Transfer Pricing IRAS Update - Indicative margins for related party loan
Inland Revenue Authority of Singapore (“IRAS”) has introduced the indicative margins for related party loans since the past few years whereby the indicative margins are updated at the beginning of each calendar year. The indicative margins are applied on each related party loan not exceeding S$15 million.
The indicative margins introduced by the IRAS for each of the years are provided in the table below:
If taxpayers choose to apply the indicative margin, they will apply the indicative margin on the appropriate base reference rate selected for the related party loan. For example:
- Taxpayer provided a floating rate loan of S$10 million to its related party on 1 February 2020.
- Taxpayer used SIBOR as the base reference rate for the related party loan
- Taxpayer chose to apply the indicative margin.
- The interest rate for the related party loan will be 2.00% plus the appropriate SIBOR rate.
Examples of base reference rates for floating rate loans are:
- SGD Singapore Inter Bank Offered Rate (“SIBOR”)
- USD London Inter Bank Offered Rate (“LIBOR”)
Examples of base reference rates for fixed rate loans are:
- SGD/USD swap rate
- Singapore Government Securities (“SGS”) yield
The indicative margin is not mandatory. It gives taxpayers an alternative to performing detailed transfer pricing analysis in order to comply with the arm’s length principle for their related party loans.
If taxpayers choose not to apply the indicative margin or if it is not applicable to them, they will have to apply an interest rate in line with the arm’s length principle and maintain contemporaneous transfer pricing documentation.
Details of the 3-step approach to determine the arm's length interest charges for related party loans and guidance on applying the
administrative practice for indicative margins on related party loans is provided in Part III, Section 13 of the Transfer
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