Tax Alert - Transfer Pricing

The COVID-19 pandemic has adversely disrupted many areas of our life. It comes as no surprise that the transfer pricing (“TP”) environment is impacted as well. Many jurisdictions had adopted new measures to help taxpayers meet their TP compliance-related obligations in respect of related party transactions. On this note, the Inland Revenue Authority of Singapore (“IRAS”) published a tax guidance  (“the Guidance”) on TP for taxpayers who might be impacted by the COVID-19 pandemic.

Prepared in Q&A format, the Guidance covers two main areas:

  • How to support your TP outcome during COVID-19; and 
  • What should you do if you are planning to submit an Advance Pricing Arrangement (“APA”) application or have an APA in progress or an existing APA.  

Here are the key points of the Guidance:

1. How to support your TP outcome during COVID-19 

IRAS proposed that companies include the following information (where applicable) in their TP documentation to support their respective TP outcomes:  

  • Industry analysis – Provide an overview of how the taxpayer’s industry has been impacted by COVID-19 and the direct consequences to the company.
  • A functional and risk analysis – Identify entity/personnel who has the right to control and manage risks relating to COVID-19.  In general, risks should be assumed by the relevant decision-makers. 
  • New organisational structure – To support a change in the allocation of functions performed, risks assumed and assets used before and after COVID-19.  
  • New contractual arrangements – To support changes in functions and risks among group entities before and after COVID-19.    
  • Budgeted financials –  A comparison between budgeted versus actual financials and provide explanations and evidence to support variances due to COVID-19.
  • Others – Reasons and supporting evidence to justify the negative impact of COVID-19.
  • Government assistance – Details of COVID-19 related assistance received by a taxpayer from Government or related Government imposed regulations which has an adverse impact to the company’s operations.


A company’s functional and risk profile (i.e. its’ characteristics) is key in determining the reasonableness of a TP result.   Support by way of documentary evidence is vital.  Internal documents such as Board Minutes, email correspondences, and financial budgets help to support the allocation of functions and risks among group entities. Equally important are external documentation, for example, industry analysis reports, government assistance programmes, or policies that provide independent affirmation on the general economic environment and circumstances.

2. Benchmarking taxpayer’s related party transactions using term-testing    

The Guidance allows term-testing (i.e. testing of related party transactions over a multiple-year period) to be applied if the taxpayer is of the view that annual testing may result in volatile results due to the impact of COVID-19.   This view would need to be substantiated with evidence, which would complement the information listed in point 1 above.  The term-testing could only be applied as a once-off event for the Year of Assessment 2021. Unlike normal times, taxpayers need not consult IRAS prior to the application of the term-testing.


In most cases, a comparison is based on taxpayer’s current year financial data versus comparable companies’ latest three years financial data (i.e. three immediate preceding years).  This is for the purpose of diluting the volatile economic environment that comparable companies may suffer from.  However, during this unprecedented economic downturn arising from the COVID-19 pandemic, the suggested term-testing is not likely to enhance comparability since the three years average adopted by the tested party[1] is just not comparable to the pre-COVID 19 periods.

3. APA application or renewal of APA during the pandemic  

The taxpayer may file a new APA application or request for renewal of an existing APA if its business operations and economic performance are not significantly impacted by the pandemic.  Otherwise, the taxpayer should consider filing a new APA application or request for renewal of an existing APA only when there is a greater level of certainty on the factors which may affect the determination of arm’s length transfer prices between related parties.


Applying for an APA is always regarded as one of the most effective ways in mitigating TP exposure as it is an upfront agreement with tax authorities with regard to the company’s TP policies. As long as the taxpayer complies with the terms of the APA, there should not be exposure to any TP adjustments. At this juncture when taxpayers are facing a highly uncertain economic outlook, IRAS does not encourage an APA application or renewal of APA to be made. To minimise TP exposures as far as possible, taxpayers may wish to take a more conservative approach when setting up any new TP policy for related party transactions during this period.   

4.  Impact on APA in progress 

The taxpayer should assess whether there are any TP implications arising from COVID-19 which might impact the APA application (e.g. changes in the functional profile of the covered entities) and provide the relevant details as soonest possible to IRAS for their determination of next steps.

IRAS stated that where there are significant uncertainties involved or anticipated, the case review process may be held up or terminated.  In the case of an ongoing bilateral/multilateral APA, IRAS will discuss the case with the other Competent Authority to arrive at a mutually acceptable conclusion.


Taxpayers who have submitted an APA application should review whether COVID-19 has impacted their businesses and update IRAS as soon as possible so that suitable remedial action may be taken.

5. Existing APA agreement   

The taxpayer should review and assess whether there is any breach of the terms and conditions in the existing APA agreement, in particular, whether there is a violation of the critical assumptions in the current climate.  The appropriate action should be taken to notify IRAS should there be a breach of the agreed terms and conditions and provide IRAS with an analysis of the impact arising therefrom. With this, IRAS would evaluate and come up with the best possible outcome. The evaluation might result in letting the APA runs its usual course, suspending or modifying the APA for the period in which it is impacted.

In the case of a bilateral or multilateral APA, IRAS would need to discuss the outcome with the other Competent Authority and come to a mutually acceptable conclusion.


Holders of existing APAs should revisit their agreements as soon as possible.  Special attention must be paid when preparing the APA compliance report to ensure that none of the previously agreed terms and conditions have been breached. On the other hand, if the COVID-19 pandemic has severely impacted the taxpayer, negotiations with IRAS should start immediately so as to identify the best solution for all parties concerned.    


When the economic environment becomes highly uncertain, prompt, clear, and transparent communication would be the key in securing ongoing support from the relevant regulatory authorities. Keeping good record of strategies undertaken in tackling the COVID-19 crisis is crucial in supporting the fact that taxpayers’ decisions are made based on commercial considerations rather than based on tax-driven factors.

To summarise, TP that is rooted in operational substance and decisions are made according to commercial considerations rather than the fact that the parties involved are related, the resultant outcome is likely to be viewed as arm’s length. The key is always to ensure that proper documentation is maintained to support the rationale behind the adoption of any TP policies.

[1]  In general, the “tested party” is one who has a lesser complex functional and risk profile under the Covered Transaction and it should be a party that does not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparable companies.


For further information or assistance, please contact:

Koh Puay Hoon, Partner & Head of Tax
T +65 6594 7820

[email protected]

Cindy Lim, Tax Partner
T +65 6594 7852

[email protected]

William Chua, Tax Partner
T +65 6594 7860

[email protected]

Joanna Lam, Partner
T +65 6594 7896

[email protected]