HQ entities in Singapore, notwithstanding the type of operations, the IRAS has reiterated the importance of TP analysis and documentation to substantiate the arm’s length nature of a taxpayer’s related party transactions.