Singapore’s Seventh Edition Transfer Pricing Guidelines: Comprehensive Updates and Strategic Implications for Businesses

INTRODUCTION

The Inland Revenue Authority of Singapore (IRAS) released the Seventh Edition of its Transfer Pricing Guidelines (TPG) on 14 June 2024, introducing significant updates that impact various aspects of transfer pricing. These changes reflect a tightening regulatory environment, with a stronger emphasis on compliance and documentation. The key amendments include increased exemption thresholds for transfer pricing documentation, stricter audit procedures, new rules for financial transactions, and enhanced guidance on capital transactions and government assistance. The key changes are discussed below, highlighting their implications for businesses engaged in related-party transactions.

KEY AMENDMENTS

1. Transfer Pricing Documentation (TPD)

Increased Exemption Thresholds:

• Starting from Year of Assessment (YA) 2026, the threshold for exemption from TPD preparation for certain transactions has been doubled from SGD1 million to SGD2 million. This applies to most related-party transactions except for the purchase and sale of goods or intercompany loans, which remain subject to the existing thresholds. The aggregate (total) value of transactions in that category must be considered, not the per-transaction value.
• Implication: This increase is aimed at easing the compliance burden for businesses with smaller transactions, considering the rising costs and IRAS’ focus on higher value transactions, though these businesses must still ensure that their transactions adhere to the arm’s-length principle.

Dating and Contemporaneity of Simplified TPD:

• Simplified TPD must now be prepared on a contemporaneous basis, with the date of preparation clearly documented. This is crucial for proving that the TPD was not prepared with hindsight.
• Implication: Businesses must be diligent in maintaining timely and accurate documentation, particularly when utilizing simplified TPD provisions, to avoid penalties for non-compliance.

Annual Review of Long-Term Loans:

• The guidelines emphasize the necessity of an annual review and refresh of TPD for long-term related-party loans. This is to account for changes in economic circumstances, collateral value, or credit conditions that could affect the terms of the loan. In practice, this means that TPD must be prepared for loan extensions with refreshers in the following years and possibly even new pricing after a few years.
• Implication: Companies must establish a routine process for reviewing long-term loans, ensuring that the terms remain consistent with the arm’s-length principle throughout the loan’s duration. This clarification also implies that more TP audits can be expected regarding intercompany loans in the coming years.

2. Financial Transactions

Discontinuation of Interest Restriction as a Proxy for Domestic Loans:

• Starting 1 January 2025, businesses can no longer use interest restriction as a proxy for the arm’s-length principle for their domestic-related party loans. Previously, companies could limit their interest expense claims to the actual interest charged on a loan, even if that interest was lower than what would be expected under normal market conditions. This method, known as “interest restriction”, acted as a simplified proxy to substantiate that those transactions were conducted at arm’s length. From 1 January 2025, companies must instead apply an arm’s-length interest rate supported by relevant TP analysis or the indicative margin provided by IRAS. The only domestic related-party loans that are exempted from TPD are where neither party is in the business of borrowing and lending money and the IRAS indicative margin is applied.
• Implication: Businesses must now ensure that all domestic related-party loans reflect arm’s-length interest rates, which may require revisiting and adjusting current intercompany loan pricing.

Transition from IBOR to RFR:

• The guidelines provide detailed instructions on the transition of existing loans from Interbank Offered Rates (IBOR) to alternative risk-free rates (RFRs), in line with global financial reforms. Taxpayers must document the rationale for changes and, where necessary, apply a spread adjustment to reflect differences between IBOR and RFR.
• Implication: Companies transitioning loans from IBOR to RFR must ensure that these adjustments are clearly documented and justified in their TPD, as IRAS may consider any significant changes beyond the IBOR reform as new loans requiring fresh documentation.

