The formal introduction of transfer pricing (TP) regulations into Singapore legislation began in 1947, and since then TP regulations have been subjected to different amendments. The Singapore TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines). Currently, the transfer pricing rules in Singapore are governed by Section 34D of the Singapore Income Tax Act 1947 (ITA).
Arm’s Length Principle
Singapore follows the arm’s-length principle, as outlined in Section 34D of the ITA and the OECD Transfer Pricing Guidelines, to ensure related-party transactions are conducted as if between independent parties. Section 34D allows the Controller to adjust income, deductions, or losses if related-party transactions are not at arm’s length, making adjustments to ensure income is Singapore-sourced and chargeable.
In essence, the Arm’s-Length Principle requires that transactions between related parties (businesses within the same group) be priced as if they were between independent parties, ensuring fairness and preventing manipulation of prices to avoid taxes.
To make this work, the Inland Revenue Authority of Singapore has suggested an easy step-by-step approach:
- Comparability Analysis: Identify and compare the conditions of related-party transactions with independent-party transactions, ensuring any differences are addressed. Choosing a Transfer
- Pricing Method: Identify the best transfer pricing method (such as cost plus or market price) and determine the “tested party” (usually the less complex one).
- Determine Arm’s-Length Result: Ensure that the price of the related-party transaction matches the price that independent parties would agree upon under similar circumstances.
Related Party Definition
A related party is someone who has control over another person or is controlled by them, either directly or indirectly. It also includes cases where both parties are controlled by the same person. The Singapore Income Tax Act does not specify any percentage of control or ownership required to define a related party under section 13(16).
Transfer Pricing Methods
There are no specific rules for transfer pricing methods in Singapore’s domestic law. However, the Singapore Transfer Pricing Guidelines outline the methods taxpayers can use for pricing transactions with related parties. Those methods are identical to those in the OECD guidelines for transfer pricing, and their selection is based on the most appropriate method. Singapore also has some guidelines that help people who pay taxes choose the right way to set a fair price for dealings that have another company or related persons as buyers or sellers following the OECD’s guidance.
Comparability Analysis
In Singapore, there is a preference for using local (domestic) comparable over foreign ones. Taxpayers must try to find local comparables for their analysis. If they can’t find enough reliable local comparables, they can look for regional comparables instead. When doing this, they must explain how they selected the comparable in their transfer pricing documentation. In addition, Singapore does not allow for the usage of secret comparables.
Documentation Requirements
- Country-by-country Reporting (CbC Reporting) – Taxpayers with gross revenue above SGD 10 million must prepare transfer pricing documentation starting from the 2019 assessment year (for the 2018 financial year). The documentation must be ready by the time of filing the tax return and must be submitted to the Inland Revenue Authority of Singapore (IRAS) within 30 days upon request. The documentation must be in English or translated into English. The required documentation includes a country-by-country report, and it should follow the OECD’s guidelines. Even if not required, taxpayers are encouraged to follow the guidelines when preparing their transfer pricing documentation.
Country-by-Country Reporting
Starting from January 1, 2017, Country-by-Country Reporting (CbCR) applies to Singapore-based multinational companies, as per the following:
- Singapore-headquartered MNE groups with consolidated revenue of at least SG$1,125 million must file CbC reports if the ultimate parent entity is resident in Singapore and meets specific conditions regarding tax residency and permanent establishments.
- The CbC report format includes three tables detailing income, taxes, employees, assets, entities, and additional information relevant to the MNE group’s operations across different jurisdictions.
- The ultimate parent entity must submit the CbC report electronically to the Comptroller within 12 months from the end of the financial year.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA)
Advance Pricing Arrangements (APAs) are a system that keeps companies from getting into disputes too often, and they set the prices of business deals involving related companies. Singapore’s Tax Authority and taxpayers or partners from other Agreements Against Double Taxation can work together to settle beforehand pretty clearly how they’ll do price division for a specified time frame. There are three types of APAs available in Singapore:
A unilateral APA is an agreement between IRAS and the taxpayer alone, without the involvement of other tax authorities.
In contrast, a bilateral APA is an agreement between IRAS and a DTA partner, addressing transfer pricing between entities in their respective jurisdictions.
A multilateral APA involves IRAS and two or more DTA partners, covering transfer pricing between entities in their respective jurisdictions.
A unilateral APA offers a lower level of certainty compared to bilateral or multilateral APAs. This is because the terms of a unilateral APA are not binding on the foreign tax authority, which is not a party to the agreement. If Singapore does not have a DTA with the other tax jurisdiction, the unilateral APA falls under the framework of Singapore’s Advance Ruling System, and a fee will be charged. However, if Singapore does have a DTA with the other jurisdiction, the unilateral APA is issued outside the Advance Ruling System, and no fee is charged.
For cross-border unilateral APAs, IRAS will exchange information with the tax authorities of the jurisdictions where the related parties reside, as well as with the jurisdictions of the taxpayer’s ultimate and immediate parent entities.
Mutual Agreement Program (MAP)
MAP (Mutual Agreement Procedure) is a way for IRAS and foreign tax authorities to resolve disputes when taxpayers are not taxed according to a DTA (Double Taxation Agreement). Typically, this process involves two tax authorities, but sometimes it can involve more.
Some DTAs will enforce binding arbitration as a mechanism to resolve issues if the tax authorities work out disagreements. If a taxpayer writes formally and requests it, a panel will step in after time has passed. The decision of this panel usually stands final for the IRS and IRS staff and just can’t be overtly changed by them. The tax office will draft an agreement laying out how an arbitration process will work. After the DTA (which usually stands for Double Taxation Agreement, these are big fancy documents) is out there, that same agreement we’re signing off business style will be right alongside that.
Approach to Transfer Pricing Audits
The Transfer Pricing audits in Singapore focus on ensuring that transactions between related parties are conducted at arm’s length, meaning the prices reflect those that would be charged between independent entities under similar conditions. The guidelines published by the tax authority emphasize the importance of maintaining proper documentation to support the pricing of these transactions and reduce the risk of audits and subsequent transfer pricing adjustments. IRAS conducts audits to verify compliance with the arm’s length principle, and any discrepancies can result in double taxation. To mitigate this, businesses can engage in mutual agreement procedures (MAP) or advance pricing arrangements (APA) with tax authorities, providing a framework for resolving disputes and preventing tax distortions.
Penalties
If taxpayers don’t prepare transfer pricing documentation as required by section 34F of the Income Tax Act, they could be fined up to SGD 10,000.
Additionally, if the Inland Revenue Authority of Singapore (IRAS) makes a transfer pricing adjustment to a taxpayer, the taxpayer will be charged a 5% surcharge on the amount of the adjustment.
Taxation at a Glance
The main sources of tax law in Singapore include the Income Tax Act, Goods and Services Tax Act, Property Tax Act, Stamp Duties Act, regulations, and case law. The official name of the Singapore tax authority is the Inland Revenue Authority of Singapore.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Income Tax | 17% |
VAT | 9% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 15% |
Withholding tax on royalties to non-residents | 10% |
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