Chapter Twenty-Five

Singapore Transfer Pricing Consultation Process

The Inland Revenue Authority of Singapore (IRAS) provided taxpayers with a Transfer Pricing Consultation study on July 30, 2008, revising the study on August 6, 2008 (the study). The 2008 study implements the February 2006 Transfer Pricing Guidelines Circular.1 The IRAS issued the study primarily to buttress the documentation facets of the Transfer Pricing Guidelines Circular. This study explains how the IRAS carries out its transfer pricing “Consultation.” Note that an IRAS “consultation” can result in a full-fledged tax audit plus professional advice provided by the Singapore tax authorities to the taxpayer.

BACKGROUND

The IRAS issued its Transfer Pricing Guideline Circular in February 2006, doing so to provide guidance to Singapore taxpayers on applying the arm’s length principle.2 The IRAS guidelines provide Singapore taxpayers with key concepts and with guiding principles, with the purpose of preparing and maintaining adequate documentation. The principal objective of preparing and maintaining transfer pricing documentation is to place the taxpayer in a position in which the taxpayer can readily demonstrate that it has “exerted reasonable efforts” to ensure that its transfer prices are consistent with the arm’s length principle.3 Section 4 in the 2006 circular provides specific documentation guidelines.

The IRAS has formalized its consultative process with Singapore taxpayers in its issuance of the study.4 The IRAS will apply the consultation process to its taxpayers with taxpayers it selects. The IRAS’s rationale in issuing the study is “to further help taxpayers comply with the arm’s length principle in related party transactions.” The IRAS intends to achieve three objectives as part of this consultative process. The IRAS will:

1. Assess the taxpayer’s transfer pricing risks
2. Review the taxpayer’s transfer pricing documentation
3. Provide recommendations to the taxpayer for managing risks

OBJECTIVES OF THE TRANSFER PRICING CONSULTATION

The IRAS imposes three objectives on the taxpayer:

1. To exert “reasonable efforts” to undertake sound transfer pricing analysis
2. To ascertain arm’s length pricing
3. To demonstrate that the taxpayer has undertaken those efforts

Despite the IRAS’s general expectations as to taxpayer behavior, the IRAS will monitor the taxpayer’s ease of compliance and the taxpayer’s level of compliance with the guidelines.5

The Transfer Pricing Consultation is a process designed for the IRAS to encourage taxpayers to further assist and advise the taxpayers as to the guidelines themselves and to the potential risks that the IRAS and the taxpayer identify. The IRAS states that the Transfer Pricing Consultation has two objectives:6

1. To assess the level of compliance with the transfer pricing guidelines7
2. To identify potential areas in which the IRAS can further facilitate and advise taxpayers as to good transfer pricing practices8

ISSUANCE OF THE TRANSFER PRICING QUESTIONNAIRE

The IRAS is in the process of sending questionnaires to selected taxpayers that have a significant number of related party transactions or appear to have a significant number of related party transactions.9 The IRAS is focusing primarily on transactions with overseas parties. The IRAS is looking at the volume of transactions over time. However, the consultation fails to provide guidance as to the level that would constitute a “significant amount” to engender the IRAS’s involvement with a taxpayer.

The taxpayer must provide the following transfer pricing information to IRAS through a questionnaire:10

  • The principal activities of the business and a detailed description of the business’s products or services
  • The group of affiliated entities and other entities
  • The types of transfer pricing methods the company determines; the taxpayer must provide the values of all transactions with each related party
  • A detailed extent of the documentation the taxpayer obtains, pursuant the Annex G of the guidelines

The IRAS is to evaluate the taxpayer’s response to the questionnaire. Based on these taxpayer responses, the IRAS will then determine whether it should undertake a transfer pricing consultation for the taxpayer.11

TRANSFER PRICING CONSULTATION

The transfer pricing consultation process entails the IRAS’s field office visit to the taxpayer. The stated purpose of the field office visit is to:12

  • Provide a better understanding of the taxpayer’s business
  • Provide a physical review of the documentation, if necessary

Based on this field office review, the IRAS might (or might not) decide to proceed with a transfer pricing consultation with a taxpayer. If the IRAS does proceed with a transfer pricing consultation with a taxpayer, the IRAS will seek written information for the taxpayer as to a number of matters.13

  • After the IRAS reviews the taxpayer’s responses to the questionnaire, the IRAS may require the taxpayer to provide additional information or clarification to those responses.
  • The IRAS can request that the taxpayer provide copies of documents, such as contracts or agreements.
  • The taxpayer can indicate a proposed date at which IRAS officers will come to the taxpayer’s business premises.
  • The IRS can provide to the taxpayer the contents of the taxpayer’s presentation during the field office visit.

The IRAS consultation rules set parameters for the IRAS’s visit to the taxpayer’s facilities. The taxpayer is to make available the relevant personnel to make a presentation on:14

  • The business structure of the business
  • The activities and mode of operations of the business
  • Explanations as to how certain factors in its business or industry affect the business’s operating results

In particular, the taxpayer is to provide these explanations to the IRAS as to its business operations:

  • The related party transactions in detail
  • How the business prices these transactions
  • How the business prices its transactions compared with transactions with unrelated parties

The IRAS reserves for itself the power to review the manner in which the company prepares and maintains its documentation and the contents of the documentation being prepared.

