Regulation Update

Singapore Updates TP Doc Rules: Here are the Key Changes Explained

The Inland Revenue Authority of Singapore (IRAS) updated its Transfer Pricing (TP) guidelines in Singapore by publishing IRAS e-Tax Guide: Transfer Pricing Guidelines (Seventh Edition) in June 2024. The update covers various aspects, one of which is related to the preparation of Transfer Pricing Documentation (TP Doc).

In detail, some of the provisions in the preparation of the TP Doc that have changed include provisions regarding the threshold for related party transactions, loan transactions between related parties, long-term loan transactions, and alternative interest rates to replace Interbank Offered Rates (IBOR).

Additionally, through the new regulations, IRAS also emphasizes several other provisions and provides guidance on the transfer pricing treatment of government assistance received by corporations.

Increase in Exemption Threshold

Through the IRAS e-Tax Guide: Transfer Pricing Guidelines (Seventh Edition) in June 2024, Singapore has raised the threshold for several types of affiliated transactions for the Year of Assessment (YA) 2026 and onwards, as follows:

Furthermore, intragroup purchases, sale of goods, and loan transactions remain subject to the previous thresholds.

Confirmation on Simplified TP Doc

Similar to the previous guidance, IRAS provides administrative ease for taxpayers in carrying out transfer pricing compliance. This is because Taxpayers may use the previous year's TP Doc to support the pricing of related party transactions in the current year, provided that the previous year's TP Doc meets the qualifying criteria (Qualifying past TP Doc).

The qualifying past TP Documentation can be used if the taxpayer has prepared a simplified TP Doc, which requires the following two elements:

a)Taxpayer's statement or declaration that he/she has prepared the qualifying past TP Doc; and

b) Include, through an attachment, a copy of the qualifying past TP Doc.

In the declaration section, IRAS does not specify a particular format. However, in general, the declaration section should contain an explanation that the previous year's TP Doc has met the requirements as a qualifying past TP Doc

Regarding the simplified TP Doc, IRAS emphasizes that its preparation must be done on a contemporaneous basis. To substantiate this, the preparation of the simplified TP Doc must include an appropriate date.

For example, the deadline for filing the 2024 YA tax return is November 30, 2024. To demonstrate that the simplified TP Doc was prepared according to a contemporaneous basis, the taxpayer must clearly state the completion date of the simplified TP Doc in the declaration. The completion date of the simplified TP Doc is the date stated in the declaration, not the date stated in the qualifying past TP Doc.

Review and Update of TP Doc on Long-Term Loan Transactions

IRAS stresses that the review and update of TP Doc applies to long-term loan transactions with related parties. Given, the facts and circumstances of the parties involved in such transactions may change from time to time.

The changes may include fluctuations in economic conditions, collateral value, borrower's financial status, credit status, and other matters that may affect the interest rate or terms and conditions of long-term loans.

If the previous year's TP Doc meets the requirements to become a qualifying past TP Doc, the taxpayer may consider preparing a simplified TP Doc.

Application of the Arm's Length Principle to Domestic Loan Transactions

Starting 1 January 2025, IRAS will update the provisions related to the application of the Arm's Length Principle (ALP) in loan transactions between domestic related parties. This change marks the end of the use of the interest cap method as a simple proxy to demonstrate the arm's length of the transaction.

Previously, companies could limit their interest expense claims to the actual interest charged, even if the interest was lower than a reasonable interest rate under normal market conditions.

Based on the latest guidance, loan transactions between domestic-related parties concluded since January 1, 2025, will be deemed to comply with the ALP if they meet two conditions.

First, the parties involved do not carry on the business of lending money. Second, the parties must choose to apply the indicative margin set by IRAS to determine the interest rate. These indicative margins are published on the IRAS website and updated at the beginning of each year.

This change was implemented because IRAS considered that the fairness method used in the previous guidance is no longer relevant to produce a reasonable analysis.

However, for loan transactions between domestic related parties concluded before 1 January 2025, the old approach using the interest cap method still applies. Therefore, companies should be more thorough in ensuring that their transactions continue to comply with the arm's length principle, especially in the face of this regulatory change.

