IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition)

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1 Issue 9 17 January 2017 Transfer pricing alert IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition) Overview On 12 January 2017, the Inland Revenue Authority of Singapore (IRAS) released the fourth edition of the Singapore transfer pricing guidelines (2017 Singapore TP Guidelines). Changes include enhanced guidance to support the fact that profits should be taxed where real economic activity is performed and value is created; additional information requirements for TP documentation, Mutual Agreement Procedure (MAP) and Advanced Pricing Arrangement (APA) programmes; as well as the introduction of an indicative margin or safe harbour for related party loans. In line with Singapore joining the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project as a BEPS Associate, Singapore is committed to implement the four minimum standards under the BEPS project. In the 2017 Singapore TP Guidelines, there are greater details relating to three of these standards Action 5: Countering harmful tax practices, Action 13: Transfer pricing documentation, and Action 14: Making dispute resolution mechanisms more effective. Under Action 5, compulsory information exchange between tax administrations is made evident in the 2017 Singapore TP Guidelines with specific reference to information exchange involving unilateral APAs.

2 IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition) 2 Under Action 13, the IRAS has not adopted the application of the OECD Master File and Local File concepts. Nonetheless, the information requirements for Singapore TP documentation are largely aligned to the OECD approaches. The IRAS clearly showed that Singapore is committed to the implementation of Country-by-Country Reporting (CbCR) in the 2017 Singapore TP Guidelines 1. Under Action 14, the IRAS provided additional guidance on the APA programme roll-back period, commitment to conclude MAP applications within a 24-month time frame as well as its position where taxpayers choose to resolve matters through alternative dispute resolution mechanisms with regards to MAP and APA proceedings. Aside from the commitment as a BEPS Associate, Singapore also adopts the principles of BEPS Actions 8 to 10 on aligning transfer pricing outcomes with value creation as seen in the IRAS new emphasis on risks and clarification on the arm s length principle. We provide further analyses on key changes that are introduced by the 2017 Singapore TP Guidelines as well as additional commentary on what these changes mean to taxpayers in Singapore. Enhancements to the arm s length principle and functional analysis The IRAS has reiterated its adherence to the internationally recognised arm s length principle. The IRAS has clarified that profits should be taxed where the real economic activities generating the profits are performed and where value is created in accordance to BEPS Actions 8 to 10. In the application of the arm s length principle, the IRAS provided additional clarification with respect to the risk element within the functional analysis. Greater emphasis is placed on the distinction between the assumption of risk and the capacity to bear and manage risk. From the IRAS perspective, a taxpayer should be entitled to greater returns for assuming and mitigating risks as compared to another taxpayer who either assumes or mitigates risks (i.e., does not perform both activities). The IRAS provided illustrations on what construe as control and financial capacity to assume risks. In practice, this change remodels the transfer pricing environment in Singapore. In the 2017 Singapore TP Guidelines, entities must have the ability to control and the financial capacity to assume risks in order to be entitled greater returns. As such, taxpayers who have Singapore based headquarters may consider revisiting and possibly re-calibrating the functional profiles of the relevant entities within the Group where the level of risks borne or managed does not meet the abovementioned conditions. Additional information requirements for TP documentation The preparation of TP documentation has become more stringent with the IRAS specifying the need for certain evidentiary documents to justify the tax positions adopted by the taxpayers. Taxpayers are now provided with more guidance from the IRAS on what they should include in the TP documentation. This move by the IRAS appears to be aligning the Singapore TP documentation with the documentation requirements under the OECD Master File and Local File although gaps continue to exist between the Singapore and OECD approaches. Singapore based taxpayers may have to supplement the Group level information within the Singapore TP documentation with the additional information stipulated in the OECD TP Guidelines or specific country documentation requirements such as China and Indonesia. At the same time, the IRAS continues to acknowledge that preparation of TP documentation may be administratively burdensome for certain taxpayers and has expanded the scenarios for which TP documentation need not be prepared. CbCR The IRAS has clarified that where the taxpayer is the ultimate parent company of a Singapore multinational enterprise (MNE), there may be a need to file CbCR in addition to the TP documentation. Details on the CbCR requirements can be found in the CbCR e-tax guide 2. Inclusion of additional information in TP documentation The list of information and documents prescribed to be included in TP documentation have been expanded to include the following: The Group s existing Unilateral APA (UAPA) and other tax rulings relating to the allocation of income among countries. 1 The IRAS released an e-tax Guide on CbCR on 10 October 2016, which is relevant to any Singapore tax resident multinational enterprise (MNE) with international operations and annual group revenue of at least SGD 1,125 million. The IRAS subsequently announced the acceptance of the voluntary filing for 2016 by such Singapore MNEs on 19 December More details of on CbCR are expected to be released by the end of March Reference to the CbCR e-tax guide can be found in the first footnote.

