Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore

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1 Issue July 2017 Transfer pricing alert Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore Overview On 19 June 2017, the Ministry of Finance (MOF) released the draft Income Tax (Amendment) Bill 2017 for public consultation. The draft Bill includes specific transfer pricing (TP)-related changes including the amendment of existing sections 34D, 74 and 93A, as well as the inclusion of new sections 34E and 34F in the Income Tax Act. A brief overview of the proposed TP-related amendments are as follows: Section 34D: clarifies the meaning of arm s length conditions, outlines the basis of how arm s length conditions are to be identified, and outlines the types of adjustments the Comptroller may undertake to enforce the arm s length principle Section 34E: introduces a surcharge on the TP adjustments passed by the Comptroller with effect from year of assessment (YA) 2019 Section 34F: introduces the mandatory requirement for contemporaneous and adequate TP documentation, and penalties for non-compliance from YA 2019 Section 74: lifts the time bar so as to allow the Comptroller to raise additional assessments for Mutual Agreement Procedure (MAP) cases Section 93A: clarifies any claim for relief for error or mistake in relation to a related party transaction must be supported by TP documentation from YA 2019 Further analyses on the potential key TP changes that are introduced by the draft Bill, as well as additional commentary on what these changes mean to taxpayers in Singapore are provided below.

2 Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore 2 Clarification on the arm s length conditions The amended Section 34D under the draft Bill provides clarification on the definition of arm s length conditions, which is aligned with the definition provided in the Organisation for Economic Co-operation and Development (OECD) TP Guidelines. Specifically, arm s length conditions are conditions which will be made or imposed if the parties were not related parties dealing independently with one another in comparable circumstances. Further guidance is also provided to assist taxpayers in identifying such arm s length conditions. Generally, taxpayers may identify arm s length conditions based on the actual commercial or financial relations between the parties (the form is to be disregarded where the substance of the transaction is inconsistent with the form of the transaction). However, in identifying the arm s length conditions, If non-related parties in comparable circumstances would have entered into substantially different relations, then the identification must be done on the basis of the non-related parties relations If non-related parties in comparable circumstances would not have entered into any commercial or financial relations, then the identification must be done on the basis of the absence of any such relations The amended section 34D under the draft Bill also provides further details on the types of TP adjustments the Comptroller may make to related party transactions that have resulted in tax advantage situations due to non-compliance with the arm s length principle. Specifically, the Comptroller may make the following TP adjustments: Increase the amount of income of the taxpayer had the arm s length condition been applied 1 Reduce the deductions or allowances claimed by the taxpayer had the arm s length condition been applied Reduce the losses claimed by the taxpayer had the arm s length condition been applied Surcharge for non-compliance with the arm s length principle The new section 34E introduces a penalty regime with effect from YA 2019, which allows the Comptroller to apply a surcharge of 5% on the TP adjustments made for non-compliance with the arm s length principle. Introducing TP documentation legislation The new section 34F under the draft Bill formally legislates the requirement for Singapore taxpayers to prepare contemporaneous TP documentation, as well as codifies the guidance found in the Singapore TP Guidelines issued by the Inland Revenue Authority of Singapore (IRAS). Who is required to prepare TP documentation? The new section 34F states that a company, the person making the return for a firm (including a partnership) or the trustee of a trust is required to prepare TP documentation, if: The gross revenue of the company, firm or trust in the basis period for a year of assessment (current basis period) exceeds S$10m and its related party transactions in the current basis period are not exempted by rules under section 7 (expected to be aligned with the current exemption categories in the Singapore TP Guidelines) The company, firm or trustee of the trust was required to prepare TP documentation for a transaction in the previous basis period and its related party transactions in the current basis 1 It is to be noted that the increase in income under the TP adjustment will be deemed to have been accrued in or derived from Singapore, or received in Singapore from outside Singapore.

