Other Issues

The arm's length principle should be applied to: 

  • Related party services- charges should be comparable to the charges for the services provided between unrelated parties under similar circumstances.
  • Related party loans- interest rates should reflect the rates charged between unrelated parties under similar circumstances.

 

Applying The Arm’s Length Principle to Related Party Services

There should be arm's length charges for services provided between related parties, comparable to the charges for such services provided between unrelated parties under similar circumstances.

Routine Support Services

If the services provided between related parties are in the list of routine support services in Annex C of the e-Tax Guide "Transfer Pricing Guidelines" (1.46MB) Revised!, IRAS is prepared to accept the charging of these routine support services at cost plus 5% mark-up, provided that:

  1. The routine support services are only provided to related parties; and
  2. All costs relating to the routine support services performed are taken into account in computing the 5% mark-up.

Cost-pooling Arrangement for Routine Support Services

If the routine support services are provided to related parties and there is a cost-pooling arrangement among them, IRAS is prepared to accept that the services are provided at cost with no mark-up if all the following conditions are satisfied:

  1. Each participant's share of the costs must be borne in the form of cash or other monetary contributions
  2. The services are not provided to any unrelated party
  3. The provision of the services is not the principal activity of the service provider. If the cost of providing the services does not exceed 15% of the total expenses of the service provider for that financial year, the provision of the services will not be treated as its principal activity;
  4. The services are listed in Annex C of the e-Tax Guide "Transfer Pricing Guidelines" (1.46MB) Revised!; and
  5. There is documentation showing that the parties intended to enter into the cost pooling arrangement before the provision of the services.

Strict Pass-through Costs

A Singapore taxpayer may merely act as the paying agent for services provided by a service provider (whether independent or related) to the Singapore taxpayer's related parties. When the Singapore taxpayer pays the service provider and onward charges these costs to its related parties, IRAS is prepared to consider these costs as strict pass-through costs and accept no mark-up on the onward charges when all the following conditions are met:

  1. The services provided by the service provider for which the Singapore taxpayer passes on the related costs are for the benefit of the related parties ("benefits test");
  2. The service provider charges an arm's length fee for the services provided;
  3. The Singapore taxpayer is merely the paying agent and does not enhance the value of the services provided by the service provider; and
  4. The related parties are legally or contractually liable for the payment of the costs. This condition can be met even if the Singapore taxpayer is legally or contractually liable to pay for services but it has a written agreement with its related parties for the latter to assume the liabilities relating to the services.

The application of the arm's length principle to related party services is summarized in the flowchart below:

App of arm's length

Please refer to Part III, section 12 of the e-Tax Guide "Transfer Pricing Guidelines" (1.46MB) Revised! for more details.

Applying The Arm's Length Principle to Related Party Loans

Applying the arm's length principle, related party loans should be charged interest rates that reflect the rates charged between unrelated parties under similar circumstances.

If the lender and borrower of the related party loan are both Singapore taxpayers, IRAS will limit the interest expense claimed on such a loan if it is provided interest-free or at interest rates that are not supported by transfer pricing analysis. This practice will not apply if the lender is in the business of borrowing and lending funds (for example, banks, other financial institutions or finance and treasury centres) in which case the arm's length principle should be complied with.

If the related party loan is a cross-border loan, taxpayers should ensure compliance with the arm's length principle.

Indicative margins for related party loans

IRAS has introduced an indicative margin which taxpayers can apply on each related party loan not exceeding S$15 million as tabulated in this table: 

 Related party loan not exceeding S$15 million obtained or provided during the period Indicative margin
1 January 2017 to 31 December 2017 + 250 bps (2.50%)
1 January 2018 to 31 December 2018+ 175 bps (1.75%)

IRAS will update the indicative margin at the beginning of each calendar year.

The indicative margin is not mandatory. It gives taxpayers an alternative to performing detailed transfer pricing analysis in order to comply with the arm’s length principle for their related party loans.

If taxpayers choose to apply the indicative margin, they will apply the indicative margin on the appropriate base reference rate selected for the related party loan. For example:

  • Taxpayer provided a floating rate loan of S$10 million to its related party on 1 February 2018 
  • Taxpayer used SIBOR as the base reference rate for the related party loan
  • Taxpayer chose to apply the indicative margin
  • The interest rate for the related party loan will be 1.75% plus the appropriate SIBOR rate
Examples of base reference rates for floating rate loans are: 
  • SGD Singapore Inter Bank Offered Rate (“SIBOR”) 
  • USD London Inter Bank Offered Rate (“LIBOR”)

Examples of base reference rates for fixed rate loans are: 

  • SGD/USD swap rate
  • Singapore Government Securities (“SGS”) yield

If taxpayers choose not to apply the indicative margin or if it is not applicable to them, they will have to apply an interest rate in line with the arm’s length principle and maintain contemporaneous transfer pricing documentation.

Please refer to Part III, Section 13 of the e-Tax Guide "Transfer Pricing Guidelines" (1.46MB) Revised! for guidance and illustrations of the 3-step approach to determine the arm's length interest charges for related party loans and guidance on applying the administrative practice for indicative margins on related party loans.

Attribution of Profits to Permanent Establishments ("PEs")

At times, the activities performed by a company in Singapore for its overseas related company may create for the overseas company a permanent establishment ("PE") in Singapore. As such, profits that are attributable to the PE would be liable to tax in Singapore.

However, if all the following conditions are met, there will be no attribution of profits to the PE and thus, there will be no Singapore tax liability for the overseas company arising from the inter-company service arrangement:

(a) The Singapore company receives an arm's length fee from the overseas company that is commensurate with the functions performed, assets used and risks assumed by the Singapore company;

(b) The fee paid by the overseas company to the Singapore company is supported by adequate transfer pricing documentation to demonstrate compliance with the arm's length principle; and 

(c) The overseas company does not perform any functions, use any assets or assume any risks in Singapore, other than those arising from the activities carried out by the Singapore company under the inter-company service arrangement.

Please refer to Part III, section 14 of the e-Tax Guide " Transfer Pricing Guidelines" (1.46MB) Revised! on the attribution of profit to PE.

  • A Singapore company provides routine support services to its related parties and charges for these services at cost. However, when filing its tax return, the company will apply a 5% mark-up on the costs. Will IRAS now mandate that the Singapore company charge for the services at a mark-up computed via a transfer pricing study instead of applying a 5% mark-up for tax purposes?

    No. IRAS does not mandate the Singapore company to perform a transfer pricing study on its charges for routine support services, so long as this is in line with Part III, section 12 of the e-Tax Guide "Transfer Pricing Guidelines" (1.46MB) Revised!. The company may continue with its practice of applying a 5% cost mark-up for routine support services provided to its related party as a reasonable arm's length charge. For non-routine services, the company has to determine the arm's length price for tax purposes, supported by a transfer pricing study.

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