On 12 January 2017, IRAS released its 4th edition of the Singapore transfer pricing guidelines relating to business entities incorporated or registered in Singapore or carrying on a business in Singapore that have transactions with related parties.
Related Party Loans
A related party loan arises when there is money lent in one form or another, irrespective of whether the loan is made through a written agreement or otherwise. It includes credit facilities or intercompany credit balances arising from the normal course of sales and provision of services which are left uncollected over a substantial period of time beyond which a third party trade creditor would typically allow.
Charging of Interest on loans
Interest must be charged on related party loans and the rate must reflect those charged between unrelated parties under similar circumstances.
(i) Loans between related domestic entities.
IRAS recognizes that the application of the arm’s length basis could give rise to difficulties and concerns for businesses and hence, they are prepared to continue with their current practice of restricting the interest expense claimed on loans made to related entity that are interest-free or at interest rates not supported by transfer pricing analysis. However, this practice will not be accepted if your company is in the business of borrowing and lending funds e.g. banks or other financial institutions, finance and treasury centres.
(ii) Loans between related cross-border entities.
The guidelines require all cross-border loan arrangements to reflect arm’s length principle. The adoption and compliance with this principle will reduce the incidence of transfer pricing adjustments, improve the resolution of transfer pricing disputes and hence reduce the potential for double taxation to arise.
The main factors that need to be considered in determining the arm’s length interest rate include:-
- Nature and purpose of the loan;
- Market conditions at the time the loan was granted;
- Principal amount;
- Tenure and terms of the loan, etc.
Withholding tax on loan interest
- As regards to interest payable on loans to non-Singapore tax resident recipients, the payer is required under Section 45 of the Singapore Income Tax Act to withhold tax at 15% (reduced rate under Double Tax Treaty may be applicable if Certificate of Residence from the non-Singapore tax resident is available) of the gross interest and account to IRAS together with a completed Form IR 37 by the 15th of the second month following the date of payment to the non-Singapore tax resident. This Form is obtainable from IRAS website: http://www.iras.gov.sg. Date of payment is deemed to be the earliest of the following dates:-
when payment is due and payable based on agreement/contract. In the absence of contract/agreement, the date of invoice would be the deemed date of payment;
- when payment is credited to the account of the non-Singapore tax resident person (reinvested, accumulated, capitalized or carried to any reserve) or any other account however designated; and
- the date of actual payment.
Related party services
These services must be charged at arm’s length basis, comparable to those charged between unrelated parties under similar circumstances. However, if the services provided to related parties relates to certain routine support services, IRAS is prepared to accept at cost plus 5% mark-up. Routine support services refer to accounting and auditing services, general administrative services and staffing and recruiting services. Further details may be obtainable from IRAS website: http://www.iras.gov.sg under “Transfer pricing guidelines for related party loans and related party services”.
Withholding tax on service fees
As an administrative concession for services that are solely rendered outside Singapore, withholding tax will not be applicable for the fees payable to the non-Singapore tax resident recipients. For services rendered in Singapore and the recipient is a non-Singapore tax resident, the payer is required under Section 45 of the Singapore Income Tax Act to withhold tax at 17% (reduced rate under Double Tax Treaty may be applicable if Certificate of Residence from the non-Singapore tax resident is available) of the gross fees and account to IRAS together with a completed Form IR 37 by the 15th of the second month following the date of payment to the non-Singapore tax resident.
- In the event that the routine support services are provided to related parties and there is a cost-pooling arrangement amongst them, IRAS is prepared to accept if services are charged at cost (i.e. no mark-up) provided the following conditions are met:-
Services are not provided to any unrelated party;
- The provision of the services is not the principal activity of the service provider. If the cost of the provision of services exceeded 15% of the total expenses of the service provider, the services will be treated as the principal activity of the service provider;
- The services must be routine support services; and
- There is evidence to prove that the cost-pooling arrangement was entered into on a prospective basis.
Strict Pass-through Costs
Where payments are made to third-party or related party service providers which have already charged an arm’s length mark-up for their services, it would be appropriate for the group service provider to pass on such costs without a further mark-up. This is provided the costs are the legal or contractual liabilities of the related party and the group service provider is merely the paying agent and does not itself act to enhance the value of such services.
Arm’s Length Basis
IRAS recognises that applying arm’s length principle is not easily achieved especially where business structures and arrangements are complicated and unique, date and information are not readily available due to confidentiality and business secrets and also costly to perform comprehensive analyses. As a result, detailed guiding principles on the application of arm’s length are made available at IRAS website to assist businesses.
Contemporaneous transfer pricing documentation
Proper contemporaneous transfer pricing documentation must be maintained and prepared prior to or at the time of undertaking the related party transactions. Where there is material impact on their operational business conditions, the documentation must be reviewed timely and updated at least once every three years, to ensure transfer prices are concluded at arm’s length. To ease compliance and administrative burden to taxpayers, IRAS has simplified the administrative rules by the inclusion of exemption for taxpayers from the preparation of the transfer pricing documentation if any of the following situations are met:-
- Where the taxpayer transacts with a related party in Singapore and such local transactions (excluding related party loans) are subject to the same Singapore tax rates for both parties;
- Where a related domestic loan is provided between the taxpayer and a related party in Singapore and the lender is not in the business of borrowing and lending (e.g. banks or other financial institutions, finance and treasury centres);
- Where the taxpayer applies the 5% cost mark-up for routine support services;
- Where taxpayer applies the indicative margins (published on IRAS’ website yearly) for related party loan that does not exceed S$15 million at the time the loan was obtained or provided from 1 January 2017;
- Where the related party transactions are covered by an agreement under an APA whereby annual compliance report is kept to demonstrate compliance with the terms of the agreement and the critical assumptions remain valid; or
- Where the value of the related party transactions does not exceed the thresholds as below:
|Category of related party transactions||Threshold (SGD) per financial year|
|Purchase of goods from all related parties||15 million|
|Sale of goods to all related parties||15 million|
|Loans owed to all related parties||15 million|
|Loans owed by all related parties||15 million|
|All other categories of related party transactions, including:||1 million
per category of transactions
|· service income|
|· service payment|
|· royalty expense|
|· rental income|
|· rental expense|
|For the purpose of determining if the threshold is met, aggregation should be done for each category of related party transactions. For example, all service income received from related parties is to be aggregated.|
For the purpose of determining if the threshold is met, aggregation should be done for each category of related party transactions. For example, all service income received from related parties is to be aggregated.
Any taxpayer whose related party transactions has little risk of tax leakages and are below the required threshold should still be compliant with arm’s length pricing.
The transfer pricing guidelines also require substantially more group and entity level detailed documentation such as worldwide organisational and management structure chart, location, ownership linkages among all related parties, nature of global business products and services, key competitors, recent developments and restructuring and overall transfer pricing policies.
Non-compliance with the transfer pricing guidelines may result in adjustments to the pricing of the transactions and penalties imposed by the tax authorities.