Quantera Global, our Transfer Pricing partner firm, recently published an article on Singapore Transfer Pricing Guidelines. 

The Inland Revenue Authority of Singapore (“IRAS”) has released an updated second edition of its Transfer Pricing Guidelines (“TPG”) (dated 6 January 2015). The TPG contains sections on transfer pricing principles and fundamentals, transfer pricing administration including details of the IRAS’s transfer pricing consultation (“TPC”) program, how to avoid disputes and guidance on dispute resolution mechanisms such as advance pricing arrangements (“APA”) and mutual agreement procedures (“MAP”). The TPG also contains detailed examples of how certain methodologies can be applied, and sample letters and other guidance on APAs and MAP. Lastly, the IRAS reiterates its position of allowing a safe harbor mark-up of 5% in respect of routine support services, examples of which are noted in Annex C to the TPG, or that a cost pooling arrangement is permitted subject to satisfaction of certain conditions.

The updated second edition of the TPG is available here. So what does this all mean for Singapore taxpayers?

Preparation of transfer pricing documentation

Many taxpayers will simply want to know whether transfer pricing documentation is now required in Singapore. The IRAS view is stated in paragraph 6 of the TPG as follows:

it is important that taxpayers prepare and keep contemporaneous records to support the pricing of their transactions with their related parties. IRAS expects taxpayers to maintain appropriate and sufficient transfer pricing documentation as provided in this section as part of the record-keeping requirements for tax”.

In a footnote, the IRAS states that they will monitor the compliance level and they may, if necessary, introduce more stringent measures including specific record-keeping regulations for transfer pricing. Tax authorities are rarely satisfied at compliance levels in such cases, so we can expect more stringent measures to be introduced in the future.

Therefore, the IRAS have an “expectation” that taxpayers maintain transfer pricing documentation as part of the normal record keeping requirements for tax purposes. This is the same position taken by other tax authorities such as the Australian Taxation Office for example. The IRAS does appreciate the compliance burden for taxpayers, so there are some exceptions for low-value or low-risk transactions (see paragraph 6.19). For example, the IRAS does not expect taxpayers to prepare transfer pricing documentation where the amount of the related party transactions does not exceed SGD15 million for sales of goods, purchases of goods and loans, or SGD1 million for service fees, royalty income/expense and rental income/expense (assessed per type of transaction with all related parties per financial year). These thresholds may be lower than have been expected based on previous draft versions of the TPG. It is also worth noting that these thresholds do not apply to interest income/expense. This would imply that IRAS may take a more stringent view of the transfer pricing documentation compliance as far as inter-company loans or other financing transactions are concerned.

The consequences of failure

The penalty for failure to maintain transfer pricing documentation is as stipulated in section 94(2) of the Income Tax Act (“ITA”), which is a fine of up to SGD1,000. However, it would be dangerously naïve to claim that this would be the only penalty for failure to prepare transfer pricing documentation. Most other jurisdictions with transfer pricing regimes do not have large fines for failure to prepare transfer pricing documentation. The serious consequences for such failure come from an increased likelihood of transfer pricing audit by the tax authority, which in itself can be a very time consuming exercise for company management and very costly as well in terms of professional fees, and can lead to large additional tax payments on transfer pricing adjustments which often lead to double taxation of the same income. In extreme cases, for multinationals operating in jurisdictions outside Singapore, additional tax as well as interest and penalties on transfer pricing adjustments can push a company into receivership with serious consequences for company management.

These serious consequences are mentioned as “adverse consequences” in paragraph 6.21 where the IRAS states that failure to prepare transfer pricing documentation may lead to the IRAS making an upward transfer pricing adjustment under section 34D of the ITA, and/or the IRAS may not support the taxpayer in any MAP discussions, and/or the taxpayer may be barred from the APA program in the future. These are indeed serious consequences.

The transfer pricing documentation does not need to be submitted to the IRAS along with the tax return, but this is not a weakness as some commentators have claimed in the past. It is standard practice internationally. The documentation should be available for submission to the IRAS within 30 days of a request. This is not long enough to prepare transfer pricing documentation so it is clear that transfer pricing documentation should be prepared in advance of any request by the IRAS. Such documentation should be prepared at the latest so that it is finalized before submission of the tax return for the year in question. And it should be updated at least every three years, or whenever there is a material change to the operating conditions or financial performance. We recommend that the taxpayer carries out an annual update of the financial analysis of the taxpayer’s performance and that of the comparable companies if the taxpayer has carried out a benchmarking study.

