On June 14, 2024, the Inland Revenue Authority of Singapore (“IRAS”) published the 7th Edition of the country’s Transfer Pricing (“TP”) Guidelines. This updated version contains numerous amendments and additional TP guidance in multiple areas, including financial services transactions, TP audits, and TP documentation, as well as guidance on working capital adjustments, Mutual Agreement Procedure (“MAP”) processes, strict pass-through costs, and TP surcharge.
Below, we summarize some fundamental changes to be aware of with this new edition.
Key Aspects of the Singapore TP Guidelines 7th Edition
Additional Guidance on TP for Financial Services Transactions: Under the new TP Guidelines, all domestic loans must apply an arm’s length interest rate supported by an appropriate TP analysis or utilize the indicative margin prescribed by IRAS. However, the TP Guidelines exempt related-party domestic loans from TP documentation requirements, provided that the loans were entered into on or after January 1, 2025, and meet certain other criteria. Specifically, related-party domestic loans are exempted from TP documentation requirements if (i) neither the lender nor the borrower is in the business of borrowing and lending money and (ii) the IRAS indicative margin is applied. The new TP Guidelines also discontinue using the interest restriction approach as a proxy for the arm’s length principle since that approach has become less reliable.
TP Audits: In the new TP Guidelines, IRAS has shifted to a more stringent and proactive approach to TP audits, eliminating the prior step of consulting with taxpayers before issuing a TP adjustment. More specifically, the updated TP Guidelines reflect a change in the TP audit process: Now, after the fact-finding and discussion stage, IRAS can make a TP adjustment, impose a surcharge, and issue a closing letter if the taxpayer’s profit is understated or loss is overstated. Under the prior approach, IRAS would have first had a discussion with the taxpayer before making a TP adjustment. It is also worth noting that the updated TP Guidelines expand the criteria for TP adjustments to include an overstated loss, whereas the prior TP Guidelines only referenced understated profit. In addition, the updated TP Guidelines refine the criteria for the remission of surcharges, emphasizing that taxpayers with a history of surcharges and penalties should not anticipate relief.
Taxpayers now must maintain high-quality TP documentation and be prepared to undergo the formal objection and appeals process if they disagree with the adjustments. Additionally, the TP Guidelines clarify that disputes related to TP adjustments will follow the same objection and appeal process as other tax matters, including the imposition of the five percent surcharge for non-compliance with the arm’s length principle. These revisions reflect IRAS’s enhanced scrutiny and assertive stance on TP compliance.
TP Documentation: The TP Guidelines make numerous changes to the prior TP documentation requirements. First, beginning in fiscal year 2025 (i.e., year of assessment 2026), the transaction threshold for exemption from TP documentation requirements for certain transactions (e.g., services transactions, grant of right to use movable property, leases, guarantees, and “other” transactions) will be raised from S$1 million to S$2 million. While this higher exemption threshold will help reduce the TP compliance burden on taxpayers, it does not exempt taxpayers from compliance with the arm’s length principle.
In the updated TP Guidelines, IRAS clarifies that the contemporaneous TP documentation requirements also apply to simplified TP documentation. Therefore, to be considered contemporaneous, taxpayers must complete and date their simplified TP documentation by the tax filing due date to demonstrate it was prepared contemporaneously.
Lastly, the updated TP Guidelines further clarify the TP documentation requirements for long-term loans, specifically confirming that the requirement to review and refresh TP documentation annually does apply to long-term intercompany loans. This requirement emphasizes that ongoing monitoring and review of loan terms is crucial, as changes in economic conditions, collateral value, or the borrower’s financial status could impact the loan’s arm’s length interest rate. Although this does not represent a change in IRAS practice regarding long-term loan documentation requirements, it does highlight the importance of regularly updating TP documentation, including preparing simplified or new TP documentation as needed and potentially repricing the loan to ensure it adheres to the arm’s length principle.
Other Notable Updates in the Singapore TP Guidelines 7th Edition
In addition to the updates described above, the TP Guidelines also include further guidance in the following areas:
- Working capital adjustments
- TP adjustments for capital transactions
- Strict pass-through costs
- TP considerations for government assistance
- Updates to the MAP process
- IRAS’ disregard of actual related-party transactions
- The transition from an interbank-offered rate (IBOR) to a risk-free rate (RFR)
Contact GTM for Help
GTM’s transfer pricing team brings extensive industry expertise to each project, providing customized solutions that enhance tax strategies and bolster global operations. Whether managing intricate transfer pricing documentation or strategizing for international growth, our tailored approach guarantees alignment with your company’s unique goals. By leveraging our global tax network, WTS Global, GTM delivers cohesive support across diverse jurisdictions, including Singapore, ensuring reliable service and strategic coherence internationally. Contact us to learn how your company can best comply with Singapore’s Transfer Pricing Guidelines 7th Edition.
