The Inland Revenue Authority of Singapore (“IRAS“) has issued the fifth edition of the Transfer Pricing Guidelines on 23 February 2018 and we summarise below the major amendment to the e-Tax Guide as follows:
- Additional guidance on related parties for the Singapore Permanent Establishment (“PE”)
The IRAS has clarified that for the purpose of attributing profits to the Singapore PE, the Singapore PE and other PEs outside Singapore of the non-resident person would be considered realted parties and therefore, the arm’s length principle applies to them when attributing profits to the SIngpaore PE. The profits to be attributable to the Singapore PE will be based on the profits that PE would have derived if it were to be a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions.
2. Arm’s length adjustment by IRAS – Section 34D(1A) of the ITA
Paragraphs 5.117 to 5.124 have been inserted in which to explain how IRAS were to be effected the transfer pricing adjustment pursuant to Section 34D(1A) of the ITA. Take note:
- Once a TP adjustment is made, the amount of income increased is treated as accruing in or derived from Singapore or received in Singapore from outside Singapore. If such an adjustment involves reducing a loss, the amount of loss reduced is treated as not having been incurred.
- Where a taxpayer engages in a transaction with its related party that independent parties would not undertake, IRAS would not disregard the transaction merely because the transaction may not be seen between independent parties without considering if the transaction has characteristics of an arm’s length arrangement.
- IRAS would disregard an actual related party transaction or replace it with an alternative transaction only in exceptional circumstances where: (a) the arrangements made in relation to the transaction lack the commercial rationality that would be agreed between independent parties under comparable circumstances; and (b) 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. TP Documentation Requirement has been rewritten
Paragraph 6 of the Guidelines has been rewritten due to the insertion of the new provision under Section 34F of the ITA.
4. Application of arm’s length principles for re-financing
For TP purposes, the IRAS considers a new loan from a related party will be obtained with the refinancing or extension of the tenture of the existing loan. In such a case, the taxpayer is required to establish the arm’s length terms and interest rate for the new loan following the guidance nd prepare TP documentation accordingly.
5. TP Surcharge and Penalty
The IRAS has provided explanations and examples of how the TP surcharge and penalty are imposed pursuant to Section 34E of the ITA.
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The Ministry of Finance has published for public consultation the Draft Income Tax (Amendment) Bill 2017 to incorporate 34 proposed legislative amendments, including:
1. Eight Budget 2017 changes, including
- Enhancement and extension of the Corporate Income Tax (CIT) rebate for Year of Assessment (YA) 2017 and YA 2018.
- Introduction of the Personal Income Tax rebate of 20% (capped at S$500) for YA 2017.
- Liberalisation of the tax deduction for payments under Cost Sharing Agreements (CSAs) for Research and Development (R&D) projects.
2. Amendment to introduce mandatory Transfer Pricing Documentation Requirement
To limit compliance burden for smaller businesses, the mandatory TPD requirement will only apply to businesses with a turnover exceeding $10m and significantly related party transactions. The majority of companies will not be affected, as this change will only be relevant to fewer than 5% of all companies, many of which have already been maintaining TPD.
3. 25 Other non-budget changes including
- Amendments relating to third-party voluntary contributions to the Medisave accounts of private sector employees and self-employed persons (SEPs).
- Changes to enable the Minister for Finance to implement Singapore’s obligations under the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS).
The consultation exercise will end on 10 July 2017.
If you have any questions regarding the above, contact us at firstname.lastname@example.org.
IRAS issued the fourth edition of the Transfer Pricing Guidelines (TPG) on 12 January 2017. The following amendments to the TPG have been made in this edition:
Enhancement on arm’s length principle and functional analysis
- Profits should be taxed where the real economic activities generating the profits are performed and where value is created. IRAS has provided guidance on the functional analysis of functions performed, assets used and risks assumed (FAR) in this guideline with examples.
Enhancement on guidance on TP documentation
- Amendment to make reference to the e-Tax Guide on Country-by-Country Reporting
- Amendment to include APAs and other tax rulings in the TP documentation at Group Level and Entity Level.