The IRAS is to provide the taxpayer with its opinion as to the following issues based on the IRAS’s findings:15

  • Whether the taxpayer’s documentation is adequate and timely.
  • Any reservations the IRAS might have regarding the taxpayer’s transfer pricing methodology.
  • The IRAS is to review the taxpayer’s transfer pricing risk and provide an assessment of that risk, taking into account the commercial realism of the company’s business results and the quality of the company’s documentation.
  • The IRAS is to provide advice to the taxpayer as to how the taxpayer can improve its documentation or methodology.

The transfer pricing consultation is “a process designed to further facilitate taxpayer’s compliance with the transfer pricing guidelines.”16 Nevertheless, the taxpayer’s transfer pricing might deviate significantly from the IRAS’s opinion of arm’s length pricing. In that event, the IRAS will express its position and will “make arrangements with the taxpayer to review the issue at an appropriate time.”

The transfer pricing consultation process is designed to push the taxpayer toward tax preparation and self-review. Accordingly, the taxpayer with significant related party transactions should ensure that it has a system in place to prepare and maintain adequate and timely transfer pricing documentation, doing so to demonstrate compliance with the arm’s length principle.17 The taxpayer can use Annex G of the 2006 guidelines as a general checklist of the usual types of information as to such documentation. The taxpayer can use this information to help prepare its documentation or conduct a self-review of its documentation. Taxpayers and others can reach the IRAS at [email protected] or call 63513367 in Singapore.

TRANSFER PRICING QUESTIONNAIRE

The IRAS provides the Singapore taxpayer with a sample questionnaire but reserves the right to change the format and contents of the questionnaire from time to time or to customize the form for specific taxpayers. The IRAS is to indicate the taxable year of the entity. The taxpayer is to provide this information to IRAS:

1. Principal activities of the business.
2. Detailed description of the business’s products or services.
3. Ultimate holding company, including its country of incorporation.
4. Immediate holding company, including its country of incorporation.
5. Chart of accounts for the group of companies to which the company belongs, from and including the ultimate holding company to the direct and indirect subsidiaries and associated companies of the company and other related companies. The chart is to include companies with which the company entered related party transactions.
6. The taxpayer is to indicate its sales to unrelated parties, specifying the currency the taxpayer uses.
7. The taxpayer is to indicate its sales to related parties, specifying the name of each related party, the country or domicile, the description of the goods or services provided, and the amount of applicable currency.
8. The taxpayer is to indicate its purchases to unrelated parties, specifying the currency the taxpayer uses.
9. The taxpayer is to indicate its purchases from related parties, specifying the name of each related party, the country or domicile, the description of the goods or services provided, and the amount of applicable currency.
10. The taxpayer is to indicate its other income and gains from related parties, specifying the name of each related party, the country or domicile, the description of the goods or services provided, and the amount of applicable currency.
11. The taxpayer is to indicate its other income and losses from related parties, specifying the name of each related party, the country or domicile, the description of the goods or services provided, and the amount of applicable currency.
12. The IRAS seeks information as to transfer pricing inquiries in other jurisdictions, including audit and tax adjustments in any foreign tax jurisdiction. The taxpayer is to provide the details of the affected transactions, current status and issues, and action taken by the related party.
13. The taxpayer is to indicate the extent of the company’s documentation in Annex G, specifying the noncompliance, partial compliance, or completion as to each category:
  • General information concerning the group:
    • Worldwide organizational structure
    • Group’s line of business and so forth
    • Group’s business models and strategies
    • Principal business of each party
    • Business relationships or related parties
    • Consolidated financial statements
  • Information as to each related party in Singapore:
    • General information
    • Entity’s line of business and so forth
    • Entity’s business models and strategies
    • Entity’s functions, risks, and assets
    • Entity’s financial statements
  • Transactions between the company and all related parties:
    • All transactions taking place with related parties
    • The party’s contracts and agreements
    • The party’s segmented financial accounts
  • Transfer pricing analysis:
    • Taxpayer’s choice of tested party, and the reasons why the taxpayer made that choice
    • Comparables the taxpayer uses and the company’s screening criteria
    • Taxpayer’s comparability analysis
    • Taxpayer’s adjustments to achieve comparability
    • Transfer pricing method the taxpayer selects and the taxpayer’s rationale in making that decision
    • Computation of the taxpayer’s arm’s length price or margin
    • The taxpayer’s reasons for selecting the arm’s length range
14. The tax preparer must sign and date the Questionnaire, affirming that information the tax preparer provides is true and complete.

NOTES

1. For background concerning the Transfer Pricing Guidelines Circular, see R. Feinschreiber and M. Kent, “Transfer Pricing in Singapore,” Corporate Business Taxation Monthly (November 2007): 35.

2. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, sec. 1.1.

3. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 1.2.

4. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 1.3.

5. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 2.1.

6. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 2.2.

7. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 2.2(a).

8. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 2.2(b).

9. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 3.1.

10. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 3.2.

11. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 3.3.

12. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 4.1.

13. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 4.1.

14. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 4.2.

15. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 4.3.

16. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 4.4.

17. Inland Revenue Authority of Singapore Transfer Pricing Consultation, 2008, section 5.1.

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