Transfer Pricing in Singapore 2019 | InCorp Global Pte. Ltd.

1. TRANSFER PRICING IN SINGAPORE 2019 Twitter Facebook Google+ Connect with us for the latest business updates: LinkedIn

2. INSIDE THIS GUIDE 1 Introduction to Transfer Pricing 2 Evolution of Transfer Pricing • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 3 ● The OECD BEPS Project ● • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 4 BEPS Action Plans ● • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 5 Key actions to tackle BEPS • • • • • • • • • • • • • • • • • • • • • • • • • • • 6 ● Singapore ratifies the Multilateral Convention to implement BEPS related measures Singapore Transfer Pricing Documentation Requirements 7 ● Changes in the Singapore Income Tax Act • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 7 ● Summary of Transfer Pricing related changes • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 7 ● Transfer Pricing Documentation • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 7 ○ IRAS Requirements • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • 8 ○ Income Tax (Transfer Pricing Documentation) Rules 2018 (‘Rules’) • • • • • • • • • • • • • • • • • • • • • • • • • • • • 9 • • • • • • • • • • • • • • • • • • • • • • • • • • • •10 ○ Country-by-Country Report (‘CbCR’) • • • • • • • • • • • • • • • • • • • • • • • • • • 10 ○ Importance of Transfer Pricing Documentation

3. TRANSFER PRICING IN SINGAPORE INTRODUCTION Introduction to Transfer Pricing Territorial expansion of businesses that followed after globalization, has led to an increase in intracompany transactions and cross border transactions between related companies. For instance, while manufacturing activities are managed by an entity of a larger group in one country, marketing of the manufactured products in another country are being handled by a different subsidiary belonging to the same group. In such cases, Transfer Pricing mechanism determines the price of the goods, services, funds, rights or intangible assets that are thus transferred for sale or consumption to a related entity. “Transfer pricing is the pricing of goods, services, and intangibles between related parties. The arm’s length principle should be adopted for transfer pricing between related parties. Taxpayers should prepare and keep contemporaneous transfer pricing documentation to show that their related party transactions are conducted at arm’s length.” What is Arm’s Length Principle of Transfer Pricing? Transfer pricing is not limited to just pricing but also includes terms and conditions of such transactions between related parties. It is important to understand the transfer pricing mechanism because it largely determines the revenue of related entities and therefore their taxable profits under their respective tax jurisdiction. The fundamental guideline for transfer pricing is “Arm’s Length Principle”, that is, the pricing of cross-border transactions between related entities must be market based, and similar to the pricing that would have been charged if the parties were unrelated. “The arm’s-length principle of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s-length price for a transaction is therefore what the price of that transaction would be on the open market.” In the case of unrelated entities the market forces such as demand and supply largely determine the commercial pricing of such cross border transactions, but in the case of related entities, because of the element of association and relationship, there is a propensity to set prices that are deviant from the actual market price. The selling entity may undercut the price, or the buying party may set a higher cost in order to lower their profits thereby affecting their taxable income. Such distortion of prices will impact the tax liability of the entities in their respective jurisdiction. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 1

4. TRANSFER PRICING IN SINGAPORE EVOLUTION With businesses rapidly expanding beyond their domestic borders, leading to a spike in cross border transaction between related parties, tax authorities around the globe are stepping up their scrutiny on such transactions. Where a related party transaction is identified to be not in compliance with the arm’s length principle, tax authorities would make adjustments to the profits and tax liabilities. Such adjustments along with interest and in some cases penalty will always amount to increased tax liability of the entity. Therefore, multinational corporations should now approach transfer pricing in a structured manner by identifying the jurisdictions in which they operate, the related party transactions, revisiting the structures to ensure that they are compliant with the transfer pricing guidelines, aligning the returns of the group entities commensurate with the value creation and preparing a comprehensive transfer pricing documentation to avoid tax adjustment and penalties. Evolution of Transfer Pricing Due to the nature of relationship that exists between related companies there is a potential for artificially shifting profits from an entity in higher tax jurisdiction to a related entity in lower tax jurisdiction, in order to reduce the overall tax liability. To prevent the practice of such tax reduction strategies by related entities engaging in cross border transactions, tax authorities of various countries required a regulatory framework. Following the initial efforts by United Nations, the Organization for Economic Cooperation and Development (OECD) Council originally approved the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995. The OECD transfer pricing guidelines, is widely acknowledged by tax authorities around the globe to determine transfer pricing. It is a powerful tool for the tax authorities to attribute taxable profits to their jurisdiction. The OECD guidelines recommend several methods that taxpayers may use to derive an arm’s length price or allocation, for the valuation, for tax purposes, of cross-border transactions between associated enterprises. In 2010 there were some elaborate additions to the guidelines on the selection of the most appropriate transfer pricing method, on how to apply transactional profit methods and on how to perform a comparability analysis. Further, in 2017 there has been updation to reflect the changes emanating from the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. Many OECD member countries and non-member countries follow the OECD guidelines on transfer pricing, it must be noted that although the OECD guidelines are widely adopted, its interpretation, application and emphasis may vary between jurisdictions. The OECD guidelines are based on arm’s length principle defined in Article 9 of the OECD Model Tax Convention, which also forms the basis of many bilateral tax treaties involving OECD member countries and non-member countries. The application of the arm’s length principle is generally based on a comparison of the prices or margins used by related parties with those used by unrelated entities engaged in similar transactions. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 2

