Singapore’s new transfer pricing requirements

11 December 2019

If you operate in Singapore, you need to know that 2019 is the first year of mandatory transfer pricing documentation in that country. Failure to comply with the requirement can lead to significant penalties and additional taxes.

The Inland Revenue Authority of Singapore (IRAS) updated its transfer pricing guidelines in 2015 to include documentation requirements supporting arm’s-length pricing, which is common in advanced economies. In 2017, the IRAS clarified its transfer pricing guidelines related to service companies. This post addresses recent additional changes and provides a brief overview of transfer pricing concepts.

Transfer pricing basics

Transfer pricing is the process of calculating prices for the sale of goods, services, intellectual property or financing between related parties. “Related parties” in this context means entities that share a common business interest, such as two different companies operating in different countries that are owned by the same parent company. (Transfer pricing generally affects cross-border related-party transactions, but it can also apply to related-party transactions made in a single country.)

The transfer pricing rules of most countries, including Singapore’s, are based on the arm’s length principle. Basically, pricing between related parties should be set as though the entities were at arm’s length, or not affiliated with each other. In other words, prices should be set to reflect prevailing market rates, not artificially set to reap tax advantages based on the respective tax rates of the countries where the parties are based. If transfer pricing is not set at arm’s length there is a risk that local tax authorities in either jurisdiction will discover the discrepancy and impose transfer pricing adjustments, which may in turn lead to additional tax liabilities and penalties.

It should be noted that certain taxpayers may be exempt from preparing formal transfer pricing documentation (in Singapore and other jurisdictions) due to safe harbour thresholds.

Transfer pricing changes in Singapore

Prior to 2019, Singapore taxpayers were not legally required to prepare and maintain transfer pricing documentation — the documentation requirement mentioned earlier was actually set out in guidelines, not law. This changed with the addition of section 34F to Singapore’s Income Tax Act, which was added in February of last year and has now taken effect. Here are the key new legal requirements of the section:

  • Effective from year of assessment (YA) 2019 (that is, for the fiscal year that ended in 2018), companies with annual revenues over SG$10 million must annually prepare formal transfer pricing documentation in accordance with the Income Tax Act (unless exempt by the rules in section 7).
  • Companies must securely retain the transfer pricing documentation for at least five years from the end of the basis period in which the transactions took place.

Keep in mind that starting next year (i.e. in YA2020), Singapore companies must also examine their transfer pricing status for the preceding year(s), which will further complicate the compliance process.

In addition, penalties of up to SG$10,000 have been introduced for non-compliance with the new transfer pricing rules.

Finally, another new section (34E) has been added to the Income Tax Act. This section empowers the Singapore Tax Authority Comptroller to impose a 5 percent surcharge on any transfer pricing adjustments made by the Comptroller after an assessment.

Steps you should take to comply with the new requirements

Strictly speaking, Singapore’s new transfer pricing requirements apply only to taxpayers who exceed the $10 million threshold. That said, all Singapore taxpayers must be prepared demonstrate that the terms of their intercompany transactions are at arm’s length. Regardless of the size of a company’s annual revenues, the IRAS has the right to adjust the pricing for related-party transactions when they are found not to be at arm’s length. As I mentioned, under the new rules the IRAS can impose a 5 percent surcharge on any transfer pricing adjustments they make.

Companies should also keep in mind that tax authorities in other countries (in and outside Asia) have similar transfer pricing documentation requirements. These countries, along with Singapore, perform database searches to evaluate the arm’s length nature of taxpayers’ transfer pricing policies for goods and services to uncover non-compliant practices.

All companies, then, must be able to justify their transfer pricing practices. For relatively straightforward transactions involving goods or services, this is accomplished through a transfer pricing benchmarking analysis. A benchmarking analysis typically includes the following main elements:

  • A detailed analysis of functions, assets and risks carried by the related parties.
  • An identification of independent comparable companies in the same region to determine the typical margin achieved.
  • A quantitative analysis of the identified margins to determine the arm’s length range of the remuneration that supports a taxpayer’s transfer pricing policy.

Taxpayers may rely on a benchmarking analysis to develop a transfer pricing policy and to support the policy during an audit.

Companies should also note that Singapore has not yet adopted master file and local file requirements, as recommended by the OECD. As a result, Singapore’s transfer pricing documentation is required at the group level and the entity level.


Wanying ZhengSenior Manager, International Tax Advisory, contributed to this article.