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How the Singapore transfer pricing landscape has evolved over a decade

The recent "10 year challenge" that went viral on social media saw people comparing photos of themselves in 2009 to those taken in 2019. If a snapshot of Singapore's transfer pricing landscape in 2009 were juxtaposed with the current state, it would certainly show a marked difference, given the slew of developments that have taken place over the past 10 years.

2009: enactment of arm's length principle

2009 was a landmark year in Singapore's transfer pricing landscape as it was the year that the arm's length principle was enacted explicitly for the first time under section 34D of the Income Tax Act (ITA). Prior to that, references to the arm's length principle were made primarily in Singapore's tax treaties. The Singapore Transfer Pricing Guidelines issued in 2006 provided detailed guidance on the arm's length principle, but these were, arguably, guidelines that did not have the force of law.

While section 34D enacted in 2009 was kept succinct with wording largely similar to that of the Associated Enterprises Article of the OECD Model Tax Convention, its enactment provided the legal basis for the Comptroller of Income Tax to make upward adjustments on transfer pricing between related parties that is not conducted on an arm's length basis. It signalled Singapore's desire for detailed transfer pricing legislation to be put in place to ensure that its transfer pricing rules are adhered to, and heralded a series of legislative changes on transfer pricing over the next 10 years.

2015: contemporaneous transfer pricing documentation requirement

Fast forward to 2015 – the year Singapore's Transfer Pricing Guidelines underwent a major revamp. Notably, the 2015 update to the Guidelines included – for the first time – the requirement for contemporaneous transfer pricing documentation. Alongside this requirement, the 2015 Guidelines introduced various categories and dollar value thresholds below which there would be no need for transfer pricing documentation.

The 2015 Guidelines also introduced the "group level" and "entity level" approach towards transfer pricing documentation, perhaps a hint on closer alignment with the impending OECD's Base Erosion and Profit Shifting (BEPS) Project initiatives.

Suffice to say, the 2015 Singapore Transfer Pricing Guidelines made many taxpayers sit up and take notice of the contemporaneous transfer pricing documentation requirement, in particular. However, it remained unclear how strictly the Inland Revenue Authority of Singapore (IRAS) would enforce the contemporaneous transfer pricing documentation requirement, since the question of penalties for the failure to prepare transfer pricing documentation was not addressed specifically in the 2015 Guidelines nor in the ITA. This question would eventually be addressed through legislation three years later.

2016 – 2017: BEPS Project initiatives take centrestage

The next two years were largely dominated by the BEPS Project initiatives, which were moving globally at an unprecedented fast pace. The BEPS Project final reports were released by the OECD in October 2015 and within two years, the recommendations in the BEPS Project final reports on Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation and Action 13: Transfer Pricing Documentation and Country-by-Country Reporting were formally incorporated into the 2017 update of the OECD Transfer Pricing Guidelines.

With such rapid changes taking place globally, it would be unwise for Singapore to take a backseat and not be involved in the refinement of the BEPS Project initiatives that could impact its economy.

In June 2016, Singapore became one of the first jurisdictions to join the Inclusive Framework for the global implementation of the BEPS Project as a BEPS Associate. As a BEPS Associate, Singapore must adopt the four minimum standards under the BEPS Project. It also allows Singapore to partake in the further development of the BEPS Project initiatives on an equal footing with other participating jurisdictions. This move reiterated Singapore's commitment to combat tax evasion and adopt internationally accepted standards of tax policy, with the aim for the country to be seen as a reputable tax jurisdiction.

What followed shortly after was the implementation of Country-by-Country Reporting (CBCR) in Singapore. Singapore's CBCR requirements came into effect for financial years beginning on or after 1 January 2017 for Singapore-headquartered multinational enterprises, with voluntary filing allowed for financial year 2016. Besides the fact that CBCR is one of the four minimum standards under the BEP Project that Singapore must adopt as a BEPS Associate, the secondary reporting mechanism of CBCR means that Singapore would be better positioned to adopt CBCR rather than be kept out of the loop on information shared by Singapore-headquartered multinational enterprises with other tax jurisdictions.

At the same time, it is observed that the IRAS started taking into account the BEPS Project Action 8-10 concepts on value creation and substance in their transfer pricing audits. More considerations seem to be made for unilateral Advance Pricing Arrangements (APAs) as well since they would now need to be shared with counterparty jurisdictions under the BEPS Project Action 5. All in all, the BEPS Project has left its mark on Singapore's transfer pricing landscape and the impact of its presence will only increase thereafter.

2017-2018: transfer pricing penalties and documentation rules

In tandem with its international commitments, Singapore took the next step in its domestic transfer pricing legislation in 2017 and substantially revised section 34D of the ITA to be aligned with the additional guidance on the arm's length principle arising from the BEPS Project. Furthermore, to quell any doubts on whether Singapore is serious about enforcing its transfer pricing rules, new sections 34E and 34F were introduced in the ITA to provide for specific transfer pricing penalties.

The transfer pricing penalties that have been passed into law and are effective from the Year of Assessment (YA) 2019 consist of a 5% surcharge on transfer pricing adjustments as well as penalties for non-compliance with transfer pricing documentation requirements.

Since penalties now apply to non-compliance with transfer pricing documentation requirements, detailed transfer pricing documentation rules were gazetted in February 2018 and are similarly effective from

YA 2019. Documentation requirements are therefore no longer merely guidelines without the force of law.

These transfer pricing legislative changes in 2017 and 2018 were the logical next steps in the development of a transfer pricing regime and should come as no surprise to observers. To help the IRAS in its transfer pricing audit process, a disclosure form on related party transactions is now required to be submitted together with the corporate tax returns starting from YA 2018.

What remains to be seen is how tightly the IRAS will interpret and enforce the laws, although it would be unwise for taxpayers to treat the new transfer pricing penalties lightly.

Next 10 years: controversy is the name of the game

What lies ahead in the next 10 years of Singapore's transfer pricing landscape? With international and domestic transfer pricing measures in place, increased transparency on related party transactions and the continued need to raise revenues, transfer pricing audit activity is expected to increase globally and in Singapore.

At the same time, Singapore has made a commitment to the minimum standard under BEPS Action 14: Making Dispute Resolution Mechanisms More Effective, to ensure that tax treaty disputes, including transfer pricing disputes, are resolved in a timely and efficient manner. Singapore has also committed to mandatory arbitration under the BEPS Multilateral Instrument (MLI) and the Mutual Agreement Procedure.

In fact, mandatory arbitration may become a feature of Singapore's tax treaties earlier than anticipated. On 21 December 2018, Singapore deposited its instrument of ratification for the MLI and it enters into force for Singapore on 1 April 2019. As at 21 December 2018, Singapore listed a total of 86 tax treaties intended to be amended via the MLI. These tax treaties will only be amended if Singapore's treaty partners also choose to amend the tax treaties via the MLI and both treaty partners share the same position on the MLI provisions. In the course of this year, we therefore expect to see more developments on exactly which treaties will contain the mandatory arbitration clause.

To address the increasing scrutiny on transfer pricing while eliminating double taxation, dispute resolution will be key and will likely be the next phase of change in Singapore's transfer pricing landscape.