A Holistic view on Transfer Pricing – IRAS follows the Global Trend.


November 3rd this year, the IRAS (Inland Revenue Authority of Singapore) published an update of its guidelines as it pertains to related party transactions. Starting 2018, if the value of related party transactions in the audited accounts for the financial year exceeds a fairly low threshold of 15 million SGD, certain details of these related party transactions must be reported.


2014-02-03 16.04.46 klein

By Norbert Braspenning

Visit the blog-page for this and more articles (click here).

Said report will help IRAS in assessing transfer pricing risks and selecting appropriate cases for transfer pricing consultation. This allows IRAS to i) assess taxpayers’ compliance with the transfer pricing guidelines and ii) identify areas in which IRAS can advise taxpayers on good practices in transfer pricing, and more importantly iii) enforce the Arm’s Length requirement.  (see footnote 1.)

Transfer pricing for MNC’s is one of the most interesting areas within international tax law. With ongoing economic globalization, intergroup cross-border transactions are becoming increasingly important, and transfer pricing is now the key issue for profits allocation among multinational group companies. Transfer pricing may thus also be used to shift income from one country to another. This is not per definition a bad thing, as for most of the MNC’s, this shift of profits is the result of the normal business activities. However when it occurs – especially shifting profit from high tax regions to low tax regions – certain rules and guidelines need to be respected to avoid adverse consequences.

Video: How do companies avoid corporation tax?

The debate in international tax law has largely focused on the tax-paying morale of MNC’s. Are corporations contributing their fair share of taxes to the countries in which they are doing business? By not paying taxes, or paying little taxes, do MNC’s damage countries’ economies? Is the problem worse if multinationals do not pay any or little taxes when doing business in third world countries?

Are profit shifting activities conducted for the sole purpose of lowering the MNC’s global tax burden? Even though all of the above is entirely legal and lawful, it is more and more perceived as immoral and undesirable. Therefore transfer pricing has become a hot topic for journalists and political leaders around the world who are challenging international tax rules, as they feel these do not fairly deliver the revenue they were intended to capture.

The IRAS follows a world-wide trend whereby Tax Authorities around the Globe increasingly review transfer pricing based on the totality of intercompany transactions and not simply on a transaction by transaction basis. As a result, it will no longer be enough to simply make sure that individual intercompany transactions satisfy a checklist of technical requirements. Tax authorities across the globe will be taking a holistic view of taxpayers’ intercompany transactions to assess the total profit shifted from their jurisdictions, without specific regard to the individual transactions that caused the shift. Tax authorities are also using non-transfer pricing provisions, such as permanent establishment and general anti-avoidance rules, to supplement their transfer pricing review powers.

Arm’s Length Principle

So how is this in practice achieved? The answer is the “Arm’s Length Principle”, which is the international standard adopted by the OECD (Organisation for Economic Co-operation and Development) and by many countries world-wide.

The arm’s length principle is the condition or the fact that the parties to a transaction are independent and on an equal footing.

As mentioned, Tax Authorities have become much more conscious of the key role of transfer pricing in determining the taxable profit of MNC’s. For many years, transfer pricing application was left in the hands of practitioners. The recent crisis and some scandals shed light on the risk that a certain way of applying transfer pricing was the arm’s length principal itself. That’s why a few years ago the OECD’s launched many projects on transfer pricing with the aim of redrafting the guidelines. In particular since 2008, the OECD has issued more than ten discussion drafts on transfer pricing.  Consequently, Transfer Pricing has become one of the main risks to be addressed and managed by MNC’s.

Take for example the OECD’s recent action plan on Base Erosion and Profit Shifting (BEPS). 15 points outline how to validate that related party debt is treated the same as unrelated party debt. In my view, most relevant points in this action plan are the ones about substance (#3, 4 and 5), treaty benefits (#6), permanent establishment (#7) , transfer pricing (#8, 9 and 10). This will force MNC’s to develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business.

The most important risk that MNC’s may face is not just the risk of additional tax, penalties and interest, but real damage to their company’s overall reputation. Transfer pricing is in the media spotlight and is likely to remain there for some time. The coverage has created a number of reputation risk challenges for companies looking to reconcile legally compliant tax positions with public perceptions about them. These concerns are magnified when accusations of tax avoidance are amplified by social media. Remember Margaret Hodge (MP UK Parliament constituency) debate with Matt Brittin (Google)?

Video: Margaret Hodge grills Google Boss on UK tax dodging

Video: Amazon, Starbucks and Google grilled by MP’s over tax

It leaves very little doubt that companies having important intercompany transactions across various different countries are struggling to meet their heightened obligations and an increasingly onerous worldwide regulatory framework in a rapidly changing world. Besides this, the need to consider how the public at large has come to perceive transfer pricing only makes that task more complex.

In order to mitigate risks, MNC’s will have to consider the following actions:

  • Have appropriate and updated processes and policies in place for determining what for a specific transaction Arm’s Length is. How can it be ensured that internal pricing mirrors and ensures an independent and equal footing.
  • Risk assessment may need updating. Increasingly detailed documentation requirements at local level, combined with increased scrutiny by tax authorities, will require MNC’s to adjust their approach to documentation globally. Documentation requirements are in place in markets that may never have been on our radar screen in the past.
  • Consider the perspectives of the rapid-growth markets. Tax authorities in developing countries may also conclude that intangibles have been developed locally that taxpayers haven’t acknowledged, much less compensated. Analysis of functions, risks and intangibles can assist in uncovering where those risks may lie. The requirements in those jurisdictions may be more onerous and individualistic than what taxpayers are accustomed to in mature markets.
  • Make sure systems are up to the challenge of handling transfer pricing processes. These challenges can be particularly severe if the taxpayer operates in an industry where tangible assets are a significant portion of the value chain.
  • As attention begins to shift to how MNC’s implement and adjust prices, MNC’s in all industries should make sure that they have the people and systems in place to undertake frequent reviews and adjustments to transfer prices in order to eliminate uncertainty of outcomes. The inability to evaluate the system profit and a product-by-product or intangible-by-intangible basis may limit the ability of the taxpayers to assess how profits are currently allocated across the business and leave the taxpayer open to a challenge by the tax authority.


Keep in mind that, from a broad international tax law perspective, setting up an entity in a specific jurisdiction solely to leverage that country’s tax treaty network, is frowned upon by many countries. To prevent such practices, additional requirements (anti-abuse provisions) have been introduced in tax treaties, for example allowing only a reduction if the recipient is the ultimate (beneficial) owner of the income or allowing reduction only if the recipient has specific ties with the jurisdiction in which it is resident, for example be stock-listed there (so-called limitation on benefits clauses). The OECD is re-evaluating the effectiveness of existing anti-abuse provisions as part of the OECD BEPS project.

Visit the blog-page for this and more articles (click here).

About the author


The regulations cater specific situations and exemptions. Under Mutual Agreement Procedures (MAPs), present in Singapore’s Avoidance of Double Taxation Agreements (DTAs), taxpayers can apply to the IRAS to enter into discussions with Singapore’s tax treaty partners to eliminate any double taxation arising from transfer pricing adjustments. There are two possibilities. In case Singapore does not have a DTA with a certain other tax jurisdictions, then the unilateral Advance Pricing Arrangements (APAs) come under the framework of Singapore’s Advance Ruling System. However if Singapore has a DTA with the other jurisdiction, the unilateral APA will be issued outside of the Advance Ruling System.