The evolving transfer pricing landscape in Singapore

The transfer pricing landscape in Singapore has evolved over the past year, and for multinationals with local operations there is increasing scrutiny on the horizon. From broader requirements for tax transparency led by the Inland Revenue Authority of Singapore (IRAS), through more stringent transfer pricing guidelines and the contemporaneous transfer pricing documentation requirement to greater scrutiny of businesses via additional reporting of related party transactions as part of its tax compliance programme, every multinational with operations in Singapore is witnessing the impact.

On January 12 2017, IRAS released new transfer pricing guidance in the form of an e-tax guide – Transfer Pricing Guidelines 4th Edition (TPG4). In summary, TPG4 expands upon the guidance released by IRAS over the past two years. As with previous iterations, the content of TPG4 details transfer pricing concepts and methods, as well as how taxpayers should apply them. There are also sections on mutual agreement procedures (MAP) and advance pricing arrangements (APA), and the administrative details thereof.

Of importance, transfer pricing requirements such as the need for contemporaneous documentation to be completed by the taxpayer's filing due date remain unchanged. Compared to previous IRAS guidance however, most of the changes in TPG4 are focused in the following areas.

• Following last year's announcement that Singapore has joined the inclusive framework for implementing measures against base erosion and profit shifting (BEPS), TPG4 contains sections which are aligned to BEPS concepts. For example, in addition to endorsing the arm's length principle, IRAS subscribes to the principle that profits should be taxed where real economic activities generating the profits are performed and where value is created and will generally follow the OECD (Actions 8-10) 2015 final reports on aligning transfer pricing outcomes with value creation.

• The guidance detailing the treatment of risk has been significantly expanded. When analysing risks, taxpayers should:

a) Determine the risks assumed and the functions performed to manage that risk;

b) Demonstrate capacity to assume the risk and the capability to mitigate or control the risk; and

c) Reflect the consequences of risk assumption and the remuneration for risk management into the transfer price.

• Contents of transfer pricing documentation have been expanded to include, where applicable, disclosure on the group's existing APAs and tax rulings, as well as the filing of a country-by-country report.

• Updates to the sections on MAP and APAs include:

a) Commentary on the spontaneous exchange of information on cross-border unilateral APAs, which IRAS will agree to if certain conditions are met;

b) Some flexibility on the bilateral or multilateral APA roll-back years beyond the usual two year rollback period;

c) Commentary that IRAS is unlikely to take a position that will be at odds with that determined by Singapore tribunals and courts; and

d) Clarifications on the deadlines involved during the APA filing process.

• As an alternative to performing detailed benchmarking, taxpayers may opt to apply an indicative margin for committed related-party loans from January 1 2017 that do not exceed SGD 15 million ($10.8 million). The indicative margin, which is published on IRAS's website and updated annually, is currently 250 basis points for the 2017 calendar year. The margin must be added to an appropriate base reference rate such as the Singapore interbank offered rate (SIBOR) or others.

On October 24 2016, IRAS released administrative guidance reflecting its increasing focus on transfer pricing audits. As set out herein, the IRAS guidance makes clear that taxpayers are expected to adopt arm's length pricing for their related party transactions (RPT). IRAS audits taxpayers' compliance with transfer pricing documentation and arm's length pricing requirements as part of its compliance programme.

IRAS will be introducing a new RPT reporting requirement for companies with effect from a financial year beginning on or after January 1 2017. The RPT reporting requirement will provide IRAS with relevant information to better assess companies' transfer pricing risks and to improve on the enforcement of the arm's length pricing requirement. Companies will be required to complete the form for reporting of related party transactions (RPT Form) only if the value of RPT exceeds SGD 15 million.

IRAS guidance states that the values of the following categories of RPT are to be reported in the RPT Form: sales and purchases of goods; services income and expense; royalty and licence fee income and expense; interest income and expense; other income and expense; and year-end balances of loans and non-trade amounts. In addition, in the case of a company with cross-border related party sales or purchases of goods and services, it has to list the top five foreign related parties that it transacts with (by value of sales or purchases respectively) and provide their entity details including entity names, countries, relationship and amounts transacted.

On October 10 2016, IRAS released its e-tax guide on country-by-country reporting (CbCR). In general, CbCR requires multinational enterprise (MNE) groups with a Singapore-based ultimate parent to compile information on the group's profits from operations worldwide. IRAS's position on CbCR follows Singapore's decision to participate in the OECD's inclusive framework, for the implementation of measures against BEPS.

