In a break with standard policy, Singapore’s tax agency will allow taxpayers that have been seriously affected by the COVID-19 pandemic to assess the tested party’s financial results on a multiyear basis without prior consultation.
In guidance posted September 8 on the agency’s website, the Inland Revenue Authority of Singapore (IRAS) addressed the consequences of the COVID-19 crisis for multinationals’ transfer pricing documentation obligations and described the information necessary to support a loss as an arm’s-length outcome for 2020. According to the guidance, taxpayers claiming to be severely affected by COVID-19 must include a broad industry analysis, a functional analysis before and after the COVID-19 crisis began, and a comparison of projected profit and loss to actual results. The documentation should also corroborate the allocation of risk and detail the parties’ contractual arrangements, the guidance says.
One potential way for taxpayers to support a loss by a local distributor is to apply the transactional net margin method to the distributor’s financial results for 2018, 2019, and 2020, according to the guidance. Although Singapore's most recent transfer pricing guidelines generally require that taxpayers individually assess the tested party’s results for each year unless the IRAS is consulted beforehand, prior consultation will not be necessary for 2020 if taxpayers can justify doing so in their transfer pricing documentation.
“If you are of the view that annual testing may result in volatile results due to the impact of COVID-19, you may apply term-testing (generally over three years) for the Year of Assessment 2021. This view would need to be substantiated with evidence, which would complement the information” contained in the taxpayer’s transfer pricing documentation, the guidance says. However, it cautions taxpayers that disputes may arise if the corresponding jurisdiction does not also allow multiyear testing.
The guidance provides an example concerning a local distributor that reported a positive operating margin in 2018 and 2019, followed by a loss in 2020 that caused the tested party’s three-year operating margin to fall below the lower bound of the arm’s-length range. In the example, an adjustment in 2020 that raises the distributor’s three-year operating margin to the lower bound would then be sufficient to satisfy the arm’s-length principle.
The guidance also addresses the effects of COVID-19 on advance pricing agreement requests. According to the guidance, taxpayers should file new APA requests only if the COVID-19 crisis did not significantly affect their performance. “Otherwise, the company should consider filing a new APA application or request for renewal of an existing APA only when there is greater level of certainty on the factors which may affect the determination of arm’s-length transfer prices between related parties,” the guidance says.
Companies with existing APAs should promptly review the agreement to assess whether there has been a breach in material terms and conditions, according to the guidance. If the change in economic circumstances constitutes a breach, taxpayers should inform the IRAS as soon as possible and provide an analysis supporting a proposed course of action, it says.
The global COVID-19 pandemic and the resulting economic downturn have led to a variety of transfer pricing issues, especially regarding the treatment of low-risk entities and APAs. In response, the OECD has opened a consultation regarding the areas in which new guidance is necessary. With its new guidance, the IRAS joins its counterparts in the United States and Australia in publicly addressing the consequences of the crisis on transfer pricing.