5. TRANSFER PRICING IN SINGAPORE EVOLUTION The OECD BEPS Project Base Erosion and Profit Shifting refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity but the taxes are low, resulting in little or no overall corporate tax being paid. Although some of the schemes used are illegal, most are not. This undermines the fairness and integrity of tax systems because businesses that operate across borders can use BEPS to gain a competitive advantage over enterprises that operate at a domestic level. When business activities are undertaken across borders, there is a possibility that an item of income can be taxed by more than one jurisdiction, thus resulting in double taxation (juridical/ economic). There is a also a possibility that the income may not being taxed anywhere. Base erosion and profit shifting strategies take advantage of these gaps between tax systems of countries in order to achieve double non-taxation. The recently issued OECD Brochure on Tax and Development (2018-19) in the Chapter “Combatting tax avoidance to ensure a fair deal for all” gives an overall perspective about BEPS. The Chapter highlights the important issue of artificially shifting profits to low or no-tax jurisdictions. 1The global landscape has changed dramatically since the international tax rules were first written in the 1920s. Globalisation, evolving business models and shifting geopolitics have brought with them new economic opportunities and challenges, making it imperative to update many of the original tax rules. One of the priorities in this reform process is countering tax avoidance strategies that exploit gaps and mismatches in tax rules, artificially shifting profits to low or no-tax locations. BEPS undermines the fairness and integrity of tax systems, allowing businesses that operate across borders to gain a competitive advantage over domestic enterprises either by avoiding becoming part of the tax base or by shifting profits offshore. The OECD conservatively estimates that every year, USD 100 to 240 billion in corporate tax revenue is lost to BEPS. Although these stakes are high for governments around the world, for developing countries BEPS is of particular significance. Developing countries rely heavily on corporate income tax, particularly from multinational enterprises. Therefore, the OECD/G20 BEPS Project aims to ensure that international tax rules don’t facilitate shifting corporate profits away from where the real economic activity and value creation takes place. This involves: ● ● ● improving the coherence of tax rules across borders, reinforcing substance requirements (real or actual presence), and enhancing transparency and certainty. 1Source: OECD Work on Tax and Development Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 3

6. TRANSFER PRICING IN SINGAPORE EVOLUTION BEPS Action Plans 2To overcome the menace of base erosion and profit shifting, in 2015, the OECD and G20 delivered a comprehensive package of policy tools (BEPS package) to support governments in addressing the gaps in the international tax system. In addition to the OECD and G20 countries, a number of developing countries were invited to participate in the project, which took place over two years, and consultations were held with countries in all regions. The International Monetary Fund (IMF), the World Bank Group (WBG) and the United Nations (UN) also participated in the project, as did regional tax organisations. The BEPS package covers 15 areas and provides a range of tools to counter the issue of base erosion and profit shifting. The OECD/G20 BEPS Project has facilitated greater coherence and clarity in international tax rules, while also strengthening and broadening the application of international tax norms. It has identified common approaches and best practices for the effective implementation of these norms and standards. Singapore is not a member of OECD; however, Singapore is fully committed to work with the international community and adopt the BEPS package as part of its domestic legislation. With this intent, Singapore revised the Transfer Pricing guidelines in 2018 and made it mandatory to prepare Transfer Pricing Documentation. The guidelines are in accordance with the BEPS action plan on documentation. 2Source: OECD Work on Tax and Development Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 4