The CbCR requirements set out by IRAS closely follow but are not identical to those proposed by the OECD under BEPS Action 13. CbCR will only be applicable to MNE groups, where:

• The MNE group's ultimate parent entity is in Singapore;

• The consolidated group revenue in the preceding financial year is at least SGD 1.125 billion (broadly equivalent to the OECD's €750 million threshold); and

• The MNE group has subsidiaries or operations in at least one foreign jurisdiction.

Where the Singapore entity is not the ultimate parent, it will not be required to prepare a CbC report. This is because the foreign ultimate parent may be responsible for filing the CbC report in its home country. However, the Singapore company may still be involved internally, by providing the required information to its ultimate parent.

In addition, a year later than many OECD countries, affected Singapore MNE groups will need to submit the CbC report within 12 months from the end of any financial year which begin on or after January 1 2017. To address the transition issue arising from this, affected Singapore-headquartered MNEs may file a CbC report for a financial year beginning on or after January 1 2016 to IRAS on a voluntary basis.

CbC reports submitted to IRAS will be provided to tax authorities of countries with which Singapore has signed bilateral agreements for automatic exchange of CbCR information. CbC reports may be used by Singapore and other tax authorities in evaluating transfer pricing risks and other BEPS related risks.

Since joining the inclusive framework, Singapore has been taking steps to keep pace with OECD requirements. IRAS is continuing to monitor taxpayer compliance, and appears to be increasingly taking enforcement action via tax audits. There may be upcoming changes in tax legislation and new penalties. In line with this new level of scrutiny, IRAS has recently mandated CbCR and a form for reporting related-party transactions, both of which are to be filed in 2018 by Singapore taxpayers meeting certain conditions and thresholds.

With TPG4, IRAS continues its trend of stressing transfer pricing compliance in line with BEPS concepts, in particular the need for robust transfer pricing documentation. Accordingly, companies with significant related party transactions will need to carefully evaluate the extent of their transfer pricing compliance in a systematic manner. Tax transparency is expected to increase in Singapore. While new initiatives emerge on the horizon, Singapore taxpayers are becoming more aware of the changes and many are updating their tax business models and transfer pricing policies.

Geoffrey K. Soh

Partner KPMG in Singapore 16 Raffles Quay, #22-00, Hong Leong Building, Singapore 048581 Tel: +65 6213 3035 geoffreysoh@kpmg.com.sg Geoffrey Soh is the head of transfer pricing at KPMG in Singapore. He has 19 years of experience in providing transfer pricing advisory services to clients. Prior to joining KPMG in Singapore, he worked for more than five years in Canada at KPMG's Vancouver transfer pricing practice. In 2003, Geoff transferred to Singapore to develop KPMG's transfer pricing practices in the Asia Pacific region. Geoff has managed thousands of international transfer pricing engagements encompassing the compliance, planning, audit defence, and dispute resolution aspects of transfer pricing. He has helped clients in transactions relating to transfer of products, risks, services, intellectual property, and funds. In addition, he has led a number of advance pricing arrangements involving tax authorities from Asia, Europe, and the Americas. Under his leadership, KPMG in Singapore was recognised by the International Tax Review as the Singapore Transfer Pricing Firm of Year 2016. His viewpoints and articles on transfer pricing issues can be found in industry publications and the media.

Felicia Chia

Partner KPMG in Singapore 16 Raffles Quay, #22-00, Hong Leong Building, Singapore 048581 Tel: +65 6213 2525 fchia@kpmg.com.sg Felicia is a partner in the Transfer Pricing Practice of KPMG in Singapore and the Financial Services Transfer Pricing lead in Singapore. She has more than 13 years of experience in providing transfer pricing services to multinational clients in Singapore, the United States, and the Asia Pacific region. Felicia's experience includes advising on transfer pricing planning and documentation projects to determine proper arm's-length compensation for tangible property, intangibles, and intercompany services. In addition, she has assisted in the preparation of cost allocation studies for global/regional headquarters, as well as audit defence assistance and conducting transfer pricing risk analyses. She has also been involved in the negotiation and implementation of unilateral and bilateral advanced pricing arrangements and mutual agreement procedures. Felicia has also led several value chain management projects and advised clients on how to comply with OECD BEPS guidance. Felicia is a regular speaker on global transfer pricing and has published a number of articles in connection with transfer pricing issues. She was recognised as a leading adviser in Singapore in the inaugural 2015 and 2016 editions of the International Tax Review's "Women in Tax Leaders" guide.