Singapore’s Official TP-Guidance on COVID

In September, the Internal Revenue Authority of Singapore (“IRAS”) published new guidance on transfer pricing (“TP”) in connection with the effects of the COVID-19.  This guidance answers several questions relating to TP and TP documentation for financial years under the influence of the pandemic.  Specifically, it addresses the question of contents of the TP documentation, the possibility of multi-term testing, treatment of benefits from government assistance, loss-sharing, and loss making comparables.  For example, IRAS usually only may accept a multi-year testing after the taxpayer consulted with them.  Nevertheless, for the years of assessment 2021 and 2022, IRAS now allows multi-year testing without such prior consultation.  Relating to government assistance, IRAS states – among other things – that the benefits from these would typically be retained by the enterprise.  Finally, regarding justifying losses for so called routine entities, the IRAS guidance reiterates the general guidance provided already by the OECD TP guidelines, that such is possible, if consistent with the risk that the entity bears.  For loss-making comparables, it is stated that while the IRAS prefers multi-year benchmarks, it may accept the annual results during a COVID-year, if the respective comparable company was otherwise profitable.

In our view, this guidance provides a good example of the efforts the IRAS has undertaken to develop a more thorough understanding of TP economics and promoting good practices among Singaporean taxpayers.  For example, it refers explicitly to the possibility of substantiating the outcomes of controlled transactions by means of forecasting with regression analyses.  However, it also reflects the formulaic and oversimplified thinking that many tax administrations show in practice.  As an instance, while lifting it for years under influence of the pandemic, the ITAS still required testing of annual results of the taxpayer as general standard.  Especially with testing on the level of operating profits – as typical today with the strong prevalence of the TNMM over traditional transaction methods in practice – this is often not appropriate as testing of multi-year results would typically be more in line with the intentions of uncontrolled enterprises (particularly, when simultaneously using benchmarks based on multi-year results, as is also the international standard).  In practice, the IRAS guidance can still be expected to reduce the efforts taxpayers will have to make when justifying the arm’s-length nature of their controlled transactions.  This is a positive development as it could otherwise be expected that for many routine-type transactions, taxpayers would either be required to excessive efforts or face unnecessary TP risks.

The IRAS Guidance on TP under COVID-19 can be found online here: https://www.iras.gov.sg/news-events/singapore-budget/covid-19-support-measures-and-tax-guidance/tax-guidance/transfer-pricing