Introduction

Introduction Singapore continues to refine its transfer pricing (TP) regime to keep pace with global BEPS measures and evolving economic realities. The 7th Edition of the Transfer Pricing Guidelines (TPG), issued on 14 June 2024, introduces robust reforms aimed at enhancing audit transparency, documentation stringency, and commercial rationality.

These guidelines align Singapore’s TP practices more closely with OECD’s evolving framework, while also addressing local enforcement priorities, including the phasing out of IBOR, increasing reliance on risk-free rates (RFRs), and stricter documentation and audit regimes.

Key Updates in the 7th Edition of the Transfer Pricing Guidelines

New Documentation Exemption Thresholds

Effective from Year of Assessment (YA) 2026, the exemption threshold for several categories of related-party transactions has increased from SGD 1 million to SGD 2 million. This includes services, royalties, guarantees, and other routine transactions. However, this threshold only exempts taxpayers from contemporaneous documentation. Taxpayers must still comply with the arm’s length principle and be prepared to provide supporting records if requested by IRAS.

Discontinuation of Interest Deduction Restriction for Domestic Loans

For related-party domestic loans entered into on or after 1 January 2025, the prior practice of capping interest deductions is eliminated. Taxpayers must either apply IRAS’s indicative margin or justify interest rates based on arm’s length principles, considering their functional and risk profile analysis.

Commercial Rationality and Substance as Audit Focal Points

The 7th Edition introduces criteria for disregarding transactions that lack commercial rationality:

• If the payer is Singapore-based and the transaction lacks commercial justification, IRAS may deny deductions (e.g., for royalties or service fees).
• If the recipient is based in Singapore, IRAS generally will not disregard the income, avoiding double non-taxation. This reflects IRAS’s dual objective of curbing base erosion and ensuring fairness under tax treaties.

MAP Process Update

The Mutual Agreement Procedure (MAP) framework removes pre-filing steps and introduces:

• A detailed evaluation phase by IRAS prior to acceptance;
• Discretion to reject applications upfront;
• A requirement for well-substantiated documentation within treaty deadlines.

Clarified Guidance on IBOR Reform

With the global transition to Risk-Free Rates (RFRs), taxpayers must:

• Justify any spread adjustments;
• Explain basis for loan term changes;
• Determine whether restructuring triggers a new loan arrangement. Taxpayers should document these elements contemporaneously to meet compliance expectations.

Capital Transactions and TP Adjustments

TP adjustments will not apply to non-taxable capital gains or non-deductible losses. However, if capital transactions impact depreciation allowances (under Sections 19B, 19D, 19E, or 20 of the ITA), IRAS may still enforce arm’s length pricing.

Contemporaneous Supplementary Analyses

Supplementary analyses submitted during TP audits must not rely on hindsight. Taxpayers are encouraged to prepare contemporaneous analyses (e.g., sensitivity testing or benchmarking rationales) to defend pricing positions.

Emphasis on Working Capital Adjustments

The updated guidance permits working capital adjustments (WCA) in benchmarking analysis when justifiable. Adjustments may include:

• Receivables/payables turnover;
• Inventory holding cycles;
• Funding cost implications. This update aligns Singapore’s WCA practices with OECD Chapter III guidance.

Government Assistance

Taxpayers must now disclose and analyse the impact of government grants or subsidies (e.g., COVID-19 relief). IRAS expects:

• Documentation of assistance type and amount;
• Accounting treatment;
• How the receipt of specific government assistance had been taken into consideration in their comparability analysis.
• Evidence that independent parties in similar situations would have retained such benefits.

Audit Red Flags: What Triggers IRAS Attention

With IRAS sharpening its audit toolkit, taxpayers must be aware of common triggers:

TP Audit Enhancements & 5% Surcharge Policy

• IRAS now proceeds directly to issue TP adjustments and a 5% surcharge after completing fact-finding.
• This marks a departure from the prior “inform and discuss” phase.
• Taxpayers must file formal objections to contest the adjustment.
• From YA 2024, taxpayers must demonstrate good compliance over three YAs to be eligible for surcharge remission.

Practical Recommendations for Taxpayers

Strengthen Documentation

Ensure documentation reflects actual conduct, contains robust FAR analysis, and includes reliable benchmarking.

Annual Review of Long-Term Loans

Reassess intercompany loans annually to ensure continued arm’s length compliance; refresh documentation if needed.

Simplified TP Documentation

Simplified TPD must be completed by the tax filing due date and explicitly dated to prove contemporaneity.

Pass-Through Costs and Written Agreements

Email correspondence is acceptable as evidence of cost-sharing agreements. Keep audit trails updated.

Prepare Supplementary Analyses Early

Conduct and document supplementary justifications (e.g., sensitivity tests) ahead of audits to pre-empt disputes.

Conclusion: Evolving Expectations and the Way Forward

Evolving Expectations and the Way Forward Singapore’s 7th Edition TPG raises the bar for taxpayers, emphasizing substance over form, proactive governance, and audit readiness. The regulatory shift underscores the need for deeper commercial alignment, especially as IRAS increasingly focuses on nuanced economic substance tests, documentary quality, and long-term risk management.

Taxpayers must treat TP not merely as a compliance checkbox, but as a strategic function, ensuring that pricing policies, business operations, and documentation evolve in step with regulatory expectations. Where appropriate, pursuing APAs or engaging in early-stage MAP discussions may mitigate long-term risks and enhance certainty across jurisdictions.

Share via