Changes to Transfer Pricing Documentation Rules and Transfer Pricing Guidelines
The Income Tax (Transfer Pricing Documentation) Rules 2018 governing mandatary transfer pricing documentation were amended on 7 June 2024, with the changes taking effect on 10 June 2024.
Following the amendment of the rules, the Inland Revenue Authority of Singapore (IRAS) has published the 7th edition of its Transfer Pricing Guidelines on 14 June 2024 to reflect the legislative changes as well as to expand on its existing guidance on transfer pricing.
The notable changes are summarised below.
Using Qualifying Past Transfer Pricing Documentation
Current
Taxpayers are allowed to use the transfer pricing documentation they have prepared previously (“past transfer pricing documentation”) to support the transfer price in the basis period concerned if that past transfer pricing documentation is a qualifying past transfer pricing documentation. For a taxpayer to use the qualifying past transfer pricing documentation to support the transfer price for a related party transaction, the simplified transfer pricing documentation in relation to that transaction must contain a declaration by the taxpayer that it has prepared a qualifying past transfer pricing documentation.
From Year of Assessment (YA) 2026
Where the related party transaction is undertaken in the basis period for the YA 2026 or a subsequent YA, the taxpayer making a declaration that it has prepared a qualifying past transfer pricing documentation must specify the date on which the declaration is made.
IRAS Clarification
IRAS has explained that the purpose of requiring the taxpayer to date the declaration which is submitted as part of the simplified transfer pricing documentation is to substantiate that the taxpayer has prepared it on a contemporaneous basis, i.e. not based on hindsight.
Exempting Domestic Related Party Loans from Transfer Pricing Documentation
Current
Transfer pricing documentation need not be prepared for a domestic related party loan provided by a related party that is not in the business of borrowing or lending money.
From 1 January 2025
For a domestic related party loan provided on or after 1 January 2025 by a related party that is not in the business of borrowing or lending money, taxpayers are exempted from preparing transfer pricing documentation only if the related parties have agreed to apply the IRAS indicative margin to approximate an arm’s length interest rate for the year in which the loan is granted. The relevant indicative margins are published on the IRAS website annually.
IRAS Clarification
IRAS has explained that in the case of a domestic related party loan provided by a taxpayer who is not in the business of borrowing and lending, IRAS has generally been applying interest restriction in place of the arm’s length methodology. Using the interest restriction approach, when a taxpayer provides a loan to a related party and incurs interest expense in providing the loan to the related party, IRAS will limit the taxpayer’s claim for the interest expense incurred to the amount of interest income received by the taxpayer from the related party.
Over time, especially with the introduction of the IRAS indicative margin, the interest restriction approach has become less relevant to achieve an arm’s length outcome. Thus, IRAS will discontinue the interest restriction approach for any domestic related party loans entered into on or after 1 January 2025. Instead, the parties to that loan are considered to have adhered to the arm’s length principle when they have chosen to apply the IRAS indicative margin to derive the interest rate. The indicative margin is not mandatory. If taxpayers choose not to apply the IRAS indicative margin or either of them is in the business of borrowing and lending, they should determine the interest rate based on the arm’s length principle.
Exempting Related Party Transactions Not Exceeding Certain Thresholds from Transfer Pricing Documentation
Current
Transfer pricing documentation need not be prepared if the related party transaction comes within a category of transactions and the total value of the aggregated related party transactions in that category in the basis period (excluding the value of other specified transactions qualifying for exemption from transfer pricing documentation) does not exceed the threshold for that category.
The threshold for each category of transaction is as follows:
|
Category of Related Party Transactions |
Threshold (S$) per Financial Year |
Meaning of Value of Transactions |
|
Purchase of goods from related parties/Sale of goods to related parties |
15 million per category of transaction |
Amount paid or payable by the taxpayer for the purchase of goods from, or gross revenue derived by the taxpayer from the sale of goods to, related parties |
|
Loans from related parties/Loans to related parties |
15 million per category of transaction |
Principal amount of the loans received from, or provided to, related parties |
|
All other categories of related party transactions Examples:
|
1 million per category of transaction |
Amount paid or payable by the taxpayer for, or gross revenue derived by the taxpayer from, each category of transaction |
From YA 2026
The threshold for each category of transaction undertaken in the basis period for YA 2026 or a subsequent YA has been revised as follows:
|
Category of Related Party Transactions |
Threshold (S$) per Financial Year |
|
Purchase of goods from related parties/Sale of goods to related parties |
15 million per category of transaction (no change) |
|
Loans from related parties/Loans to related parties |
15 million per category of transaction (no change) |
|
All other categories of related party transactions Examples:
|
2 million per category of transaction |
Making Working Capital Adjustments
IRAS has introduced guidance on when working capital adjustment should be made, and the interest rate to be used when making such adjustment.
Working capital adjustment is a type of comparability adjustment to account for differences in levels of working capital between a tested party and comparable independent parties. Generally, the three (3) accounts considered are:
- trade receivables
- inventory, and
- trade payables.
