Inland Revenue Authority of Singapore releases 2016 Transfer Pricing Guidelines

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1 11 January 2016 Global Tax Alert News from Transfer Pricing Inland Revenue Authority of Singapore releases 2016 Transfer Pricing Guidelines EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary On 4 January 2016, the Inland Revenue Authority of Singapore (IRAS) released revised transfer pricing guidelines (2016 TP Guidelines). Many of the changes from the transfer pricing guidelines (Second Edition) that were released on 6 January 2015 (2015 TP Guidelines) are cosmetic, although changes to note include enhanced guidance on the cost plus method and significant enhancements to the Mutual Agreement Procedure (MAP) and Advance Pricing Arrangement (APA) programs. The 2016 TP Guidelines remain broadly in line with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). This Alert summarizes the key changes introduced by the 2016 TP Guidelines as well as additional commentary on what is not included. Detailed discussion Enhancements to the MAP and APA process The IRAS has made changes to the MAP and APA process that will impact any taxpayer seeking to use these programs. Taxpayers should pay particular attention to these changes if they are looking to enter the APA program with a

2 2 Global Tax Alert Transfer Pricing covered period commencing 1 January 2017, as action may be required by 31 March 2016 to avoid years being excluded from the program. Changes to the MAP program Given that the MAP program is largely driven by treaty obligations and concerns prior years, changes to the MAP program are minimal. The 2016 TP Guidelines include an updated timeline table in paragraph 9.2, but changes are largely cosmetic. Changes to the APA program roll-back period The main changes to the APA program include the definition of what constitutes a roll-back year and the timeframe for submission of the formal application. The 2015 TP Guidelines stated in paragraph 8.19 that As a rule, IRAS does not regard a financial year (FY) as a roll-back year if that FY has not ended at the time when the APA application is filed. This created a situation whereby a taxpayer could miss the timeline for filing an APA and retain the intended financial year as part of the covered period (or even include the current year as well). Within this guidance, specific requirements are included with respect to external benchmarking searches and the application of results. This concession has now been removed. Taxpayers can no longer include the year of application as part of the covered period, unless specific approval for it to be covered as a rollback year is granted by the IRAS. Furthermore, if any of the APA process deadlines are missed, then taxpayers are at risk of having the following year excluded from the program as well. This may have significant implications for taxpayers seeking to enter the APA program in For example, consider a taxpayer with a financial year end falling on 31 December (so FY2016 refers to the year ending on 31 December 2016): The taxpayer can no longer include FY2016 as part of the covered period. Where the taxpayer wishes to include FY2016 in the APA program, an application would need to be made to include FY2016 as a roll-back year. The decision to apply a roll-back is at the discretion of the IRAS. If the taxpayer misses any of the deadlines (which are covered later in the Alert), then the inclusion of FY2017 as a covered year would also be put at risk. Again, the decision to apply a roll-back to cover FY2017 is at the discretion of the IRAS. The IRAS typically only grants a roll-back period to cover two years. On this basis, if the taxpayer were to include FY2016 or FY2017 as part of a roll-back period, then the coverage of prior years would be put at risk. For unilateral APAs, the IRAS does not allow roll-back periods. On this basis, the removal of this concession effectively brings forward significantly the application timeline for unilateral APAs with no means of capturing earlier years using a roll-back mechanism. Taxpayers wishing to enter the APA program in 2016 should consider the implications of the changes and start work early to ensure maximum flexibility on which years are included as part of the covered period. Changes to the APA program application process The IRAS has changed the application process, with the most significant change being the timing of the submission of the formal filing document. Under the 2015 TP Guidelines, taxpayers were required to submit the formal application no less than six months before the start of the covered period. This timeline effectively restricted the extent of work that the IRAS was able to undertake at the pre-filing stage. Under the 2016 TP Guidelines, the IRAS will indicate if it is inclined to accept the APA request at least four months before the first day of the APA covered period, giving the IRAS an additional two months to consider the information provided during the pre-filing process. From the IRAS date of indication, the taxpayer will then have three months to submit the formal application document and the IRAS will issue an acceptance letter within one month from receipt of the application.