3 IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition) 3 Copies of existing APAs and other tax rulings to which the IRAS is not a party. Documents relating to the justification of the pricing and comparability adjustments performed by the taxpayer. In practice, this change implies that taxpayers can expect more information requests from the IRAS on areas where TP documentation may be lacking. Extent of TP documentation The administrative concession the IRAS provides in relation to non-preparation of TP documentation is expanded to include the following: Application of indicative margin for related party loans (which is covered later in the alert). Guarantee income and guarantee expense each not exceeding SGD 1 million. IRAS also clarified that strict pass-through costs should be included in aggregating the value for each category of related party transactions to determine whether these transactions surpass the relevant threshold limit. The inclusion of strict pass-through costs encourages taxpayers to rethink: The need and purpose for the existence of intermediary entities within related party transaction flows where they may not be providing much valueadd to the related party transactions. The need to cover more related party transactions within the TP documentation than before. Enhancements to the APA and MAP programmes Unlike the Singapore Transfer Pricing Guidelines (Third Edition) released in January 2016 where significant changes to the APA and MAP application processes were introduced, many of the changes to the 2017 Singapore TP Guidelines were meant to provide greater clarity in terms of the APA programme roll-back period as well as IRAS position where taxpayers choose to resolve matters through alternative dispute resolution mechanisms (e.g., tribunals and courts). Of notable change is the forthcoming compulsory spontaneous exchange of information between IRAS and relevant tax jurisdictions under the UAPA programme as well as concluding MAP applications within 24 months. Both topics are discussed below. Changes to the UAPA programme In accordance with Action 5 on countering harmful tax practices, the most significant change under the UAPA programme will be the automatic exchange of UAPA information 3 by the IRAS with: Jurisdictions of residence of all related parties with whom the taxpayer enters into transactions that are covered by the unilateral APAs; and Jurisdictions of residence of the taxpayer s ultimate parent entity and the immediate parent entity. Automatic exchange is subject to meeting certain conditions such as having in place tax treaties or exchange of information instrument. These conditions are listed in paragraph 8.13 of the 2017 Singapore TP Guidelines. The exchange of information for UAPAs will take place by December 2017 for UAPAs that are issued: On or after 1 January 2012 and still in effect on 1 January On or after 1 January 2015 but before 1 April For UAPAs issued on or after 1 April 2017, the exchange of information will take place within three months after the date of agreement. Clarification on the APA programme roll-back period The extension of APA to prior years (i.e., roll-back years) for bilateral APA or multilateral APA coming under the discretion of the IRAS was inferred in the Singapore Transfer Pricing Guidelines (Third Edition) released in January In the 2017 Singapore TP Guidelines, the IRAS specifically clarified that the determination of the number of roll-back years is decided by the IRAS on a case-by-case basis. Other changes to guidance on MAP and APA To provide taxpayers with greater clarity with regards to the MAP and APA processes, the IRAS mentioned that if taxpayers choose to accept the outcome of a transfer pricing audit with a foreign tax authority, any unprejudiced negotiation between the IRAS and the foreign tax authority to eliminate double taxation arising from the audit could be challenging. In addition, the IRAS clarified that if a matter is resolved through any legal or judicial proceedings under the order of the Singapore tribunals and courts, the IRAS is not likely to amend the transfer pricing adjustments that will 3 While the IRAS indicated that information exchange may take place per conditions listed in paragraph 8.13 of the 2017 Singapore TP Guidelines, such conditions do not suggest that an automatic exchange of information is possible. This may be a starting point but does not fulfil the compulsory spontaneous commitment to information exchange. To enable an automatic exchange of information, it remains to be seen whether the IRAS will put in place a similar agreement to the CbCR Multilateral Competent Authority Agreement (MCAA), which Singapore is not a party to at the moment.

