IRAS Issue COVID-19 Guidance on Singapore Transfer Pricing

BlogIRAS Issue COVID-19 Guidance on Singapore Transfer Pricing

IRAS Issues COVID-19 Guidance on Singapore Transfer Pricing.

The Covid-19 pandemic has triggered the most severe recession in 2020 and is causing enormous damage to the world economy. The economic downturn will impact a group’s transfer prices, analysis and documentation, more so with the BEPS Action Plans in place and the high level of transfer pricing scrutiny across the globe.

A few months ago, tax and transfer pricing practitioners (including our firm) provided feedback on the potential measures for the Inland Revenue Authority of Singapore (IRAS) to consider as taxpayers in Singapore keep facing uncertainty on how to manage their transfer pricing risks as a result of COVID 19.

The early released of IRAS’ guidance on Singapore Transfer Pricing is very welcoming by the industry. The new guidance will help taxpayers to plan and be more prepared to manage their transfer pricing risks and the changes required on transfer pricing policies, benchmarking analysis and transfer pricing documentation.

We are also delighted to see some of our proposed measures included in IRAS’s COVID 19’s guidance. We especially welcome the measure that allows Singapore taxpayers to perform multi-year analysis for Year of Assessment (YA 2021), i.e. financial year ends 2020 to spread the impact of COVID-19 on profitability for Singapore taxpayers.

We have summarised the key areas addressed by IRAS below:

  1. How will IRAS assess the economic impacts of COVID 19 on transfer pricing arrangements?
  2. What type of economic analysis will IRAS expect to support the arm’s length nature of transfer prices?
  3. What are the implications of COVID 19 for Advance Pricing Arrangements (APAs)?

1. How will IRAS assess the economic impacts of COVID 19 on transfer pricing arrangements?

IRAS is prepared to evaluate the facts and circumstances of taxpayers who are operationally and financially hit by the COVID-19 pandemic. We summarised the key changes to the transfer pricing analysis below:

Key takeaway: Document and gather evidence to support any changes to, or impacts on your business as a result of COVID-19.

Industry Analysis A clear explanation of how COVID 19 impacts directly the taxpayer
Functional Analysis Functional analysis of the Singapore taxpayer and related parties before and after COVID-19 to support recharacterization of entities. 
Functional analysis that supports which entities in the group made decisions relating to the management of risks relating to COVID-19.
Contractual arrangements

Effects on contractual obligations and explanation on variation, amendment or termination of contract terms and conditions.

Evidence of impact

Comparison of budgeted (pre COVID-19) and actual results to show evidence on variances.
Evidence of government support and regulations

Details on government assistance received from the government.
Explanation of government regulation that impacted the company.

2. What type of economic analysis does IRAS expect to support the arm’s length nature of transfer prices?

IRAS is prepared to accept multi-year analysis to spread the impact of COVID 19 for YA 2021 (financial year-end 2020).

Key takeaway:
Calculate and document early the multi-year analysis to ensure compliance with arm’s length principle and if needed, perform appropriate adjustments early.

Detailed three year profit or loss analysis

Perform a three-year analysis early to show whether COVID-19 has negatively impacted the Singapore taxpayer in YA 2021.
Comparison with benchmarking analysis A benchmarking and comparability analysis to compare the three-year analysis vs the arm’s length result.
TP Adjustments

If adjustments are required, they will need to be performed as early as possible and ideally before the audit starts (for taxpayers subject to audit) for financial year end 2020.

3. What are the implications of COVID 19 for Advance Pricing Arrangements (APAs)?

For new and APAs and renewals, IRAS welcome applications if the Singapore taxpayer has not been impacted significantly by COVID 19. IRAS welcomes early discussion and engagement.

For APA applications currently under review, the Singapore taxpayer need to communicate early in transfer pricing implications arising from COVID 19 such as change of functional profile of the covered entities.

How can we help?

Transfer Pricing Solutions is here to help you manage your Transfer Pricing risks and save on your compliance costs, offering affordable fees on transfer pricing planning and compliance.

We can assist with:

Check out our blogs to help you understand how we can help you during the COVID-19 and beyond.

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