In light of the recent announcements by the Inland Revenue Authority of Singapore (IRAS) regarding its success in tax recovery through Transfer Pricing Audits (TPA) , businesses now face an evolving tax landscape with heightened scrutiny. This article aims to provide practical insights and guidelines for business owners and CFOs to manage their transfer pricing audit exposures.
Understanding Transfer Pricing Audit (TPA)
IRAS conducts TPA to ensure compliance with the arm's length principle and TP documentation requirements. The process involves a collaborative exchange of opinions between the IRAS officers and taxpayers, resulting in two possible outcomes as follows:
A closing letter from IRAS without making any transfer pricing (TP) adjustments but with recommendations to improve TP documentation, use of appropriate TP method(s), etc.; or
TP adjustments accompanied by comments; and from the year of assessment 2019 onwards, a surcharge of 5% will be imposed on any TP adjustments, regardless of whether there is additional tax payable or not.
Selection Criteria for TPA
The IRAS selects taxpayers based on risk indicators such as the value of related party transactions, business performance over time, and the likelihood of understated taxable profits due to inappropriate TP measures. Below are some examples on high-risk circumstances in relation to TP issues:
- Transactions with cross-border related parties that are of large value relative to the other transactions of the taxpayer;
- Transactions with related parties subject to a more favourable tax treatment;
- Recurring losses or large swings in operating results which may be unusual given the functions and assets of the taxpayer and the risks it assumed;
- Operating results that are not in line with businesses in comparable circumstances;
- Use of intellectual property, proprietary knowledge or other intangibles in the business;
- Transactions involving Research & Development or marketing activities which could lead to development or enhancement of intangibles; and
- Indications (examples, through engagement with tax authorities, the country’s audit focus, etc.) that the transactions are likely to be subject to transfer pricing audit by tax authorities.
Key Strategies for Managing TPA
Comprehensive Internal Review:
Conduct a thorough internal review of TP policies, documentation, and potential weaknesses. Address identified concerns proactively.
Dedicated Team Formation:
Assemble a dedicated team comprising tax professionals, financial analysts, and legal advisors. Clearly define the roles and responsibilities of each team member to ensure effective collaboration in formulating and executing TP policies for the taxpayer.
Engage External Experts:
Consider hiring external TP experts or consultants with experience in working with tax authorities. Their insights can be invaluable during the audit.
Establish open lines of communication with IRAS. Respond promptly to information requests and maintain a cooperative approach throughout the process.
Document a strong defence of TP policies, emphasizing the economic rationale behind pricing decisions and the selection of comparables.
Taxpayers’ key personnel must be fully aware of the company’s TP policies and practices for their interviews with IRAS. Ensuring effective communication of the company's TP policies and practices is key to a smoother TP audit for both the auditor and the auditee.
Exploring Settlement Options:
Assess settlement options through negotiation or alternative dispute resolution mechanisms. Consider the potential benefits of settling to avoid protracted disputes.
Financial Implications Assessment:
Evaluate the financial implications of potential TP adjustments and develop contingency plans. Understand the impact on financial statements and tax liabilities.
Conduct a comprehensive review after the TP audit's conclusion. Identify lessons learned and areas for improvement in TP practices and compliance procedures.
How we can help
Each TP audit case is unique, requiring tailored strategies. Regular consultation with TP professionals, proactive measures, and maintaining transparency contribute to a favourable outcome during such audits.
RSM, with its global presence and technical expertise, can assist businesses in navigating transfer pricing tax controversies proactively.