RFRs as base rates.

IRAS no longer publishes indicative interest rate to be added to Interbank Offered Rates (“IBORs”) (i.e. such as the Singapore Inter Bank Offered Rate (“SIBOR”) or the London Inter Bank Offered Rate (“LIBOR”)) as IBORs were phased out in 2022. Instead, the indicative interest rates are to be added to Risk Free Rates (“RFRs”) (i.e. such as Singapore Overnight Rate Average (“SORA”), Secured Overnight Financing Rate (“SOFR”), Sterling Overnight Index Average (“SONIA”)) that have replaced the IBORs.

IRAS’ indicative margins limit the choice of base rates that taxpayers had prior to 2022. From 2022 onwards, Singapore Taxpayers are allowed to use only risk free rates as a base rate for intercompany loans that uses IRAS’ indicative interest rates. If a Singapore Taxpayer decides to use non-risk free rate as a base rate (.e.g. interbank-offered rates) it will be required to set the interest rate for the loan via a methodology different to using IRAS’ indicative margin rate.

It is recommended that all legacy related party loans using IBOR as a base rate are renegotiate to use risk free rates as base rate. Guidance for the relevant IBOR/RFR depending on the currency of the loans are issued by the relevant governing bodies.

Intercompany agreements for ongoing intercompany loans falling below SGD 15 million in 2023 would have to be updated to remove reference to IBORs as a base rate and include RFRs as the base rate. If a Singapore taxpayer sets an intercompany loan with an interest rate using IBORs plus indicative interest rates, the taxpayer will be required to perform a complete Transfer Pricing (“TP”) analysis regardless of the amount of the intercompany loan. This would mean that a TP analysis to support the base rate and the indicative margin will be required to comply with Singapore transfer pricing provisions.

IRAS’ indicative margins represent a market interest rate available to Singapore Taxpayers that meet certain conditions. Once the conditions are met the Singapore Taxpayer can choose to use it or to refer to a different interest rate if the indicative interest rate published by IRAS does not represent the likelihood of default of the borrower. Hence, IRAS’  indicative margin rate is not mandatory.

If a Singapore Taxpayer chooses not to use IRAS’ indicative margin rate (despite meeting all the conditions to use it), the Singapore Taxpayers will need to perform a detailed transfer pricing analysis to comply with Singapore’s Transfer Pricing legislation.

Table 1: Below reflects the indicative margin for related party loans obtained or provided after 2022 that should be added to the new base reference rates (i.e., RFRs).

Table 1: Base reference rates for RFRs

The following example illustrates how Taxpayers can use the indicative interest rate for intercompany loans.