7. TRANSFER PRICING IN SINGAPORE EVOLUTION Key actions to tackle BEPS Addressing the tax challenges of the digital economy. Neutralising the effects of hybrid mismatch arrangements. Designing effective controlled foreign company rules. Limiting base erosion involving interest deductions and other financial payments. Countering harmful tax practices more effectively, taking into account transparency and substance. Preventing the granting of treaty benefits in inappropriate circumstances. Preventing the artificial avoidance of permanent establishment status. Aligning transfer pricing outcomes with value creation. Measuring and monitoring BEPS. Strengthening transparency through mandatory disclosure rules. Harmonising and improving transfer pricing documentation and country-by-country reporting. Making dispute resolution mechanisms more effective. Multilateral convention to implement tax treaty related measures to prevent BEPS. The above-mentioned action plans are soft law legal instruments. They are not legally binding but there is an expectation that they will be implemented accordingly by countries that are part of the consensus. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 5

8. TRANSFER PRICING IN SINGAPORE EVOLUTION The Singapore Transfer Pricing Guidelines of 2017 included references to the BEPS action plans on documentation (Action Plan 13) and value creation (Action Plan 8-10). The 2018 Transfer Pricing Guidelines carry forward the reference and state as follows: “IRAS endorses the arm’s length principle as the standard to guide transfer pricing. IRAS subscribes to the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created. A proper application of the transfer pricing rules would ensure this outcome.” With the above principle in place, corporations need to establish that inter-company pricing reflects the existence of substance and the returns are commensurate with the value creation being undertaken by the respective group entities. For example, allocation of profits to the group entity performing the DEMPE functions (development, enhancement, maintenance, protection and exploitation of intangibles) vis-à-vis the entity performing routine business functions. The advent of BEPS has led to greater transparency requirements to be adopted by the multinational corporations. The tax authorities also would greater ammunition to deal with base erosion and profit shifting techniques adopted to minimize/ avoid tax incidence. Singapore ratifies the Multilateral Convention to implement BEPS related measures On 21 December 2018, Singapore deposited the Instrument of Ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“the Multilateral Instrument”). The Multilateral Instrument, signed by Singapore on 7 June 2017, has entered into force for Singapore on 1 April 2019. Singapore is committed to the Base Erosion and Profit Shifting project. Ratifying the Multilateral Instrument is an important step in protecting the treaty network against BEPS activities. Singapore will apply the Multilateral Instrument to an additional 18 tax treaties, thereby bringing the total number of listed agreements to 86. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 6

9. TRANSFER PRICING IN SINGAPORE DOCUMENTATION REQUIREMENTS Singapore Transfer Pricing Documentation Requirements The Inland Revenue Authority of Singapore (‘IRAS’) issued the revised Transfer Pricing Guidelines (fifth edition) on 23 February 2018. Concurrently, the Income Tax (Transfer Pricing Documentation) Rules, 2018 were gazette and came into operation on 23 February 2018. Changes in Income Tax Act On 2 October 2017, the Income Tax (Amendment) Bill, 2017 was passed by the Parliament. The Bill introduced Transfer Pricing changes as follows: Amendment of existing Sections 34D, 74, 93A and 105K Insertion of new Sections 34E and 34F Summary of Transfer Pricing related changes ● ● Comptroller may make adjustments where the arm’s length principle has not been followed. Time limit of 4 years lifted for IRAS to raise additional assessments for cases pursuant to the Mutual Agreement Procedure. For YA 2019 or any subsequent year of assessment, application by a person in respect of error or mistake in respect of related party transaction has to be supported by Transfer Pricing Documentation. Minister may declare Country-by-Country report as internal tax compliance agreement. Introduction of a surcharge of 5% on the Transfer Pricing adjustments made by the Comptroller with effect from Year of Assessment (‘YA’) 2019. Mandatory requirement for preparation of contemporaneous Transfer Pricing Documentation and penalties for non-compliance. ● ● ● ● Transfer Pricing Documentation Newly legislated of the Singapore Income Tax Act, requires the preparation and maintenance of contemporaneous Transfer Pricing Documentation with effect from Year of Assessment 2019 (i.e. for financial year ending 2018). There was requirement to prepare and maintain Transfer Pricing Documentation as per earlier rules. However, with the new rules, the Transfer Pricing Documentation would be as per the requirements of the new Section 34F. ● ● Applies to basis period for YA 2019 and every subsequent year of assessment. Applicable for Company, Firm or Trust ○ if gross revenue from its trade or business for the basis period is more than $10 million, or ○ if required to prepare TP Documentation under Section 34F for the basis period immediately before the basis period concerned (YA 2020 would be first year when this would be applicable). Documentation must be prepared before the due date of making return of income and must be retained for a period of atleast 5 years from the end of the basis period in which the transaction took place. ● Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 7