Transformation of Benchmark Interest Rate from IBOR to RFR

In line with global financial market reforms, the Inland Revenue Authority of Singapore (IRAS) has mandated the use of alternative risk-free rates (RFRs) to replace Interbank Offered Rates (IBORs) as the benchmark interest rate for all products or contracts referencing IBOR.

For information, IBOR is a benchmark interest rate that is often used for interbank financial products globally.   

IRAS suggests several RFRs that can be used to replace IBOR. For example, the Secured Overnight Funding Rate (SOFR) can replace the USD London Interbank Offered Rate (LIBOR).

Read: The End of the LIBOR Era and Its Impact on Affiliated Transactions

In addition, it can also use the Sterling Overnight Index Average (SONIA) to replace GPB LIBOR. And to replace SGD SOR and Singapore Interbank Offered Rate (SIBOR) can use the Singapore Overnight Rate Average (SORA).

However, if the IBOR transition is deemed too significant, IRAS may classify the transaction as a new loan requiring a new TP Doc. Therefore, taxpayers should ensure that the transition complies with the arm's length principle. Taxpayers may also consider a spread adjustment to address the economic difference between the RFR and the transitioned IBOR.

Use of Interest Rate in Working Capital Adjustments

Meanwhile, to provide certainty to taxpayers, IRAS also adds an explanation regarding the provisions on the use of interest rates in the application of Working Capital Adjustment (WCA).

The WCA is an adjustment in TP that compares the level of working capital between the tested party and a comparable independent party.

IRAS emphasizes that the interest rate used in the WCA must be consistent with the interest rate prevailing in the same market as the tested party, such as the interest rate on commercial loans or bond yields. If taxpayers are uncertain, they can also test the appropriateness of the interest rate used with the actual funding costs of the tested party.

Affirmation of Strict Pass-through Costs Provision

IRAS confirms that service costs can be considered as strict pass-through costs only if the following four conditions are met:

1) The services are genuinely for the benefit of the related party;
2) The services are charged at arm's length and in accordance with business practice;
3) The service-providing entity merely acts as a paying agent without adding value;
4) The fee is a legal or contractual obligation of the related party, even if the service contract with an independent party is performed by the group service-providing entity.

In addition to these four conditions, the specific facts and circumstances of each transaction should also be considered. Currently, email correspondence may be considered a written agreement or supporting document for strict pass-through cost transactions.

Transfer Pricing on Government Assistance

In this new provision, IRAS also provides guidance on transfer pricing related to government assistance received by taxpayers. According to it, taxpayers should consider whether this assistance will affect transactions between independent parties in the same industry.

If the assistance is economically relevant and accounted for in comparable transactions, the benefits should be included in the transfer pricing analysis between related parties.

However, government assistance does not necessarily affect the price of related party transactions so a comparability analysis is required to ascertain the impact. Receiving assistance also does not change the allocation of risk, but may reduce the negative impact of such risk. In addition, taxpayers need to document information and accounting treatment related to the assistance.

Meanwhile, in general, the purpose of this update is to improve the compliance of TP Doc preparation. This is because, according to IRAS, the new provisions are designed as a guide that can provide clearer direction for companies, especially in ensuring that each transaction complies with the Arm's Length Principle.

Author Profiles

Meiliana is a Transfer Pricing Manager who has been with MUC Consulting since 2015. Her primary focus is providing strategic guidance on transfer pricing across various industries. She also has experience in preparing detailed transfer pricing documentation, including Local Files, Master Files, and Country-by-Country Reporting (CbCR). Meiliana has also experience in preparing TP Docs for entities in Singapore. Additionally, she has expertise in resolving transfer pricing disputes.

Choirunisa Nadilla Safitri is a transfer pricing consultant with over 2 years of experience. She has experience in preparing Local Files and Master Files, including TP Docs for entities in Singapore. Choirunisa has assisted clients from various industries such as retail, logistics, automotive, chemicals, finance and insurance, steel, automotive, and others.

For further information and consultation on this matter, please contact us at 0811-1770-1290 (WhatsApp) or via email: ask_muc@mucglobal.com