On 12 January 2017, the IRAS released the 4th edition of its Transfer Pricing Guidelines. The new edition incorporates BEPS Action 8-10: Final Reports on Aligning Transfer Pricing Outcomes with Value Creation.
The New Guidelines puts greater emphasis on risk analysis, introduces indicative interest rate margin for loan transactions, and adds the level of information required in the preparation of transfer pricing documentation, MAP and APA process. We have summarised below the key changes that can impact your Company.
The new edition emphasises that ‘Profits should be taxed where the real economic activities generating the profits are performed and where the value is created.' With this paragraph, the new edition includes the substance over form principle as a key consideration when applying the arm’s length principle.
For this reason, a Functional Analysis is now a crucial step in any transfer pricing study, and it should include all commercial and economic circumstances to demonstrate that profits earned by a taxpayer are consistent with the economic activities performed.
Ultimate parent entities in Singapore may now be obliged to submit CbC Report in addition to the regular transfer pricing documentation.
The new edition added new information to be included in the TP documentation. At the Group level, a list and a brief description of the group’s existing APAs and other tax rulings relating to the allocation of income among countries is to be submitted to explain the Group’s financial position. A similar request will also be made at the entity level to complete the description of taxpayers’ business. Also at the entity level, all adjustments made to achieve comparability must be presented.
The IRAS is still aware that transfer pricing obligation can be complicated and costly. Therefore, the safe harbours from the third edition have been also included in this edition. Additional safe harbours were included as follows: (1) Indicative margin for related party loans with total value of SG$15 million or less (2) Extension of the safe harbour to include guarantee fees (income and expenses) with a total value of SG$ 1 million or less.
The new indicative interest rate margin will be published in the IRAS’s website and will be updated at the beginning of every year. It intends to facilitate TP compliance for loans that comply with the following conditions:
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Singapore is often a preferred location for setting up headquarters as the door to conduct business in Asia. The IRAS has released its views on how Singapore HQ's should plan and implement their transfer pricing framework. Want to know more? Read our article with our views on IRAS TP Guidelines for Singapore HQs.
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The OECD guidance emphasised that, besides interest rates, all terms and conditions of the financing transactions (including the volume of debt) should be tested against the arm’s length principle.