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IRAS Issues Guidelines on Transfer Pricing for Businesses
Posted on Thursday, February 23, 2006 - 06:00 AM

Following the Prime Minister's Budget Speech on guidance concerning transfer pricing, the Inland Revenue Authority of Singapore (IRAS) on 23 February 2006 issued a circular entitled "Transfer Pricing Guidelines" (Ref: 2006/IT/2).

This circular gives guidance to Singapore taxpayers on applying the arm’s length principle and the recommended preparation and maintenance of documentation to demonstrate compliance with the arm’s length principle.

This circular also sets out the procedures for applying for the Mutual Agreement Procedure (“MAP”) and Advance Pricing Arrangement (“APA”) facilities in order to avoid or eliminate double taxation. The guidance on arm’s length principle and documentation requirements are applicable to all transactions, both local and cross-border, between a Singapore taxpayer and its related parties. However, the MAP and bilateral/multilateral APA facilities to eliminate or avoid double taxation are only available where the non-Singapore related parties concerned are residents of jurisdictions with which Singapore has concluded comprehensive Agreements for the Avoidance of Double Taxation (“DTAs”).

With this guidance, taxpayers can better understand the conditions for arm’s length pricing and hence take steps to reduce the risk of double taxation.

The IRAS Press Statement issued on 23 February 2006:-

1. In his Budget Statement delivered on 17 February 2006, Prime Minister and Minister for Finance, Mr Lee Hsien Loong announced that IRAS will provide businesses with guidance on the application of the arm’s length principle for transfer pricing purposes, and assistance in resolving disputes with foreign tax authorities on transfer pricing issues.

2. The full details have been released by IRAS in a Circular entitled “Transfer Pricing Guidelines”. This Circular is available at IRAS’ website (www.iras.gov.sg) under the section “e-Tax Guides”.

3. Transfer pricing refers to the determination of prices at which goods, services and intangible properties are transacted between related parties. When unrelated parties deal with each other, independent market forces shape the commercial pricing of such transactions. However, in transactions involving related parties, their commercial and financial relations may lead to the setting of prices that deviate from independent commercial prices. This results in distortion of the profits derived by each related entity to the transactions as well as in the tax liabilities of each.

4. The distorting effects of non-arm’s length transfer pricing is of greater concern to tax authorities where related parties engaged in the transactions are located in different tax jurisdictions. This is because the varying taxation levels in different tax jurisdictions may lead to entities concerned not paying their fair share of tax in one or more jurisdictions, and the related entities as a group enjoying a tax advantage.

5. Increasingly, tax authorities worldwide are stepping up their audit efforts to verify that transfer pricing of cross-border related party transactions comply with the arm’s length principle. Where related party transactions are found not to have complied with the arm’s length principle and where the profits and tax liabilities of the related parties have been reduced, adjustments to the profits and tax liabilities would be made by tax authorities. Such unilateral adjustments increase the total taxable profits arising from the related parties’ transactions and hence result in double taxation.

6. IRAS endorses the arm’s length principle as the standard to guide transfer pricing. The arm’s length principle requires the transaction with a related party to be made under comparable conditions and circumstances as a transaction with an independent party. The “Transfer Pricing Guidelines” are intended to provide practical guidance on applying the arm’s length principle. The Guidelines also set out the recommended documentation requirements for the related party transactions that will facilitate reviews that may be undertaken by tax authorities and assist businesses in demonstrating that reasonable efforts have been taken in complying with the arm’s length principle. In addition, the Guidelines include information on the facilities available to help taxpayers avoid or eliminate double taxation that may arise from transfer pricing adjustments. It is envisaged that by adhering to the principles and guidelines, Singapore taxpayers that transact with related parties would be able to reduce the risk of transfer pricing adjustments and double taxation.

7. IRAS welcomes feedback from members of the public.

Lee Leng Kiong (Mrs)
Director (Corporate Communications)
Tel: 6351 2076
Fax: 6351 2077
Email: lengkiong@iras.gov.sg

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