IRAS has indicated that taxpayers may make working capital adjustment when applying the transactional net margin method, although it may also be applicable in resale price or cost plus methods. Taxpayers only need to make working capital adjustment when it improves the reliability of the comparables and it can be made reasonably accurately.
Taxpayers should determine the interest rate to use for making working capital adjustment by reference to the interest rate applicable to a commercial enterprise operating in the same market as the tested party. In most cases, a commercial loan rate will be appropriate. IRAS has provided some examples of interest rates that may be used.
Refreshing Transfer Pricing Documentation for Long Term Related Party Loans
IRAS has clarified that taxpayers are required to review and refresh their transfer pricing documentation relating to long term loans with related parties on an annual basis. This is because the facts and circumstances relating to taxpayers and their related parties in relation to the long term loans may change over time. To ease compliance, taxpayers may consider preparing simplified transfer pricing documentation if the relevant conditions are met.
Providing Additional Information to Supplement Existing Transfer Pricing Documentation
IRAS has clarified that it will consider the additional details or analysis submitted by taxpayers in 2024 to support or further explain the position covered in their transfer pricing documentation for financial year 2022 as contemporaneous, unless those details relate to subsequent developments or the analysis is conducted with hindsight.
Making Transfer Pricing Adjustments and Imposing Surcharge during Transfer Pricing Audit Process
Current
Before 14 June 2024, when conducting a transfer pricing audit, IRAS would propose a transfer pricing adjustment if IRAS was of the view that the taxpayer’s taxable profit was understated due to non-arm’s length related party transactions. The taxpayer would have the opportunity to respond to IRAS’ proposal and discuss how to resolve the issue, before IRAS made the adjustment.
From 14 June 2024
From 14 June 2024, IRAS will consider making a transfer pricing adjustment if the taxpayer’s taxable profit is understated or loss is overstated due to non-arm’s length related party transactions. Once the adjustment is made, IRAS will impose a surcharge on the transfer pricing adjustment accordingly. If the taxpayer does not agree with IRAS’ adjustment and wishes to object to the corresponding notice of assessment, it must follow IRAS’ Objection and Appeal Process to resolve the issue with IRAS.
Disregarding an Actual Related Party Transaction
IRAS has expanded on the example used to illustrate when it will disregard an actual related party transaction or replace it with an alternative transaction.
In the example, Company A and Company B, who are related parties, enter into a royalty agreement where Company B pays Company A an annual royalty of $X for using Company A’s knowhow. The knowhow is publicly available and independent parties would not have to pay to use such knowhow. Since the transaction is commercially irrational, there is no price that is acceptable to both Company A and Company B from their individual perspectives.
IRAS has clarified that if Company A is a taxpayer in Singapore, IRAS will not disregard Company A’s royalty income from Company B in the absence of an Advance Pricing Arrangement (APA) or a Mutual Agreement Procedure (MAP) with the tax authority of the country in which Company B is resident.
If Company B is a taxpayer in Singapore, IRAS will disregard Company B’s transaction with Company A for transfer pricing purpose and treat Company B’s royalty payment to Company A as not deductible. IRAS will not replace the transaction between Company A and Company B with an alternative transaction given that no independent parties would pay to use such knowhow.
Making Transfer Pricing Adjustments for Capital Transactions
IRAS has introduced guidance on when and how it will make transfer pricing adjustments relating to capital transactions.
IRAS will not make any transfer pricing 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 Income Tax Act 1947 (ITA).
Where a sale or transfer of fixed assets (i.e. intellectual property rights, machinery, plant and indefeasible right of use) between related parties is not conducted at arm’s length, while IRAS is not precluded from applying the arm’s length principle to determine the capital allowance/writing-down allowance and balancing adjustment, IRAS will apply the specific provisions in the ITA on the use of open-market price for the making of:
- capital allowance/writing-down allowance when the capital expenditure incurred in acquiring the fixed assets exceeds the open-market price, and
- balancing adjustment when the proceed for the sale, transfer or assignment of the fixed assets is less than the open-market price.
Remitting a Transfer Pricing Surcharge
IRAS has introduced an additional condition under which partial or full remission of the surcharge on a transfer pricing adjustment will be given. To qualify for partial or full remission of the surcharge, the taxpayer must have no history of surcharges and penalties being imposed or remitted/compounded.
Simplifying the Mutual Agreement Procedure Process
IRAS has removed the requirement for a pre-filing meeting for MAP applications.
Meeting the Conditions for Strict Pass-through Costs
One of the conditions for a group service provider to pass on the costs of the acquired services to its related parties without a mark-up is that the costs of the acquired services must be the legal or contractual liabilities of the related parties.
IRAS has clarified that email correspondence between the group service provider and its related parties, whether it is a single email with all the related parties or separate emails with each related party, may be accepted as evidence that the related parties will assume the liabilities relating to the acquired services.
To help taxpayers determine whether a cost can be regarded as strict pass-through cost, IRAS has introduced three (3) examples to illustrate the application of the qualifying conditions.
Identifying Suitable Base Reference Rates for Related Party Loans
IRAS has introduced guidance on transitioning the base reference rate from interbank offered rates (IBORs) to alternative near risk-free rates (RFRs) in view of the global IBOR reform.
