Anti-avoidance provisions in Singapore
1.Transfer pricing legislation
Transfer pricing (TP) legislation are rules that broadly require transactions between any related parties to be on arm’s length terms. If the actual terms are not at arm’s length, tax authorities can substitute the actual terms with arm’s length terms, thereby, there may be increase in income or reduction in deductions/ losses, as may be applicable.Any adjustment made by the tax authorities will be deemed to be accruing or received in Singapore.
Further, administration of transfer pricing rules is explained in IRAS Transfer Pricing Guidelines e-Tax guide. These guidelines are in line with OECD Transfer Pricing Guidelines (2010). The transfer pricing guidelines provide more guidance on the application of the arm’s length principle, including the functional analysis based on three-step approach to apply the arm’s length principle in related party transactions, i.e. conduct a comparability analysis, identify the most appropriate transfer pricing method and tested party and determine the arm’s length results.
Transfer pricing methods –The transfer pricing methods mentioned in the transfer pricing guidelines are as follows:
- comparable uncontrolled price (CUP) method;
- resale price method;
- cost-plus method;
- transactional profit split method; and
- transactional net margin method (TNMM).
Corresponding adjustments –Various types of other adjustments are as under –
- Compensating adjustments – these are adjustments made when the taxpayers’ actual results differ from the agreed arm’s length prices provided in the Advance Pricing Agreement (‘APA’) with Inland Revenue Authorities of Singapore (‘IRAS’).
- Self-initiated retrospective adjustments – these arise when taxpayers conduct a review of their past transfer prices due to subsequent changes in circumstances.
- Corresponding adjustments arising from transfer pricing adjustment by tax authorities – IRAS will only consider making corresponding adjustments to eliminate double taxation when tax treaty is in place and taxpayers have applied for the mutual agreement procedure (MAP) provided in the tax treaty and such application is accepted by IRAS and the foreign tax authority.
Other aspects –
- If TP adjustment is made, taxpayer may be liable for a surcharge of 5% of the adjustment
- IRAS requires contemporaneous TP documentation to be maintained by the taxpayers. Transfer pricing documentation is not required to be submitted when tax returns are filed. Such documentation should be kept on file and submitted to IRAS upon their request.
- If the taxpayer is the ultimate parent entity of a Singapore multinational enterprise group, in addition to the transfer pricing documentation, it may be required to file a country-by-country report to provide information on the global allocation of the group’s revenues, profits, taxes and economic activity.
- In certain situations, tax authorities can make secondary adjustments
- The transfer pricing guidelines provide detailed step-by-step procedures for the mutual agreement procedure (MAP) and APA processes.
2. Thin Capitalization rules
There is no thin capitalization rules in Singapore
3.Controlled foreign company legislation
There are no controlled foreign company rules in Singapore
4.General anti-avoidance rule
The tax authorities has the power to counteract any arrangement that has the purpose or effect of avoiding or reducing tax by –
- disregarding the arrangement
- varying the arrangement or
- making appropriate adjustments, including:
- recomputing the gains or profits; or
- re-evaluating the tax liability.
GAAR provisions can be invoked where IRAS is satisfied that the purpose or effect of any arrangement is directly or indirectly to :
- alter the incidence of any tax payable by any person;
- relieve any person from any liability to pay Singapore income tax or file a Singapore income tax return; or
- reduce or avoid any liability imposed or to be imposed on any person under the tax laws.
However, if the arrangement is entered into for bonafide reasons, this anti-avoidance rules would not apply. Further, even if the arrangement is for a bonafide commercial reason, the taxpayer must still prove that tax avoidance is not one of the main purposes of the arrangement. IRAS has expressed the view that it is targeted only at blatant and artificial tax avoidance schemes, and not intended to catch genuine commercial arrangements with incidental tax avoidance effects.
IRAS issued the e-Tax Guide on the general anti-avoidance provision and its application. The guidelines and accompanying examples in the Guide are not meant to be exhaustive.
The examples of arrangements that IRAS would regard as having the purpose or effect of tax avoidance may be classified into the following groups:
1. circular flow or round-tripping of funds;
2. setting-up of more than one entity for the sole purpose of obtaining tax advantage;
3 change in business form for the sole purpose of obtaining tax advantage; and
4. attribution of income which is not aligned with economic reality.
5.Other anti-avoidance legislation
Exchange of information – The exchange of information between the tax authorities of Singapore and of another treaty country is permitted by the relevant article in the relevant tax treaty. Only information relevant to the implementation of the treaty provisions may be exchanged. Further, Singapore also endorses the OECD standard for the effective exchange of information through tax treaties.
Others – There are several other specific provisions in the Singapore tax laws to curb avoidance of taxes. Some of these are –
- where the property in machinery or plant passes at less than the open market price, then for the purposes of computing balancing allowances and balancing charges, the machinery or plant is deemed to have passed at the open market price
- certain undistributed profits may be treated as distributed and the persons concerned assessable accordingly, if IRAS believes that the profits remain undistributed in order to avoid or reduce tax
- Alternate rules for sales between associated enterprises, restriction on deduction of trading losses, provisions related to assessment of non-residents etc.