3 Global Tax Alert Transfer Pricing 3 deliberation is undertaken at the pre-filing stage. It continues to be important to align the timeline of the IRAS with the timeline of the relevant counterparty tax jurisdiction. It remains to be seen whether the revised pre-filing review work by the IRAS means that the actual review time required post-submission will be shortened. This development would be welcomed, particularly for unilateral APAs. In practice, this change has the following implications: Taxpayers can expect more information requests and meetings during the pre-filing phase, including potentially site visits. In this way, the IRAS can get more comfortable with the facts of the case prior to indicating its inclination to accept and inviting the taxpayer to move forward towards submission of the formal application. Taxpayers can expect more guidance from the IRAS on what they should include in the formal application. Formal acceptance into the program may be up to five months later compared to the previous timeline and may not be received until the start of the covered period. This may create an extended period of uncertainty for taxpayers, although in our experience, the IRAS tends to maintain open communication throughout the APA application process. The likely reason for this change in timeline is that the IRAS wants to avoid the situation whereby it discovers only at a later post-submission review stage that they are not agreeable to various, sometimes important, aspects of the APA. This appears to be in line with international developments of other APA programs where more extensive Taxpayers that wish to enter the APA program should familiarize themselves with the revised timeline and engage the IRAS early to ensure best chances of success in the APA program. Other changes to guidance on MAP and APA Paragraph 8.29 previously stated that the acceptance of a MAP or APA application is at the discretion of the competent authorities. Where IRAS or the relevant foreign competent authority rejects the MAP or APA application, the taxpayers will have to consider other options to manage their transfer pricing risks. A sentence has now been added to read that the IRAS is also not precluded from conducting an audit on the taxpayer if there is non-compliance with the Singapore tax law. Previous iterations of Singapore transfer pricing guidance had never precluded this ability of the IRAS. In other jurisdictions, the inclusion of such a sentence can create nervousness on the part of taxpayers. In this case, it remains to be seen whether this sentence has been included for avoidance of doubt on the IRAS position or whether there are specific situations the IRAS may target in future. There are also minor changes to Annex B2, which is the guide on minimum information required for a pre-filing meeting. Taxpayers should review the revised table when working towards a pre-filing meeting or formal submission. Enhanced guidance on the application of the cost plus method The main change to the guidance on the application of the cost plus method relates to the determination of the cost base. The 2016 TP Guidelines states that where necessary, adjustments will be made to ensure the cost base is arm s length. This means that the cost base may include cost not reflected in the tested party s accounts. An example follows whereby the service recipient directly incurs some of the costs that would otherwise have been part of the cost base of the service provider. The guidance states that this cost

4 4 Global Tax Alert Transfer Pricing should form part of the cost base of the service provider even though this amount has not been reflected in the accounts of the service provider. Other comments While the above sections outlined the main changes included within the 2016 TP Guidelines, there are some other areas to note: Changes not included in the 2016 TP Guidelines On 5 October 2015, the OECD released its final reports on Base Erosion and Profit Shifting (BEPS). These reports constitute a comprehensive review of international tax rules and include a number of measures that impact transfer pricing. It is notable that the 2016 TP Guidelines do not include any changes to reflect the content of these final reports. The 2016 TP Guidelines do not introduce a requirement for taxpayers to implement Country-by-Country reporting, although consultation is ongoing regarding implementation. The final BEPS report on Actions 8-10 included a section on low value-adding intra-group services. The recommendations therein were broadly in line with the existing IRAS guidance on routine services (including an appropriate mark-up being 5%), but the 2016 TP Guidelines do not attempt to align these exactly. Other aspects of the report on Actions 8-10 (such as consideration of DEMPE functions) and indeed other papers may have merited consideration in the 2016 TP Guidelines. However ratification of these BEPS reports was not until late Furthermore the 2016 TP Guidelines remain directionally aligned with the BEPS outcomes, particularly around the importance of substance and alignment of transfer pricing outcomes with value creation, and so any further updates are likely to be reflected in future iterations of the guidelines. Update on the Singapore transfer pricing environment The IRAS continues to be active in its transfer pricing consultation program; some taxpayers have already received requests for their Year of Assessment 2015 (relating to FY 2014) transfer pricing documentation as a first step in the consultation process. Implications The 2016 TP Guidelines will have immediate effect. In fact some taxpayers have already been invited to adopt the revised APA process on a voluntary basis. Taxpayers contemplating applying for the MAP or APA programs should start preparations early and heed the revised timeframe, which is expected to be enforced strictly. Otherwise taxpayers should continue to adhere to the guidance, including maintenance of contemporaneous transfer pricing documentation, and monitor future changes to the transfer pricing framework in Singapore. For additional information with respect to this Alert, please contact the following: Ernst & Young Solutions LLP, Sinagpore Luis Coronado, Asean Transfer Pricing Leader luis.coronado@sg.ey.com Henry Syrett, Transfer Pricing Services henry.syrett@sg.ey.com Stephen Lam, Transfer Pricing Services stephen.lam@sg.ey.com Stephen Bruce, Financial Services Tax stephen.bruce@sg.ey.com Senaka Senanayake, Transfer Pricing Services senaka-k.senanayake@sg.ey.com Jonathan Belec, Transfer Pricing Services jonathan.belec@sg.ey.com

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Transfer Pricing Group 2016 EYGM Limited. All Rights Reserved. EYG no. CM NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com