Transfer pricing documentation

Comments from ACCA to the Inland Revenue Authority of Singapore (IRAS)
September 2014


General comments

The revised guidance and Appendix represent a significant shift in tone and content. Previously, the Section 4 Guidance acknowledged the importance of facilitation of effective and efficient business, requiring only the maintenance of reasonable records while recognising the broader societal cost of imposing unreasonable or excessive administrative burdens on taxpayers.

The proposed revisions move away from that enabling model, and set out instead more prescriptive requirements. The taxpayer is no longer required to “readily demonstrate that it has exerted reasonable efforts to ensure that its transfer prices are consistent with the arm’s length principle”. Rather, the requirement is that taxpayers “should prepare records that demonstrate the pricing of transactions with their related parties is arm’s length”. The concept of reasonable efforts is removed, and calculations must be “in accordance with” rather than simply “consistent with” the arm’s length principle. Though subtle, the changes are significant, especially where the sums at stake are likely to be significant and the risk of legal argument high.

There is also a question mark over whether all of the information is directly relevant to the setting of transfer prices. Given the increased level of information exchange between tax authorities there must be an increased risk that commercially sensitive information could be inadvertently disclosed or otherwise compromised where it is transmitted outside of IRAS’s purview.


Specific comments

(a) What challenges do you anticipate in preparing transfer pricing documentation on a contemporaneous basis?

Detailing items specific to each individual contract should not in itself constitute an unreasonable burden. However, a considerable amount of the information called for under the new guidance will not necessarily be directly relevant to a given transaction, but will not necessarily be easily kept up to date.


(b) What difficulties would you have in getting the information listed under Annex A?

The new requirements impose a number of potentially significant additional burdens on business, including preparation of information which may not otherwise be generated in the format suggested by the guidelines.

Moreover it is not necessarily clear that all the information required under the revised guidance is directly relevant to the setting of transfer prices as between related parties – for example, the requirements under the second bullet at Item (2)(a) of the Annex A, the details of individuals in the management team of the Singapore entity.

Likewise under the category “description of group’s business’, the requirement to disclose “drivers of business profit” on a global basis, “charts showing the supply chains of products and services” and extensive details of the business relationships “among all related parties” will involve detailed disclosure of commercially sensitive information.


(c) We have included guidance under paragraph 7.3 on situations that are considered low risks such that transfer pricing documentation is not required. In your view, are there other situations that should be added to paragraph 7.3? If so, please provide details of such situations.

The purpose of TP scrutiny under the taxes acts is to manage tax risk, rather than regulate internal group affairs per se. It appears on a reading of 7.3(a) that the critical criterion for exemption on the TP documentation is that ‘related party transactions are local transactions subject to the same Singapore tax rates’. It follows that SMEs that do NOT fulfil this criterion are subject to the TP documentation.

However, it is not clear why non-SMEs that fulfil this criterion should not be exempted. After all, if all of a non-SME’s related party transactions are local transactions, TP-related risks would also be negligibly low. Hence, it seems sufficient to provide this criterion for exemption; and remove the criterion on the SME status of the entity which appears to be superfluous.

The alternative scenario is that purely domestic businesses will be under an obligation to prepare all the documentation listed out at Appendix A under eg paragraph 7.5(e), “operating results that are not in line with industry norms”. In purely practical terms, a domestic business with no differential internal tax treatments will not have historically undertake benchmarking of the type demanded under Annex A (2)(d), and there is no tax reason why it should do so going forwards.

Maintenance in full of the requirements under A (2)(b) and (c) would likewise serve no purpose in managing the risk to the public purse. The mere fact that a business is unusually successful or (as is perhaps more likely to be the case to attract the attention of the tax authorities) struggling and hence making less taxable profit than its peers should not trigger obligations under the TP provisions.

The guidance should be more explicit that a simple demonstration of no tax risk under the TP provisions will serve to satisfy the requirements of the guidance. Details of management structure, historic commercial strategy and contractual documentation will add nothing but an administrative burden where the tax characteristics of the operations pose no tax risk.


(d) Frequency of documentation updates.

Given the detail now required, any updating on a more than annual basis would be extremely onerous.


(e) Describe any other areas relating to transfer pricing documentation that are not provided in the revised guidance which you think should be included.

5.1, which provides the definition of contemporaneous documentation, states ‘Documentation and information that taxpayers have relied upon to determine the transfer price prior to or at the time of undertaking the transactions would be most relevant and important.’ And that ‘Contemporaneous TP documentation ensures the integrity of taxpayers’ transfer pricing positions and prevents taxpayers from justifying their positions after the fact.’

However, 5.2 and 4.2(a) provide a more liberal interpretation. 4.2(a) states that the objective of TP documentation will be ‘To ensure taxpayers carefully evaluate, at or before the time of filing their tax returns, their compliance with the transfer pricing rules’. And 5.2 states that the TP documentation can be prepared ‘up to the time of preparing the relevant tax returns’.

While there are some practical benefits in allowing compliance ‘at or before the time of filing their tax’, this text contradicts the strict interpretation of ‘contemporaneous documentation’ and the spirit of good TP documentation practices.

The guidance document may therefore require a clarification or resolution of the apparent contradiction inherent between 5.1 and 5.2.