In March 2020, the Australian Taxation Office issued a tax assessment regarding transfer pricing to Rio Tinto’s aluminium division according to which additional taxes for $86.1 million must be paid for fiscal years 2010 – 2016. According to the assessment, Rio Tinto’s Australian subsidiaries did not charge an arm’s length price for the aluminium they sold to Rio Tinto’s Singapore marketing hub.
What if this happened to your business operations or clients in Singapore? Are you ready to face
such a huge penalty? How can you avoid this from happening?
A simple solution is to comply with the transfer pricing obligations in Singapore!
Did you know Singapore introduced compulsory transfer pricing documentation from the year of assessment (YA) 2019? A new penalty regime was included for non-compliance with the transfer pricing documentation requirements. Apart from penalties, taxpayers without contemporaneous documentation can face the following consequences:
What are the primary transfer pricing obligations in Singapore?
Obligation to comply with the arm’s length principle?
A Singapore taxpayer that enters into a controlled transaction (domestic or cross border) is obliged to comply with the arm’s length
principle regardless of the type of transaction or value. There is no exemption from following the arm’s length principle.
Obligations to prepare Transfer Pricing Documentation in Singapore
TP documentation is expected to be prepared by taxpayers who entered into related party transactions to show evidence on how the price is in line with the arm’s length principle.
The requirements to prepare transfer pricing documentation are specified in Section 34F of the Income Tax Act (“TP Documentation Rules”), which is effective from Year of Assessment 2019. As per the Singapore Transfer Pricing Guidelines, the transfer pricing documentation must be prepared for the related party transactions undertaken in a basis period when either of these two conditions is met:
The transfer pricing documentation in Singapore should include information of companies as prescribed in the TP Documentation Rules that covers:
Transfer Pricing Triggers for taxpayers in Singapore
The two main scenarios that would trigger transfer pricing in Singapore are an expansion of business operations outside of Singapore and domestic companies receiving tax incentives in Singapore subject to a different tax rate in Singapore.
Companies that have multiple facilities in countries other than Singapore are likely to trigger related party transactions in Singapore, whereby taxpayers are required to document such transactions and ensure compliance with the arm’s length principle.
Another scenario which triggers transfer pricing is domestic companies that receive tax incentives, e.g. global exporters, shipping and asset management. As the companies receive the incentive, their tax rates tend to reduce in Singapore. This gives rise to a difference in tax rate between domestic companies that entered into domestic related party transactions.
Deadline for preparation of transfer pricing documentation
TP documentation should be prepared by the filing due date of the tax return of the company to be accepted by IRAS as contemporaneous. Transfer pricing documentation for the financial year 2019 (YA 2020) should be completed latest by the time of lodgement of the tax return, i.e. 30 November 2020.
IRAS is particularly strict on the date of preparation of the TP Documentation, and it expects that taxpayers insert the date of
completion in the TP Documentation to evidence that it was prepared by the time the tax return is lodged.
IRAS imposes penalties for (1) non-compliance with arm’s length principle and (2) non-compliance with transfer pricing documentation requirement.
5% Non-compliance with arm’s length principle surcharge on TP adjustments regardless of whether there is tax payable.
Non-compliance with transfer pricing documentation of S$10,000
for the following offences: 1) Failure to prepare TP documentation by the time for the making of the tax return 2) Failure to prepare transfer pricing documentation with the details and in the form and content as prescribed by the TP Documentation Rules 3) Failure to retain TP documentation for a period of at least 5 years 4) Failure to submit TP documentation within 30 days from a request by IRAS 5) Providing TP documentation that is false or misleading
The non-compliance offence applies to every offence. Therefore, if a taxpayer does not prepare TP Documentation for one basis period
or more, the fine applies to each year. For example, a company that is required to prepare TP Documentation but fail to prepare it for YA
2019, YA 2020 and YA 2021. The non-compliance fine will be SG$10,000 per year for a total for SG$30,000.
How can we help?
Transfer Pricing Solutions Asia is a boutique transfer pricing firm that provides practical, proactive and cost-effective advisory to your clients.
We can assist your clients with the preparation of transfer pricing documentation locally and regionally, Master File and Local File, local, regional and global benchmarking.
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.
The Malaysian Finance Bill 2020 incorporates transfer pricing-related changes to the current Income Tax Act, 1967 (“ITA”). The changes permit significantly greater authority to the Malaysia Inland Revenue Board (“MIRB”) and re-emphasises the importance of transfer pricing compliance, with effect from 1 January 2021.
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.