4 IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition) 4 be at odds with the determination by the Singapore tribunals and courts. The above two points suggest that whilst taxpayers may have various remedies to resolve double taxation or other matters under their respective domestic tax law, taxpayers will need to consider carefully the historical and future implications (e.g., retrospective and prospective tax adjustments) of their decisions today. In particular taxpayers will have to monitor the different options carefully at every stage of the dispute resolution, understanding where one course of action may limit future availability of other dispute resolution alternatives. Specifically in relation to MAP, the IRAS targets to resolve MAP applications within 24 months from receiving the taxpayer s complete application. The commitment by IRAS to complete MAP applications within the 24-month time frame is a testament that IRAS treats each MAP application seriously and seeks to provide taxpayers with greater certainty that an outcome will be reached within the prescribed period. Introduction of indicative margin for related party loans Another administrative concession the IRAS introduced relates to the application of indicative margins for related party loans obtained or provided from 1 January Taxpayers need not prepare TP documentation for related party loans below SGD 15 million where the indicative margin is applied. Such loans can be excluded from the aggregation of other related party loans for which determination of TP documentation is required. The indicative margin is only applicable to related party loans below SGD 15 million at the time the loan is obtained or provided. The indicative margin will be published on the IRAS website and updated at the beginning of each year. The indicative margin applicable for the period between 1 January 2017 and 31 December 2017, as published on the IRAS website, is +250 bps (2.50%). However, acceptance of the indicative margin by foreign tax authorities remains to be seen. Where the taxpayer is not in the business of lending or borrowing and extends a related domestic loan to its related party, it also remains to be seen whether the interest restriction continues to apply in light of the introduction of the indicative margin. Application of the fixed rate is challenging for fixed rate loans spanning more than six months but less than two years The IRAS introduced the use of swap offer rate and SGS coupons as possible avenues to determine the base reference rate. However, the swap offer rate is only available for a maximum of a six-month period whilst the SGS coupon is only available for a minimum of a twoyear period. Based on the mechanisms introduced by the IRAS, there remains a gap between the application of the base reference rate for loans stretching more than six months but less than two years. As such, taxpayers may still have to fall back on preparing an interest rate benchmarking study to determine the appropriate interest rate for application. Closing remarks The 2017 Singapore TP Guidelines will take place with immediate effect. Taxpayers should continue to adhere to the guidance, including maintenance of contemporaneous TP documentation in line with the additional information requirements and new emphasis on risks, and monitor future changes to the transfer pricing framework in Singapore. Taxpayers who are interested to explore APA and MAP application may put forth a request to the IRAS, International Tax Branch. Notwithstanding, taxpayers will still need to decide the base reference rate (e.g., SIBOR or LIBOR) to apply the indicative margin for fixed and floating rate loans. In case of fixed rate loans, the IRAS proposed the application of an appropriate swap rate as the base reference rate. For Singapore dollar fixed rate loans, the Singapore Government Securities (SGS) yield can be considered for application as the base reference rate. This change brings about less administration and lowers transfer pricing risks especially for taxpayers who do not have ready access to loans databases to determine the appropriate level of interest rate to apply on related party loans.

5 IRAS release of e-tax guide: Transfer Pricing Guidelines (Fourth edition) 5 Contact us Luis Coronado Partner, Asean International Tax Services Leader Tel: luis.coronado@sg.ey.com Henry Syrett Partner, Transfer Pricing Services Tel: henry.syrett@sg.ey.com Stephen Lam Partner, Transfer Pricing Services Tel: stephen.lam@sg.ey.com Stephen Bruce Partner, Financial Services Tax Tel: stephen.bruce@sg.ey.com Jonathan Belec Tel: jonathan.belec@sg.ey.com Jow Lee Ying lee-ying.jow@sg.ey.com Sharon Tan Tel: sharon.tan@sg.ey.com 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 All Rights Reserved. APAC no ED None (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 Warren Chung Tel: hoonseok.chung@sg.ey.com Jiyeon Chang Associate Tel: jiyeon.chang@sg.ey.com Molvin Yiu Associate Tel: molvin.yiu@sg.ey.com