3 Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore 3 period are not exempted by rules under section 7 (expected to be aligned with the current exemption categories in the Singapore TP Guidelines) When must it be prepared by? TP documentation is required to be prepared no later than the time of the statutory deadline for the filing of the tax return. What is to be included in the TP documentation? Taxpayers are required to prepare TP documentation based on the rules under section 7 (which are expected to be aligned with the content requirements outlined in the Singapore TP Guidelines). What are the penalties for non-compliance? With effect from YA 2019, taxpayers will be fined not more than S$10,000 if they fail to comply with any of the following: Prepare contemporaneous TP documentation if required to do so under section 34F Retain the TP documentation for a period of at least five years from the end of the basis period in which the transaction took place Furnish the Comptroller with a copy of the TP documentation within 30 days of notice to submit Similar penalties apply to a person who knowingly provides materially false or misleading TP documentation to the Comptroller. Lifting of time bar for MAP cases The amended section 74 under the draft Bill allows the Comptroller to lift the statutory time limit of four years to raise additional assessments for MAP cases. This provides taxpayers with certainty that the outcome of the MAP agreed with the relevant foreign competent authority can be given full effect by the IRAS. However, in the case of advance pricing arrangements (APA), the time bar will still apply. Application for relief for error or mistake The amended section 93A under the draft Bill outlines the requirement for the taxpayer to have TP documentation to support the claim for relief for an error or mistake in an assessment in relation to a related party transaction regardless of whether the applicant is required to prepare TP documentation under the new section 34F of the draft Bill. Implications for Singapore taxpayers The draft Bill if enacted will formally enforce the requirement for TP documentation. However, small businesses will be exempted from preparing mandatory TP documentation under the draft Bill as a result of the gross revenue threshold, if they were not required to prepare TP documentation in the prior year as well. There is now a specific penalty for the failure to prepare, maintain and submit upon request contemporaneous TP documentation. Further, there will be a surcharge on the TP adjustments made by the Comptroller due to non-compliance with the arm s length conditions. This is contrary to what has been adopted in many countries, where having contemporaneous TP documentation typically provides for penalty protection in case of a TP adjustment by the tax authorities. Notably, the Comptroller is empowered to make TP adjustments when it is favourable to the IRAS but the draft Bill does not address downward adjustments (i.e., where the amount of income could be lesser or the amount of deduction, allowances or losses could be greater). Further, the surcharge is applied on the amount of TP adjustments made by the Comptroller and not based on the amount of taxes undercharged. What this means for the taxpayer is that the surcharge is still applicable in situations where there is a reduction of losses, deductions or allowances, as well as cases where the taxpayer is enjoying a tax holiday. In addition, the draft Bill proposes to deem the increase in income in a TP adjustment to be either Singapore-sourced income or foreign-sourced income received in Singapore. This represents a fundamental change particularly in the taxation of foreign-sourced income as the deemed foreignsourced income would not have been actually received in Singapore. These changes demonstrate the IRAS intention in taking on a more active and stricter stance in

4 Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore 4 ensuring that Singapore taxpayers are in compliance with the arm s length principle. With the proposed changes, there is an urgency for Singapore taxpayers falling under the documentation requirements under section 34F who have yet to maintain TP documentation to start reviewing their related party transactions to ensure that they are in compliance with the arm s length conditions and begin preparing TP documentation to meet the contemporaneous documentation requirements. Taxpayers who will be exempted from the mandatory documentation requirements under section 34F should also review the arm s length nature of their related party transactions to ensure compliance as the surcharge on TP adjustments will still apply despite not having to prepare TP documentation. Closing remarks The public consultation is now closed. MOF will consider the feedback obtained from the public consultation and publish a summary of the main comments received together with its responses on the MOF s website by the end of August The Bill is likely to be enacted by the end of this year. Singapore taxpayers should continue to adhere to the current Singapore TP Guidelines and monitor the development of this draft Bill in order to manage their company s TP risk. For additional information pertaining to this alert, please contact your EY service consultant or any of the following personnel:

5 Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore 5 Contact us Luis Coronado Partner, Asean International Tax Services and Transfer Pricing Leader Tel: luis.coronado@sg.ey.com Stephen Lam Partner, Transfer Pricing Services Tel: stephen.lam@sg.ey.com Jonathan Belec Partner, Transfer Pricing Services Tel: jonathan.belec@sg.ey.com Stephen Bruce Partner, Financial Services Tax Tel: stephen.bruce@sg.ey.com Sharon Tan Director, Transfer Pricing Services Tel: sharon.tan@sg.ey.com Jow Lee Ying Director, Transfer Pricing Services lee-ying.jow@sg.ey.com Warren Chung Director, Transfer Pricing Services Tel: hoonseok.chung@sg.ey.com Jiyeon Chang Associate Director, Transfer Pricing Services Tel: jiyeon.chang@sg.ey.com Molvin Yiu Associate Director, Transfer Pricing Services Tel: molvin.yiu@sg.ey.com Chung-Sim Siew Moon Partner and Head of Tax Tel: siew-moon.sim@sg.ey.com Lim Gek Khim Partner, Business Tax Services Tel: gek-khim.lim@sg.ey.com Angela Tan Partner, Business Tax Services Tel: angela.tan@sg.ey.com Soh Pui Ming Partner, Global Compliance and Reporting Tel: pui.ming.soh@sg.ey.com Russell Aubrey Partner, Business Tax Services Tel: russell.aubrey@sg.ey.com Desmond Teo Partner, International and Financial Services Tax Tel: desmond.teo@sg.ey.com Mriganko Mukherjee Partner, International and Financial Services Tax Tel: mriganko.mukherjee@sg.ey.com Chester Wee Partner, International Tax Services Tel: chester.wee@sg.ey.com Wong Hsin Yee Partner, International Tax Services Tel: hsin-yee.wong@sg.ey.com

6 Mandatory transfer pricing documentation and penalty regime to be introduced in Singapore 6 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 organisation, 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 organisation, please visit ey.com All Rights Reserved. APAC no (UEN T08LL0784H) is a limited liability partnership registered in Singapore under the Limited Liability Partnerships Act (Chapter 163A). 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