Transfer pricing plays a crucial role in international taxation, ensuring that related party transactions are conducted at arm’s length and preventing the erosion of a country’s tax base. In Singapore, the Inland Revenue Authority of Singapore (IRAS) oversees transfer pricing regulations and conducts audits to assess compliance. This blog post provides an in-depth analysis of the investigation, audit, and adjustment processes related to transfer pricing in Singapore, as well as the areas of scrutiny, risk assessment, and timelines involved.
I. Investigations, Audits, and Adjustments:
To initiate the compliance process, the IRAS issues a Circular on Transfer Pricing Consultation, which involves sending a questionnaire to selected taxpayers engaged in significant related party transactions, particularly with overseas entities. The questionnaire aims to gather information regarding the taxpayer’s compliance with transfer pricing rules and typically covers details such as principal activities, product descriptions, related entities, transaction types, values, and the extent of maintained documentation.
The IRAS acknowledges that the majority of taxpayers are not currently meeting the requirement for contemporaneous documentation. Consequently, stricter scrutiny of documentation is expected in the future. If discrepancies are identified, the IRAS may conduct a field visit to the taxpayer’s business premises and review the transfer pricing documentation. The IRAS has the power to request books, documents, accounts, returns, and any other relevant information, which taxpayers are obligated to maintain for at least five years.
In cases where the IRAS disagrees with a taxpayer’s transfer pricing policies, it may issue a notice of assessment based on its own computation of profits using the arm’s length standard. If the taxpayer disagrees with the assessment, they must file an objection within 30 days, accompanied by detailed grounds and supporting documentation. Depending on the outcome of the objection, the IRAS may issue an amended assessment or a “Notice of Refusal to Amend.” Taxpayers have the option to appeal the decision to the Board of Review, and further appeals can be made to the High Court and the Court of Appeal, although the latter does not consider appeals on questions of fact.
(ii) Areas of Scrutiny:
During transfer pricing audits, the IRAS focuses on three main areas: the appropriateness of the taxpayer’s transfer pricing methods, the adequacy and timeliness of the transfer pricing documentation, and the outcome of the taxpayer’s transfer pricing studies. These areas are examined to ensure compliance with the relevant regulations.
(iii) Risk Assessment:
The IRAS selects taxpayers for audit based on various risk indicators. These indicators include the value of related party transactions, the business’s performance over time, and the likelihood that taxable profits may have been understated due to inappropriate transfer pricing practices. The risk assessment process helps the IRAS prioritize its audit efforts.
The transfer pricing guidelines provided by the IRAS do not specify a specific timeline for transfer pricing audits. Typically, when a taxpayer is selected for an audit, the process begins with the IRAS arranging a first meeting at the taxpayer’s premises to discuss the required information and documents. At the conclusion of the audit, the IRAS sends a closing letter to the taxpayer, providing comments on the appropriateness of their transfer pricing, the adequacy of their documentation, and any adjustments made under Section 34D of the Income Tax Act (ITA). The IRAS may also offer recommendations on how taxpayer can enhance their transfer pricing documentation and methods.
Under the fifth edition of the IRAS’s transfer pricing guidelines, adjustments can be made by the IRAS when related parties do not transact at arm’s length and understate their profits. The guidelines reflect the amendments to Section 34D of the ITA in October 2017. The adjustments can involve increasing income by treating it as accruing in or derived from Singapore, or received in Singapore from outside Singapore. Conversely, adjustments can also reduce a loss by treating it as not having been incurred.
For transfer pricing adjustments made by the IRAS for the year of assessment 2019 or later, a surcharge of 5% will be imposed on the adjustments, regardless of whether tax is payable on the adjustments. Additionally, the IRAS has published the second edition of the e-Tax Guide (GST: Transfer Pricing Adjustments) to clarify the GST treatment of transfer pricing adjustments. When a transfer pricing adjustment affects the original value of goods or services supplied or the price of imported goods or services, a corresponding GST adjustment is generally required.
Navigating transfer pricing audits and adjustments is a critical aspect of ensuring compliance with Singapore’s transfer pricing regulations. The IRAS’s scrutiny of transfer pricing methods, documentation, and outcomes underscores the importance of maintaining contemporaneous documentation and adhering to the arm’s length principle. By understanding the investigation process, areas of scrutiny, risk assessment factors, and adjustment mechanisms, taxpayers can proactively prepare for audits and ensure their transfer pricing practices align with the IRAS’s expectations. Seeking professional advice and support from tax experts is highly recommended to navigate the complexities of transfer pricing audits and to develop robust documentation that stands up to scrutiny.