- Where taxpayer applies the indicative margin for related party loans.
Enhancement on the guidance on MAP and APA
Indicative margin for related party loan obtained or provided from 1 Jan 2017 onwards
- The indicative margin is published on IRAS’ website and will be updated at the beginning of each year.
- The indicative margin is not mandatory. It gives taxpayers an alternative to performing detailed transfer pricing analysis on their related party loans.
- Taxpayers may adopt a margin that is different from the indicative margin. This should be supported based on the guidance provided in this section to determine the arm’s length interest rates.
- Taxpayers can choose to apply the indicative margin to each related party loan that does not exceed S$15 million at the time the loan is obtained or provided. The threshold is based on the loan committed and not the loan utilised.
- The indicative margin is applicable to both Singapore-dollar denominated and foreign currency denominated related party loans. For related party loans denominated in foreign currencies, the threshold (in Singapore dollars) is to be determined based on the prevailing exchange rate at the time the loans are obtained or provided.
- For fixed rate related party loans, taxpayers can apply an appropriate swap rate as the base reference rate. For fixed rate related party loans denominated in Singapore dollars, besides an appropriate Singapore dollar swap rate, taxpayers can consider applying an appropriate Singapore Government Securities (“SGS”) yield17 as the base reference rate.
- For floating rate loans, some examples of base reference rates include the SIBOR and LIBOR.
- If taxpayers choose to apply the indicative margin for their related party loans, they are not expected to prepare TP documentation under section 6 for such loans. Such loans will also be excluded from the loan threshold of S$15 million under paragraph 6.19(f).
If you have any questions regarding the above, please contact email@example.com.
On 12 January 2017, IRAS has updated the content on Mutual Agreement Procedure (MAP) on its website and provided the following information:
- What is MAP?
- Who can apply for MAP?
- When to apply for MAP?
- How to apply for MAP?
In summary, MAP is a dispute resolution mechanism provided under the MAP Article in our Double Taxation Agreements (DTA), in which to allow IRAS and the competent authority (CA) of another contracting state to resolve disputes regarding the DTA application.
If you are a Singapore tax resident who suffers double taxation due to the transfer pricing adjustments effected by IRAS or a foreign CA, it is possible to request IRAS to resolve the dispute through a MAP. MAP is also available to a Singapore branch of a foreign company provided the MAP application is made in the jurisdiction in which the foreign company resides and it has concluded a DTA with Singapore.
If you have any questions regarding the above, please contact firstname.lastname@example.org.
With effect from Year of Assessment (“YA“) 2018, IRAS will be introducing a new Related Party Transaction (“RPT“) reporting requirement for companies which would assist IRAS in better assessing their transfer pricing risks and enforcing the arm’s length requirement.
New Reporting for RPT
Keeping in mind the additional compliance costs, companies are required to complete a new Form for Reporting of RPT (“RPT Form“) only if the value of RPT exceeds S$15 million. A company which meets the reporting criterion would need to state in its Form C whether the value of RPT as disclosed in its accounts exceeds S$15 million and if so, it is required to complete and submit the RPT Form together with its income tax returns for the relevant YA.
The Basis of Determining the Threshold
The value of RPT as disclosed in the accounts is the aggregate of
a. All amounts of RPT as reported in the Income Statement but excluding compensation paid to key management personnel and dividends; and
b. Year-end balances of loans and non-trade amounts due to/ from all related parties.
What are the items to be reported in the RPT Form?
The values of the following categories of RPT are to be reported in the RPT Form:
- Sales and purchases of goods
- Services income and expense
- Royalty and license fee income and expense
- Interest income and expense
- Other income and expense
- Year-end balances of loans and non-trade amounts
In the case of a company with cross-border related party sales or purchases of goods and services, it has to list the top 5 foreign related parties that it transacts with (by the value of sales or purchases respectively) and provide their entity details including entity names, countries, relationship and amounts transacted.
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