It has been more than seven years since the Inland Revenue Authority of Singapore (IRAS) released the Singapore Transfer Pricing Guidelines (Guidelines). The key developments in recent times are an increase in the focus of the IRAS on transfer pricing compliance and the use of Advance Pricing Agreements (APAs).
By now it is relatively common for taxpayers to receive detailed transfer pricing related queries from the IRAS. There are various approaches used. The most common are under the Transfer Pricing Consultation process, which is a specific phased review process of the IRAS to review compliance with the arm's length principle or through specific queries raised in connection with the IRAS' review of a taxpayer's annual tax return.
All types of transactions are being reviewed; however a salient number of queries are directed at intra-group service charges. Perhaps this is not a surprise given the large number of regional headquarter companies operating in Singapore and also that the IRAS published specific guidelines on related party services. However, the nature of queries raised clearly signals that the IRAS expects taxpayers to have appropriately considered and monitored their transfer pricing practices and prepared transfer pricing documentation in line with the corresponding Guidelines (since their release in early 2006). We believe this puts Singapore into the category of countries where transfer pricing documentation should be prepared in most cases, as opposed to past practice where only a few taxpayers with large or complex related party transactions considered preparing transfer pricing documentation.
For intra-group service charges, the typical queries are:
- Why have certain costs not been charged as service fees;
- Consistency of charging between group companies and joint venture arrangements;
- Application of cost plus five percent mark-up on all services even though certain services are not considered routine or basic services;
- Characterization of costs as pass-through expenses; and
- Whether appropriate transfer pricing documentation exists for intra-group service charges
We have also seen intangible property reviewed, with queries related to the existence of royalty income, the cost of developing the intangible property (such as cost sharing arrangements and associated buy-in payments) and the sales connected to the intangible property. Other areas where we typically see queries include companies that have high sales revenues, but perform limited functions and therefore derive limited returns or in some cases incur losses.
APAs are increasingly being used, both on a unilateral (but more commonly) bilateral basis. To date there have been 50 APAs concluded (30 of which are either bilateral or multilateral) and 30 cases are currently under review. Overall the experience with Singapore APAs has been very positive for taxpayers, which we attribute to a principle-based approach used by the IRAS towards negotiating APAs. A principle-based approach means that taxpayers who appropriately develop their APA request based on their facts and the arm's length principle should have a strong level of advocacy from the IRAS in bilateral APAs. Moreover, APAs in Singapore are being leveraged in cases where a Singapore taxpayer has the same transactions with a number of countries and the same fact pattern exists.
In the neighboring ASEAN countries there has also been increased focus on transfer pricing, particularly in Indonesia and the Philippines as well as the release of the draft APA circular in Vietnam.
There continues to be a high level of scrutiny over intercompany transactions in Indonesia. Typically most, if not all general income tax audits include requests for information relating to transfer pricing. However, with the formalization of Indonesia's APA program, taxpayers now have a suitable alternative means for handling their transfer pricing with Indonesia's Directorate General of Taxes (DGT), rather than the usual "wait and see" approach necessitated through the traditional audits. Even though the APA program is relatively recent, we have a seen a large degree of interest in and positive experiences with both bilateral APAs and unilateral APA processes, the first of which are expected to be concluded this year. Some of these APAs include bilateral APAs with Singapore and the US.
On May 30 2013, the DGT issued Regulation number PER-22/PJ/2013 regarding Guidelines for Audits of Taxpayers with Special Relationships (the "PER-22"). PER-22 replaces the previous guidance issued by the DGT with regards to transfer pricing audits dating from in 1993. The DGT recently announced a tax collection target for 2013 through examination/audit of IDR 18 trillion (approximately US$1.8billion). This is a 40 percent increase on the target for 2012.
PER-22 contains a number of key items that Indonesian taxpayers should take note of, these include:
- Detailed additional information that will be required to be provided during a transfer pricing audit;
- A requirement to provide information on the value chain relevant to the taxpayer's business and the profitability of each of the entities (including foreign related parties) participating in the value chain;
- A focus on the profit split method;
- Increased focus on thin capitalization/debt to equity ratios; and
- The use of additional financial ratios /profit level indicators
Additional Indonesian transfer pricing regulations are expected, which may potentially allow an increase in transaction thresholds of up to IDR50bn for which documentation is required. Other expected changes may include that domestic transactions also need to be covered in documentation where there are significant or abnormal losses, actual submission of transfer pricing documentation may be expected and the definition of related party definition may be expanded to control and supply.
The Philippines published official transfer pricing regulations in January of this year. Overall these guidelines are consistent with the OECD Transfer Pricing Guidelines, but it is anticipated that local Philippines benchmarking will be an essential requirement for showing compliance with these regulations from a practical and audit perspective. Philippine taxpayers should bear in mind that although the regulations effectively apply from the 2013 financial year, there was a historical directive from the Philippines revenue authority in 2008 indicating that Philippines taxpayers should follow the OECD transfer pricing guidelines during the interim period until when the Philippines guidelines were released. It would seem that April 30 2014 will be first major deadline to prepare contemporaneous documentation. APAs are also adopted as part of the new regulations.
Finally, on July 19 of this year, Vietnam introduced an APA circular (Draft Circular) which is largely in line with the global best APA practices but contains more onerous information disclosure requirements.
The Draft Circular outlines the framework, governance, process, roles, responsibilities and mutual expectations for taxpayers and the Vietnamese tax authorities in applying for, negotiating and executing APAs.
An APA is valid for a maximum of prospective five years with renewal option for another five years.
With respect to the database used for transfer pricing analysis in APA application, the Draft Circular requires a use of those that contain publicly available information. This is a welcome departure from the current tax audits in which secret comparables are commonly used.
The Draft Circular is applicable to unilateral, bilateral and multilateral APAs for business transactions and/or arrangements between related parties. Its key features are:
- Pre-filing consultation is mandatory. This pre-filing process requires submission of a specific form and an exhaustive list of documents. A "no-name" basis discussion is not allowed;
- Subject to the success of pre-filing consultation step, an eligible taxpayer may file an official APA application within specified timeframe with a required processing fee;
- Due to the complicated nature of the APA process and the fact that this is a new ruling in Vietnam, both tax authority and taxpayer are allowed to invite or hire independent consultants to assist during the APA process;
- The taxpayer has an option to withdraw from the APA process anytime during the APA application processes;
- Database used for transfer pricing analysis must contain publicly recognized information;
- The Draft Circular, includes a confidentiality provision; accordingly, if an APA application is cancelled, all information and documents provided to the tax authority during the APA negotiation process will be kept confidential and not be used as evidence for further tax audit, tax inspection, and tax imposition on the taxpayers;
- Once the APA is signed, the taxpayer must monitor and adjust taxable income (if required) in line with the agreed-upon margin in the signed APA during the covered APA period; and
- During the covered APA period, the taxpayer may apply to revise the signed APA where there is a change of material assumptions, change in regulations or in other cases.