Singapore enacts transfer pricing documentation requirements and publishes updated transfer pricing guidelines

Transcription

1 26 March 2018 Global Tax Alert News from Transfer Pricing Singapore enacts transfer pricing documentation requirements and publishes updated 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 The Singapore Government published, on 22 February 2018, the Income Tax (Transfer Pricing Documentation) Rules 2018 (the TPD Rules) under the Singapore Income Tax Act (ITA) in the Singapore Government Gazette. The TPD Rules are effective as of 23 February 2018 and apply for the basis period for the Year of Assessment (YA) 2019 and thereafter. 1 In addition, on 23 February 2018, the Inland Revenue Authority of Singapore (the IRAS) released the fifth edition of the Singapore transfer pricing guidelines (2018 Singapore TP Guidelines). The changes incorporates the TPD Rules into the guidelines and provides examples and explanations on certain aspects of the TPD Rules. The 2018 Singapore TP Guidelines also provide clearer guidance on comparability analysis and the transactional profit split method. This Alert summarizes the key highlights from the TPD Rules and the 2018 Singapore TP Guidelines.

2 2 Global Tax Alert Transfer Pricing Detailed discussion Mandatory transfer pricing (TP) documentation requirement under section 34F of the ITA Under section 34F of the ITA, a company, firm or trustee of the trust is required to prepare TP documentation if: The gross revenue (derived from trade or business) of the company, firm or trust (taxpayer) in the basis period for a YA exceeds S$10m (US$7.6m) and its related party transactions in the current basis period are not exempt by specific rules; or 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 period are not exempt by specific rules. The TPD Rules supplement the above provisions by providing details on the form and content of the TP documentation, and also set out certain scenarios whereby taxpayers will be exempt from preparing TP documentation as referred to in section 34F of the ITA. Related parties for permanent establishments (PEs) in Singapore While the arm s-length principle has been applicable to PEs under the earlier versions of the TP guidelines, the 2018 Singapore TP Guidelines clarify that when a nonresident person carries on a business in Singapore through a PE, the Singapore PE and other PEs of the nonresident person outside Singapore will constitute separate related entities for the purpose of attribution of profits. Additional guidance on conducting comparability analysis The 2018 Singapore TP Guidelines improve the guidance on conducting comparability analysis. The guidance is in line with the Organisation for Economic Co-operation and Development s (OECD) Transfer Pricing Guidelines published in July 2017 (2017 OECD TP Guidelines), which had factored relevant outcomes of Actions 8 to 10 of the Base Erosion and Profit Shifting project. Emphasis on intercompany agreements The IRAS has provided enhanced guidance on comparability analysis and the importance of intercompany agreements based on the true substance of the contractual terms and conditions. Accordingly, it is recommended that taxpayers prepare contractual agreements as necessary, review the existing contractual agreements, assess whether they reflect the functions performed, assets employed and risks borne by the parties to the agreement and make necessary changes. Additional guidance on transactional profit split method (PSM) The 2018 Singapore TP Guidelines take into consideration the guidance provided by the 2017 OECD TP Guidelines on PSM. 2 While the fundamental concept regarding why a PSM is adopted remains the same, some additional guidance is provided to the common terms used in applying the method. The IRAS has also clarified that the lack of comparables alone is an insufficient reason to use the PSM as this may lead to a non-arm s length outcome of the functions performed. Arm s-length adjustments by the IRAS The IRAS has provided guidance on circumstances under which the IRAS can make transfer pricing adjustments. To aid understanding, it has also included certain examples within the 2018 Singapore TP Guidelines. Understatement of profits or overstatement of deductions will be the main triggering point for the adjustments. It is also clarified that these conditions equally apply when there are overstatements of losses. It has been emphasized that, in comparable circumstances, when independent parties will enter into substantially different commercial or financial relations than those between the taxpayer and its related party, the IRAS will determine the arm s-length price for the actual related party transaction based on the commercial or financial relations of the independent parties. Furthermore, the IRAS will disregard an actual related party transaction or replace it with an alternative transaction only in exceptional circumstances where: The arrangements made in relation to the transaction lack the commercial rationality that would be agreed between independent parties under comparable circumstances The arrangements prevent determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to them at the time of entering into the transaction

