Singapore-based entrepreneurs, start-ups and ‘Small and Mid-size Entities’ (SMEs) should not fall into the trap of thinking that ‘transfer pricing’ only affects large Multi-National Entities (MNEs). Size is immaterial.
Singapore has been adopting the OECD’s complex Base Erosion Profit Shifting (BEPS) recommendations into its tax rules. These apply to both SMEs and MNEs, and the impact of many of the changes has led to increased governance and compliance costs.
A requirement for transfer pricing (TP) documentation is triggered simply by the existence of multiple facilities in more than one taxing jurisdiction. It is mandatory for a taxpayer to prepare TP documentation for a transaction undertaken by an applicable entity with a related party if its gross revenue is more than SGD10 million (USD7.5 million) for that basis period, or if TP documentation was required for the preceeding basis period.
There are a limited number of exemptions to the requirement to submit TP documentation. TP documentation is not required where:
- The taxpayer transacts (excluding related-party loans) with a related party in Singapore and both parties are subject to the same Singapore tax rates or exemptions
- A domestic loan is provided between the taxpayer and a related party in Singapore, and the lender is not in the business of borrowing and lending
- The taxpayer applies the ‘safe harbour’ 5% cost mark-up for the provision of any routine support service provided to entities within the group of the applicable entity
- The taxpayer applies the indicative margin for related-party loans in accordance with the administrative practice
- The related-party transactions are covered under an advance pricing arrangement (although annual compliance reports are still required under an APA)
- The total value of all transactions in the basis period between the applicable entity and its related entities does not exceed:
- SGD5 million in respect of the purchase or sale of goods (respectively) or for loans owned to, or by, related parties (respectively)
- SGD1 million in respect of all other categories of transactions including the provision of service income and expense, royalty income and expense, rental income and expense, and guarantee income and expense.
Every effort should be made to price the actual related party transaction as accurately as possible by using the five methods set out in the IRAS Transfer Pricing Guidelines, any other more appropriate methods or a combination of various methods. The arm’s length principle requires that the conditions between related parties should be examined and the effect on profits due to the relationship be eliminated.
The IRAS generally does not have a specific preference for any of the five prescribed methods outlined in the OECD Guidelines, and it stipulates that the TP method that produces the most reliable results should be selected and applied. To apply the arm’s-length principle, the 2018 Singapore Transfer Pricing Guidelines recommends a three-step approach:
- Conduct a comparability analysis
- Identify the most appropriate TP method and tested party
- Determine the arm’s-length results
Taxpayers that are not required to prepare TP documentation are still encouraged to do so in order to manage their transfer pricing risk. Failure to consider transfer pricing can impact on income and expenses and result in an incorrect assessment of tax liabilities in different countries or double taxation.
There are financial penalties for taxpayers that fail to submit TP documentation, or for late submission or incorrect disclosures. Taxpayers can be fined up to SGD10,000 if they fail to:
- Prepare contemporaneous TP documentation, if required to do so
- Retain the TP documentation for a period of at least five years from the end of the basis period in which the transaction took place
- Furnish the comptroller with a copy of the TP documentation within 30 days of receiving the notice to submit.
“Singapore SMEs need to navigate this new transfer pricing landscape smartly to ensure that their global tax footprint is commensurate with group operations and value creation across tax jurisdictions,” said Andrew Galway, Managing Director of Sovereign Management Services Pte Ltd. “SMEs should plan and prioritise documentation and meeting compliance deadlines, whilst also managing costs. They also need to be aware of any available ‘safe harbours’ and other exemptions.”