The benefits of compliance

There are many benefits derived by taxpayers from the preparation of compliant transfer pricing documentation. Some of these are mentioned in paragraph 6.5 of the TPG, where the IRAS state that by preparing documentation, taxpayers will be able to demonstrate that:

  • They have conducted a thorough evaluation of their compliance with the transfer pricing rules before or at the time of filing their tax returns;
  • They can readily demonstrate that their transfer prices are determined in accordance with the arm’s length principle to manage domestic and cross-border risks;
  • They are able to defend their transfer pricing in the event of a transfer pricing audit by the tax authorities;
  • They help tax authorities to resolve transfer pricing issues under MAP; and
  • They facilitate tax authorities in the discussion and conclusion of APAs.

Particularly, keeping transfer pricing documentation in place is one of the key conditions, among others, for the IRAS to allow self-initiated year-end downward transfer pricing adjustments before tax filing (potentially resulting in less Singapore income tax payable). Hence, compliance would ensure that the taxpayer is able to implement a consistent transfer pricing policy to always leave a specific pre-determined arm’s length level of profit within Singapore by initiating year-end transfer pricing adjustments.

Compliance also enables the taxpayer to demonstrate that they have high standards of corporate governance, which helps to maintain good relations with tax authorities. This in itself helps to discourage tax and transfer pricing audits, as tax authorities would prefer to focus their audit activities on companies that are poorly prepared and have weak defenses to such attacks.

Compliance can also be a process to identify opportunities to implement a more efficient transfer pricing model, to potentially achieve a lower overall effective tax rate while at the same time reducing risks.

Mark-ups on services

While it is possible for taxpayers to avail themselves of the safe harbor mark-up of 5% on routine services, this does not mean that it is necessarily a good idea. The safe harbor is welcomed and can be a useful tool for some taxpayers in certain cases, but taxpayers will still have to have methods in place to determine the amount of the charge, such as the amount of the cost pool and the allocation and apportionment bases to split the cost reasonably between service recipients. The determination of an arm’s length mark-up is a relatively small part of the overall exercise.

Hence, taxpayers are better advised to carry out a benchmarking study to determine the arm’s length mark-up which is likely to be more than 5%. This will help to recognize more of the overall profit in Singapore, which is a relatively low-tax jurisdiction by Asian standards. The performance of a benchmarking study will also help to support the deductibility of the charge in the jurisdictions of the payers, even if the arm’s length mark-up is higher than the safe harbor of 5%. 

More stringent review on inter-company loans

Since the TPG leaves interest income/expense out of the transfer pricing documentation exemption thresholds, taxpayers should pay more attention to their inter-company financing arrangements to ensure that the interest income/expense is determined in accordance with the arms’ length principle, with an appropriate level of transfer pricing documentation. In applying the arm’s length principle, the TPG states that a loan can be in any form regardless of whether or not it is made through a written agreement. It essentially covers both inter-company credit facilities and inter-company credit balances arising from the normal course of buy/sell transactions which are left uncollected for an excessively long period of time.

Although there is no thin capitalization regime established by the TPG, in the event that taxpayers fail to adhere to the arm’s length methodology to determine the interest charges, IRAS will disallow a tax deduction for any interest expense in excess of the arm’s length amount. Hence, to avoid a disallowance of interest expenses which may give rise to double taxation in the likely event that a corresponding adjustment is not possible for the recipient of the interest, it is essential for the taxpayer to proactively document the arm’s length nature of their inter-company interest. This typically involves a search of specialized financial databases for comparable transactions between independent lenders and borrowers. 


The release of the TPG is another step forward in the transfer pricing regime of Singapore. If taxpayers fail to comply with the transfer pricing documentation requirements, then taxpayers will not meet the “expectations” of the IRAS and further action will be taken. However, the more important consequences of failure to act by taxpayers will be higher transfer pricing risk in Singapore and overseas, and this can have serious financial consequences for companies and management.

We would encourage taxpayers to be proactive in their management of their transfer pricing risks through the preparation of high quality transfer pricing documentation, including a regional or global Masterfile and local files for overseas jurisdictions, which is in line with the approach taken in the TPG and recommended by the OECD. In the course of preparation of such documentation, we are often able to identify opportunities for further risk mitigation or for reduction of the overall effective tax rate.

Hence, we consider that the benefits of compliance by taxpayers with the “expectations” of the IRAS for preparation of transfer pricing documentation clearly and vastly outweigh the costs.

For further information on this alert, please contact Quantera Global:

Douglas FoneSteven Carey and John Zhang