Transfer pricing is a common topic for audits, given its inherent subjectivity. The Inland Revenue Authority of Singapore (IRAS) transfer pricing audit is termed “Transfer Pricing Consultation” where the IRAS generally reviews for:
- The adequacy and timeliness of the taxpayers' transfer pricing documentation;
- The appropriateness of the taxpayers' transfer pricing methods; and
- The arm's length outcome of the taxpayers' transfer pricing studies.
Based on the IRAS Transfer Pricing Guidelines (TP Guidelines), the risk indicator upon which IRAS selects taxpayers for a transfer pricing audit are as follows:
- The value of related party transactions;
- The performance of the business over time; and
- The likelihood that taxable profits may have been understated by inappropriate transfer pricing.
The TP Guidelines also list further examples of circumstances in which transfer pricing risks may be considered high. Examples include transactions with cross-border related parties that are of large value relative to the other transactions of the taxpayer, use of intellectual property, proprietary knowledge or other intangibles in the business, and volatility in royalty payments and expenses or one-off/ad-hoc post-year end transfer pricing adjustments. Apart from these, the OECD describes higher risks where:
- There are transactions with tax havens (or countries with very low statutory or effective tax rates) in which the group operates;
- With country-by-country reporting, where effective tax rate is significantly different from the standard tax rate;
- Where the counterparty to the transaction is located in countries in which the tax authority is known to be aggressive in respect of transfer pricing or where OECD methodologies are not followed;
- The profit margin of the local entity is low in reference to that company’s activities within the group or very much lower compared to the group’s effective tax rates.
It is prudent to perform a self-assessment to spot transfer pricing risks early and take remedial action proactively. The self-assessment checklist should be based on three main areas:
- Identify and understand intercompany transactions;
- Country's tax and audit environment; and
- Compliance levels.
Avoiding transfer pricing disputes
Upon identification of transfer pricing risks, preemptive measures should be taken. Examples include commissioning a transfer pricing analysis or policy for certain transactions, putting in place proper documentation and adjusting the transfer pricing methodology or analysis to fit the functional profile.
Another method would be to approach one or more tax authorities for an Advanced Pricing Arrangement (APA). An APA is arrangement between IRAS and the taxpayer or the relevant foreign competent authority to agree in advance an appropriate set of criteria to ascertain the transfer pricing for a taxpayer’s related party transactions for a specific period of time. The APA process can be lengthy and costly in terms of advisor fees. However, such costs could be less taxing than the potential costs of being involved in a transfer pricing dispute.
Resolving transfer pricing disputes
If an entity faces transfer pricing adjustment, there are two options for cross-border transactions:
- Appeal to the income tax board of review and the courts subsequently.
- Consider using the Mutual Agreement Procedure (MAP) provision, should both countries have MAP facilities. Under the MAP process, IRAS, as Singapore’s designated Competent Authority and the relevant foreign Competent Authority will negotiate and resolve disputes regarding double taxation arising from the transfer pricing audit. The MAP route also applies to adjustments raised by the other authority.
Both APA and MAP can be lengthy and costly in terms of advisor fees but are not mandatory. The TP Guidelines provide very helpful guidance on the APA and MAP procedures and forms and IRAS has a good record of timely resolution of APA and MAP cases. The amounts involved in transfer pricing can be huge, and it is best to manage global transfer pricing projects early on to prevent any unnecessary cash outflows arising from transfer pricing adjustments.
Singapore Master Transfer Pricing Guide 2018/19 is an authoritative guide that provides clear and simple explanation of concepts using practical examples, infographics and case studies. It also comes with questions and recommended answers designed for practitioners and students.
This inaugural edition gets you up to speed with the latest developments such as the new Inland Revenue Authority of Singapore Transfer Pricing Guidelines (Fifth Edition) and Country-by-Country Reporting Guidelines (Third Edition) as well as Transfer Pricing Rules effective YA 2019.
The aim of this book is to provide company directors, business owners, CFOs, financial controllers, tax and finance professionals, professors and students with a solid foundation and practical appreciation of transfer pricing.