Reading tea leaves: what does Singapore’s TP landscape have in store for 2021?

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2020 will likely be remembered primarily for COVID-19, as governments, businesses and individuals grappled with the fallout from the pandemic. However, in the world of transfer pricing (TP) there have also been significant developments. These include the publication of the “Transfer Pricing Guide to Financial Transactions” by the OECD and substantial progress on the proposals for pillars 1 and 2 of the OECD / G20 Inclusive Framework.

From the perspective of Singapore TP, there have been two main developments related to TP. The first was the publication of guidelines for transactions affected by COVID-19. Subsequently, in November 2020, the Inland Revenue Authority of Singapore (IRAS) also issued guidance on how TP adjustments will be handled from a goods and services tax perspective.

In this context, what can taxpayers expect for 2021 from Singapore TP’s perspective?

COVID-19 and TP documentation

There will be an ongoing focus on the impact of COVID-19 on taxpayers and the IRAS. The initial TP advice provided by IRAS focused on the following:

  • What information should be included in the TP documentation to support the results of the TP for businesses affected by COVID-19;
  • Using multi-year data (called duration tests) to spread the impact of COVID-19 over a longer period; and
  • The ability to file a new Advanced Pricing Agreement (APA) or a renewal request for an existing APA during the COVID-19 period.

The OECD guide, on the other hand, examines broader issues such as how the comparability analysis should be carried out, how the risks should be distributed among the parties, etc. be provided by IRAS in the coming months. For example, on January 29, 2021, IRAS published three more frequently asked questions to clarify the following:

  • Can grants received from government be shared with related parties?
  • If the limited risk distributors can make losses; and
  • Whether loss-making companies should be included in the comparability analysis.

Such guidance has and will provide clarification to taxpayers in preparing the proper and adequate TP documentation for fiscal year (FY) 2020.

Given the level of tax support provided by the Singapore government to help businesses withstand the impact of COVID-19, it is reasonable to expect an increased level of scrutiny in all tax matters, including transfert price. Bearing in mind the guidance provided by the OECD and IRAS to demonstrate that the results recorded in FY2020 comply with the arm’s length standard, Singapore taxpayers should pay particular attention to the how the TP documentation reports are prepared for fiscal year 2020.

Many tax authorities, including the IRAS, have noted that COVID-19 cannot be used as an “excuse” to support business interruption. Rather, careful analysis should be undertaken to highlight the specific impact of COVID-19 on taxpayer operations.

As such, a careful analysis of the impact of COVID-19 should be included, with a robust functional asset and risk analysis to support any changes in the results of the TP before and after COVID-19. As appropriate comparable data is unlikely to be available when the TP documentation is prepared, Singapore taxpayers should attempt to show, through qualitative analysis or anecdotal evidence, that the business and financial relationships entered into by the Singapore taxpayer are generally compatible with the arm. standard length.

Secondary adjustments

The increased frequency of secondary adjustments is linked to the issue of TP audits. This is a trend that has been noticed recently, for example, in audits carried out by the Indonesian tax administration. The TP adjustment made by the foreign tax office is the main adjustment, but this does not change the fact that the excess profits represented by the adjustment are not consistent with the outcome that would have occurred if the controlled transactions had been performed in a base length arm. Thus, a secondary adjustment is included to ensure that the actual distribution of benefits is consistent with the primary adjustment.

For example, Company A, resident in country X, pays a royalty of $ 10 million to a related company abroad B. The tax authorities in country X adjust the arm’s length value of the transaction to $ 8 million and, therefore, Company A is allowed a tax deduction for only $ 8 million. However, since Company A has already paid Company B $ 10 million in cash, the accounting difference of $ 2 million is considered dividends. These secondary adjustments can result in double taxation.

Although the OECD Transfer Pricing Guide allows for secondary adjustments, these adjustments were generally not applied in TP audits. However, they are becoming more and more common.

IRAS is aware of this problem facing Singapore taxpayers due to secondary adjustments made by foreign tax authorities. In view of the possibility of additional tax debts, Singapore taxpayers facing such secondary adjustments are recommended to approach the IRAS for support and advice.

Inter-company loans

For a related party loan not exceeding S $ 15 million (approximately $ 11.3 million), the IRAS introduced an indicative safe-haven margin that taxpayers can apply as an alternative to performing a detailed TP analysis for self-help. comply with the arm’s length principle.

IRAS has reported a safety margin of 2.75% for related party loans not exceeding S $ 15 million obtained or provided during the year 2021, which is higher than its previous margins for related parties. years 2017 to 2020. The reason (s) for this increase is as follows: not clear, given that interest rates are generally on a downward trend. This could indicate that the IRAS expects the effective interest rate on loans to be around 3.5% compared to previous years. It is also possible that the increase in the margin reflects the persistent economic uncertainty which may lead to an overall decrease in the borrower’s creditworthiness.

The increased safety margin is likely to put pressure on cross-border intercompany agreements, especially for companies that use Singapore as a treasury center for cash pooling. Lending at rates below the safety margin will increase the need for contemporary TP documents to prove that the rates are at arm’s length. In contrast, the application of the indicative margin by a Singapore lender may not be attractive to a regional borrower.

The other major change that taxpayers need to be aware of is the implications of moving from an Interbank Offered Rate (LIBOR), which will close by the end of 2021, to an Overnight Finance Rate (SOFR). .

Final remarks

It looks like 2021 will be a year with potential clarity over several unknowns. As such, taxpayers should continue to keep an ear on the ground and stay in touch with advice provided by IRAS to help support and defend their TP agreements.

Sivakumar Saravan

Senior partner

Sowmya Varadharajan

Director

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