Previously, base reference rates were mainly IBORs. Arising from the global IBOR reform, IBORs have been replaced by RFRs. Existing products/contracts that reference IBORs have to be transitioned to reference their corresponding RFRs. When taxpayers made changes to their existing related party IBOR-based loans in response to the IBOR reform and in accordance with the relevant guidance issued by the governing bodies for the relevant IBOR/RFR pairs, IRAS will consider such changes as arm’s length. However, where the changes go beyond those expected under the IBOR reform and the relevant guidance, IRAS may consider if any re-financing is involved such that a new loan has been issued.
Due to its nature, a RFR tends to be lower than its corresponding IBOR. When providing a related party loan with a suitable RFR as the base reference rate, taxpayers may consider if spread adjustment is necessary to account for the economic difference between the RFR and the corresponding IBOR. IRAS has provided two (2) examples to help taxpayers decide if spread adjustment is necessary and to determine the amount of spread adjustment.
To substantiate that the pricing for their related party financial transactions is arm’s length, the transfer pricing documentation should include:
- for transitioning of existing related party IBOR-based loans, the basis of the changes and explanation on how those changes are consistent with the IBOR reform, relevant guidance and arm’s length principle
- for related party loans adopting RFRs as base reference rates, explanation on whether spread adjustment is necessary and the basis of determining the spread adjustment.
Applying the Arm’s Length Principle to Re-financing
IRAS has introduced guidance on the application of the arm’s length principle to re-financing.
IRAS will consider that a new loan has been obtained when a taxpayer:
- obtains a loan from a related party to repay an existing loan (“re-financing”)
- extends the tenor of an existing related party loan, or
- significantly changes the terms and conditions of an existing related party loan.
The taxpayer is therefore required to establish the arm’s length terms and interest rate for the new loan and prepare transfer pricing documentation accordingly.
IRAS has provided three (3) examples to illustrate when taxpayers should determine an arm’s length interest rate for the new loan and when IRAS may adjust the taxpayer’s interest expense based on an arm’s length interest rate.
Evaluating Transfer Pricing Implications from Government Assistance
IRAS has introduced guidance on transfer pricing implications arising from government assistance.
Benefits from government assistance may have transfer pricing implications. Broadly, situations involving government assistance may concern:
- a member of a group receiving government assistance, and
- assistance being availed to independent parties within the market where a group operates.
When examining the transfer pricing of a group member who receives government assistance, taxpayers should consider whether the assistance would have had impact on independent parties within the same market. Where assistance is provided to independent parties within the market where the group operates, taxpayers should likewise consider if this forms part of the economic context in which the entities operate, and which may have a bearing for transfer pricing analysis in respect of the group of related entities in the same market.
Where the benefits from government assistance are economically relevant (in that the benefits are taken into account by independent parties when evaluating the terms of a comparable transaction under comparable circumstances), such benefits would have to be examined as part of transfer pricing analysis conducted for transactions between related parties.
Generally, government interventions would tend to be regarded as altering the conditions of the market in the particular jurisdiction. The receipt of government assistance may form part of the economic circumstances of the parties and be a feature of the market in which they operate. However, it would be contrary to the arm’s length principle to assume that the very receipt of government assistance by one party to a transaction would always affect the price of the accurately delineated related party transaction. The basic transfer pricing analysis would continue to apply, i.e. to examine whether this assistance would have any influence on transactions between independent parties where one party receives a similar assistance. Hence, a comparability analysis would need to be undertaken. The potential effect of the receipt of government assistance on the pricing of a related party transaction will depend on whether a similar effect would have been observed in independent transactions occurring under similar circumstances, and the extent to which the assistance is economically relevant. IRAS has provided two (2) examples to illustrate how the receipt of government assistance by a party to a related party transaction should be evaluated from a transfer pricing perspective.
IRAS recognises the practical challenges that businesses may face in performing the analysis due to the lack of detailed and reliable information, as well as the delay in data availability in the public domain. Unless otherwise demonstrated, it is generally expected that an independent party acting in a commercially rational manner would retain the benefits from government assistance. IRAS has provided an example to illustrate the circumstances under which a taxpayer can take the view that an independent party would retain the benefits from government assistance.
Taxpayers are to properly document the following information relating to the government assistance that they have received in the TP documentation:
- details relating to the government assistance
- accounting treatment of the government assistance, and
- how the receipt of specific government assistance had been taken into consideration in their comparability analysis.
Source:
- Income Tax (Transfer Pricing Documentation) (Amendment) Rules 2024
- Income Tax (Transfer Pricing Documentation) Rules 2018
- IRAS e-Tax Guide “Transfer Pricing Guidelines (Seventh Edition)”
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Disclaimer
This article should be used as a general guide only. No reader should act solely upon any information found in this article. We recommend that professional advice be sought before taking action on specific issues and making significant business decisions. Crowe Singapore expressly disclaims all and any liability to any person in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of the above article. While every effort has been made to ensure the accuracy of the information contained herein, Crowe Singapore shall not be responsible whatsoever for any errors or omissions in it.
