Starting from 2019, penalties may be imposed on companies who do not prepare the Transfer Pricing Documentation.
The increased focus on related party transactions, both globally and in Singapore, is apparent. In this age where the amount of cross-border transactions continue to grow and companies continuously look for ways to increase their profits through various means, tax authorities in many countries are keeping up with the trends to ensure that companies are paying the appropriate amount of taxes in their respective territories.
In Singapore, the focus on related party transactions is evident from the increased regulatory compliance requirements. Transfer Pricing guidelines which were first published in 2006, were subsequently updated in 2015, 2016, 2017 and 2018. Then, starting 2018, Singapore tax payers are required to submit a form for reporting Related Party Transactions (“RPT”) together with their tax returns if certain requirements are met. Finally, penalties kick in starting 2019 when companies do not prepare TPD if they are required to do so.
At the same time, the IRAS is mindful to not unnecessarily burden Singapore tax payers by requiring TPD to be prepared only if certain thresholds are crossed. The thresholds are carefully calibrated such that a majority of companies in Singapore will not be required to prepare TPD. The RPT form is only required to be completed if the value of RPT as disclosed in the company’s financial statements exceed S$15 million for the year. As for TPD, companies must first meet one of these two conditions:
(a) Gross revenue derived from their trade or business is more than $10 million for the basis period concerned; or
(b) Transfer pricing documentation was required to be prepared for the basis period immediately before the basis period concerned
If one of these two conditions are met, then TPD has to be prepared only if the value of the transactions cross a certain threshold – S$15 million for sale/purchase/loans to/loans from and S$1 million for all other types of RPT. Even then, there are certain exemptions which are as follows:
(a) Related party domestic transactions subject to same tax rate—transactions between related parties in Singapore (excluding related party loans) where both parties are subject to the same Singapore tax rates, or exempt from Singapore tax.
(b) Related party domestic loans— loans provided between related parties in Singapore, and the lender is not in the business of borrowing and lending money.
(c) Related party loans where the safe harbour interest margin is applied.
(d) Provision of support services, qualifying as “routine” services on which 5% cost mark-up is applied.
(e) Related party transactions covered by an Advance Pricing Arrangement
Based on the above conditions, it would appear that most companies do not need to prepare TPD. However, caution should be exercised especially in cases where there are cross-border transactions. This is because even if the IRAS does not require TPD to be prepared, the tax authorities in the other countries may require TPD to be prepared.
Further, while TPD may be seen as just a piece of documentation that is prepared for the sake of compliance, there are benefits to preparing TPD – in the course of preparing TPD, companies have to look at their roles, the RPT they have and the margins for the respective RPT. This will enable companies to re-assess their positions to see if they are properly remunerated and also spot any issues that may not be apparent at first glance. Also, TPDs generally take 2 months or more to be completed whereas requests from tax authorities may not give the company sufficient time to properly prepare TPD, creating extra stress and strain on the company’s resources and employees.
In conclusion, given the extra focus by the tax authorities on RPT and the benefits of preparing TPD in advance, companies should seriously consider and start preparing TPD for their related party transactions. If you would like us to help you perform a health check on your related party transactions and potential exposure/risk, as well as to help you to prepare TPD, please reach out to us. We look forward to hearing from you!
For more information, please contact:
Director, Head of Tax
Assistant Tax Manager