3. Transfer Pricing Audits and Surcharges

Revised Audit Process:

• The Seventh Edition TPG outlines a more stringent audit process, where IRAS will now proceed directly to making TP adjustments and imposing a 5% surcharge if it determines that profits are understated, or losses overstated due to non-arm’s-length transactions. The previous “inform and discuss” phase has been largely removed, therefore, if the taxpayer does not agree with the adjustment and surcharge, it must follow the formal Objection and Appeal Process to resolve the issue.
• Implication: Businesses should be prepared for more rigorous audits and ensure that their TPD is robust and defensible to mitigate the risk of costly formal objection processes.

Surcharge Remission Conditions:

• IRAS has clarified the criteria for the remission of the 5% surcharge on TP adjustments. Only taxpayers with no history of surcharges or penalties in the current and two preceding YAs, and who maintain proper compliance records, may qualify for partial or full remission.
• Implication: Businesses must prioritize maintaining a good compliance record and prompt responsiveness during audits to benefit from surcharge remissions.

4. Capital Transactions

TP Adjustments for Capital Transactions:

• The guidelines clarify that TP adjustments will not apply to gains, losses, or deductions from capital transactions that are not taxable or deductible under the Income Tax Act (ITA). However, if these transactions involve the transfer of fixed assets and are not conducted at arm’s length, IRAS may apply specific provisions to determine the appropriate capital allowances or balancing adjustments.
• Implication: While documentation is not mandatory for such transactions, it is advisable for businesses to maintain detailed records to support their positions in case of scrutiny by IRAS, especially for fixed assets transactions.

5. Government Assistance

Transfer Pricing Implications:

• The TPG provides guidance on how benefits from government assistance should be treated in a transfer pricing context. This is relevant guidance in light of the past years Covid-19 government assistance and the upcoming Refundable Investment Credits. Generally, the benefits from government assistance are not expected to be passed on to related parties unless it can be demonstrated that independent parties would do so under similar circumstances.
• Implication: Businesses that receive government assistance must properly document how these benefits impact their TP analysis, ensuring that the treatment aligns with the arm’s-length principle.

6. Mutual Agreement Procedure (MAP)

Streamlined MAP Process:

• The Seventh Edition TPG simplifies the Mutual Agreement Procedure (MAP) by removing the pre-filing phase, which previously included the notification of intent and a pre-filing meeting. Now, the MAP application itself serves as the notification, expediting the process.
• Implication: While this change simplifies the MAP process, taxpayers must be more vigilant in preparing proper MAP applications, as IRAS will now conduct a more thorough evaluation before accepting them without the opportunity for discussion in the pre-filing phase.

7. Pass-Through Costs and Documentation

Strict Pass-Through Costs:

• IRAS has clarified that costs of group services can be passed through without a mark-up if specific conditions are met, including evidence that the costs are the legal or contractual liabilities of the related parties benefiting from the services. Simple email correspondence may now serve as acceptable documentation of these agreements.
• Implication: This clarification reduces the administrative burden on businesses, but they must ensure that all conditions for pass-through costs are adhered to and well-documented.

CONCLUSION

The Seventh Edition of Singapore’s Transfer Pricing Guidelines introduces some interesting changes. While there are some easing measures, such as increased exemption thresholds, the overall direction is clear: IRAS is raising its expectations for robust and compliant transfer pricing practices.

Notable updates include the discontinuation of interest restrictions as a proxy for the arm’s-length principle in domestic loans, and the new requirement for annual reviews of long-term loans. These changes mean that companies need to carefully reassess their intercompany financing arrangements and ensure they align with the arm’s-length principle. Additionally, the guidelines introduce stricter audit procedures and a more rigorous MAP evaluation process, signalling a stronger stance from IRAS in its oversight of transfer pricing practices.

This is a critical time for businesses to review and adjust their transfer pricing policies to meet the new standards. Being proactive in managing these changes will help avoid potential issues like audit adjustments, surcharges, and challenges in MAP/APA acceptance. As the transfer pricing environment in Singapore becomes more demanding, thorough documentation and careful management will be key to staying compliant and minimizing risks.

For further guidance on how these changes may affect your business, please contact Barbara Voskamp or Anne Klaassen.