Singapore Transfer Pricing Overview

Posted 28/9/2018 by Liz Tookey

Singapore requires compliance of the arm’s-length principle for pricing of related-party transactions involving goods, services and intangible property. The Inland Revenue Authority of Singapore (“IRAS”) has increased focus on transfer pricing (“TP”) issues and also significantly stepped up related enforcement activities in recent times. Questions regarding transfer pricing of related-party transactions are also now a regular feature of information requests from the IRAS.

Section 34D of the Singapore Income Tax Act (“SITA”) empowers the IRAS to make tax adjustments in cases where the dealings between related parties do not reflect arm’s length conditions. On 6 January 2015, the IRAS released the second edition of the Transfer Pricing Guidelines (“the Guidelines”), an update to the first edition published on 23 February 2006 to provide more comprehensive guidance on the application of TP rules in Singapore.

Section 33 of the SITA contains general anti-avoidance rules that allow IRAS to disregard or revise any arrangement in order to counteract a tax advantage obtained under an existing arrangement. The rules are applicable to any scheme, agreement or transaction as a whole, as well as the component steps by which the arrangement was carried into effect. The anti-avoidance rules do not apply if the arrangement is conducted for bona fide commercial reasons and the reduction or avoidance of tax is not one of its main purposes.

Section 34D of the SITA empowers the IRAS to make tax adjustments in cases where the dealings between related parties do not reflect arm’s-length conditions. Section 53(2A) of the SITA applies where a resident and a non-resident are closely connected and conduct business in such a way that produces profits to the resident that are less than the ordinary profits that might be expected to arise in such transactions. In such a case, the IRAS may assess and charge the non-resident tax in the name of the resident, as if the resident were an agent of the non-resident. Where the ‘true’ amount of the profit is not readily ascertainable, the IRAS have the power to assess tax on a ‘fair and reasonable’ percentage of the turnover of the business done between the resident and the non-resident.

The IRAS also has the power to simply refuse to accept a tax return as filed and assess tax based on taxable income determined according to the best of its judgement. The Guidelines also set out the requirement of Singapore taxpayers to comply with the arm’s‑length principle for related-party transactions and the second edition Guidelines now set out clearly the IRAS expectation of Singapore taxpayers to prepare and maintain robust documentation, including contemporaneous TP documentation and the types of information to be found in them, to demonstrate their compliance with the arm’s-length principle for related-party transactions, as well as spell out the adverse consequences that Singapore taxpayers could face if they are found to have insufficient documentation in this regard.

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