3 Global Tax Alert Transfer Pricing 3 Given the above, it becomes even more important that taxpayers revisit their documentation and ensure that it is robust enough to defend the transfer pricing policies and practices applied. It is also recommended that the commercial rationale of the related party arrangements are assessed and documented. Changes to TP documentation The IRAS has clarified that for any documentation prepared for years prior to YA 2019, taxpayers can apply the group level and entity level documentation provided under the 2018 Singapore TP Guidelines or the IRAS e-tax guide on Transfer Pricing Guidelines (Fourth Edition) (2017 Singapore TP Guidelines). The IRAS has provided adequate time for taxpayers to take into account the new requirements beginning in the YA 2019, as well as the transition from the previous Guidelines. The IRAS acknowledges a three-tiered documentation structure consisting of: (a) documentation at the group level; (b) documentation at the entity level; and (c) Country-by- Country Reporting. It also understands that taxpayers may have prepared similar TP documentation (for example OECD Master File and Local File) for the purpose of complying with the requirements of other countries. Such documentation may form part of the Singapore TP documentation. However, for the Singapore TP documentation to be considered compliant with the Singapore requirements, it has to meet all the content requirements outlined in the Second Schedule of the TPD Rules. It is important to note that there are certain minor additional content requirements in the Singapore TP Guidelines as compared to the 2017 OECD TP Guidelines. New surcharge and penalty regime An imposition of the new surcharge and penalty regime will be effective in the YA 2019, when taxpayers do not comply with the arm s-length principle or TP documentation requirements. If a taxpayer s related party transactions are not at arm slength and the IRAS determines that TP adjustments are required, a 5% surcharge will be imposed on the TP adjustments made. This will apply regardless of whether the TP adjustments result in additional tax liability. If taxpayers do not agree with the IRAS position, an objection may still be filed against the TP adjustments and the applicable surcharge. A separate noncompliance penalty not exceeding S$10,000 (US$7,600) will be imposed on taxpayers. Neither the surcharge nor the penalty are tax-deductible. Guidance on reliance on past TP documentation The IRAS in general expects that taxpayers review and refresh their TP documentation annually. This will result in preparing documentation for each basis period. However, considering the compliance burden, the IRAS allows taxpayers to use the TP documentation that has been prepared previously, i.e., documentation prepared for the past two YAs immediately preceding the year of preparation (for example YA 2017 and YA 2018 documentation for YA 2019 purposes). To be considered as qualifying past documentation, the conditions mentioned under the TPD Rules must be met. Implications Taxpayers should take into account the TPD Rules and the Singapore specific content requirements when preparing their TP documentation as failure to comply with the TPD Rules may result in the assessment of penalties. While the TPD Rules provide certain exemptions for taxpayers to prepare TP documentation, taxpayers should nonetheless review their related party transactions to ensure compliance with the arm s-length principle under section 34D of the ITA since the surcharge on transfer pricing adjustments under section 34E of the ITA will still apply. Endnotes 1. The term year of assessment (YA) refers to the year in which income tax is assessed on the company. The basis period for a particular YA for a company is the financial year ending in the year preceding that YA. 2. The guidance contained in the current version of the 2017 OECD TP Guidelines is not final and will be revised in future.

4 4 Global Tax Alert Transfer Pricing For additional information with respect to this Alert, please contact the following: Ernst & Young Solutions LLP, International Tax Services, Singapore Luis Coronado Stephen Lam Jonathan Belec Stephen Bruce Ernst & Young LLP, Singapore Tax Desk, New York Su Ling Agnew Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty Kaz Parsch Bee-Khun Yap

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 2018 EYGM Limited. All Rights Reserved. EYG no Gbl 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