Singapore Transfer Pricing season is here!

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2 Singapore Transfer Pricing season is here!

Recently the tax authority issued a tax assessment regarding transfer pricing to Rio Tinto’s aluminium division according to which additional taxes in an amount of $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.

Is Rio Tinto Singapore ready to pay the additional price to is related party in Australia? Is Rio Tinto Singapore willing to accept the huge double taxation that will suffer if it pays the additional price? Are you ready to face such huge penalty? How can you avoid this from happening?

A simple solution to this would be to comply to the transfer pricing obligations in Singapore!
Did you know Singapore introduced compulsory transfer pricing documentation effective from the year of assessment (YA) 2019? A new penalty regime was also included for non-compliance with the transfer pricing documentation requirements. Here, we walk you through with the obligations required in Singapore. Be informed and make the right decisions.

Obligations to comply with Transfer Pricing in Singapore

Transfer Pricing documentation is expected to be prepared by taxpayers who entered into related party transactions, in other words controlled transactions to show evidence on how the pricing of the transaction 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 consistent with the rules prescribed by the Income Tax (Transfer Pricing Documentation) Rules 2018 (“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 gross revenue from trade or business for the basis period concerned is more than S$10 million; or The company is required to prepare transfer pricing documentation for a previous basis period.

The transfer pricing documentation in Singapore should include information of companies as prescribed in the TP Documentation Rules that covers:

Group Analysis (also known under OECD as Master File)
Entity Analysis (also known under OECD as Local File)

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, resulting difference in tax rates in Singapore.

Companies that have multiple facilities in countries other than Singapore are likely to have 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 in relation to the domestic companies that receive tax incentives. The tax incentives are catered for global exporters, shipping entities and asset management arrangements among others.

As the companies receive the incentives, their tax rates tend to reduce in Singapore. This then gives rise to a difference in tax rate between domestic companies dealing with related party transactions.

Deadline for preparation of transfer pricing documentation

The transfer pricing documentation should be prepared by the filing due date of the tax return of your company that is 30 November 2022. The TP documentation should be contemporaneous to the related party transactions. Thus, it should be prepared prior or at the time of entering the transaction and in any case no later than at the time of completing and filing the tax return for the financial year in which the transaction takes place.

For instance, transfer pricing documentation for the financial year 2022 should be ready latest by the time you lodge the tax return for the financial year 2022 i.e. 30 November 2023.

Penalties

In order to ensure compliance with the transfer pricing obligations in Singapore, IRAS imposes penalties for (1) non-compliance with arm’s length principle and (2) non-compliance with transfer pricing documentation requirement. If a taxpayer has contemporaneous documentation Singapore Tax authority will consider a remission of penalties which the taxpayer an request providing evidence on how the transfer pricing documentation was prepared before the lodgement of the tax return.

Non-compliance with arm’s length principle

In the course of transfer pricing audit or review by IRAS, IRAS may make transfer pricing adjustments to increase a taxpayer’s income or reduce its deduction or loss if the taxpayer has understated its profits due to non-arm’s length related party transactions. Once the transfer pricing adjustments are finally made by IRAS, such adjustments are subject to a surcharge of 5% regardless of whether there is tax payable on the adjustments.

Non-compliance with transfer pricing documentation requirement

A company can be convicted to a fine not exceeding S$10,000 for not preparing transfer pricing documentation when filing for tax return, providing details that are false or misleading or different from the form and content prescribed, not retaining the documentation for a period of at least 5 years from the end of the basis period in which the transaction took place or not submitting transfer pricing documentation within 30 days starting from the date of the written notice/registered post requiring the company to submit the transfer pricing documentation.

How often should I review the transfer pricing documentation?

In Singapore, taxpayers are required to review and update their transfer pricing documentation annually to support the tax computation and return lodgement every year.

How can we help?

Transfer Pricing Solutions is a boutique transfer pricing firm who works directly with your team, applying our experience and expertise in transfer pricing to provide, prepare, document and assist in defending your international related party transactions. Our purpose is to make a difference in the service we provide to our clients by being practical, proactive and cost effective.

We can assist your clients with the planning and preparation of transfer pricing documentation, country by country (CbC) reporting, comprehensive transfer pricing policy, performing global and local benchmarking comparable searches, providing training designed for CFOs and tax teams and performing transfer pricing controversy and audits.

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