10. TRANSFER PRICING IN SINGAPORE DOCUMENTATION REQUIREMENTS ● Documentation shall be required to be furnished to the IRAS upon request within 30 days from the date of service of notice. Fine of up to $10,000 for not complying with the above-mentioned provisions. ● IRAS Requirements IRAS recommends that taxpayers adopt the 3-step approach to apply the arm’s length principle in their related party transactions: Comparability analysis requires: ● Identifying the actual related party transactions i.e. conditions of the transactions viz. ○ Contractual terms of the transaction ○ Characteristics of goods sold or purchased, intangible properties used or transferred ○ Functions performed, assets used and risks assumed (‘FAR analysis’) ○ Commercial and economic circumstances of the transacting parties ● Comparing the actual related party transaction with independent party transaction - To comprehensively assess the transactions of related and independent parties being compared, to ensure that they have substantially similar economic characteristics. The objective of the step is to determine that: ○ None of the differences (if any) between the situations being compared can materially affect the price or margin being compared or ○ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. Step 1 Comparability Analysis The guidelines recommend the adoption of the method that produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments. Step 2 Identify the appropriate transfer pricing method and tested party The use of the transfer pricing methods, excluding the Profit Split Method, would first require identifying the party on which to apply the transfer pricing analysis. This party is known as the tested party. IRAS recommends that the party with the smaller scope of functions and least complex operations be used as the tested party. Such a decision will make it easier to find comparable data and require fewer adjustment and greater accuracy. Once the appropriate transfer pricing method has been identified, the method is applied on the data of independent-party transactions to arrive at the arm’s-length result. More likely, the transfer pricing analysis would lead to a range of prices or margins. IRAS is prepared to accept the use of ranges, to determine an arm’s length range provided that the comparables are reliable. The outcome of this last and final step will then be used to guide or justify taxpayers’ transfer pricing practices. Step 3 Determine the arm’s length results Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Mar 2019 | 8

11. TRANSFER PRICING IN SINGAPORE DOCUMENTATION REQUIREMENTS Income Tax (Transfer Pricing Documentation) Rules 2018 (‘Rules’) ● ● Rules applicable with effect from 23 February, 2018 and effective for YA 2019 and onwards Transfer Pricing Documentation to satisfy the following ○ Must contain information mentioned in Second Schedule of the Rules. ○ Must specify the date on which it has been completed. ○ Must be in English. The Second Schedule of the Rules provides the information to be included in the Transfer Pricing Documentation. Group Information ● Worldwide organization structure. ● Description of Group’s businesses, products, services, geographic markets, business model & strategies, industry overview, changes in group structure due to mergers/acquisitions. ● Description of Group’s intangible assets – strategy for development, ownership and exploitation, legal owners within the group, agreements, research & development policy. ● Description of Group’s financial activities – group’s financial activities, transfer pricing policies, entity performing central financing function. ● Financial statements of the Group. ● List and description of Group’s unilateral Advance Pricing Arrangements. Singapore Entity Information ● ● ● ● Management structure. Organization structure of the entity. Description of the entity’s business. Description of the related party transactions covering the detailed FAR analysis. Transfer pricing economic analysis (comparability analysis to justify the related party pricing). The choice of the tested party and reasons supporting the choice. Details on comparables and the screening criteria for choosing the comparables. Comparability analysis of the related party transactions and the comparables. Details of the adjustments to be made to achieve comparability. The transfer pricing method chosen and rationale for the choice. ● ● ● ● ● ● ● The determination of the arm’s length price/margin, with computation and explanations. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Mar 2019 | 9

12. TRANSFER PRICING IN SINGAPORE DOCUMENTATION REQUIREMENTS Country-by-Country Report (‘CbCR’) Singapore implemented CbCR filing requirement and is applicable for a MNE Group in respect of financial year 2017 onwards (financial year beginning on or after 1 January 2017 but before 1 January 2018). CbCR is required to be prepared and filed by a Singapore MNE Group with international operations i.e. MNE Group whose ultimate parent entity is tax resident in Singapore. It is required to be prepared by a MNE Group that has consolidated group revenue in the preceding financial year of at least S$1,125 million and has subsidiaries or operations in at least one foreign jurisdiction. The CbCR has to be filed with the Comptroller within 12 months from the end of the financial year. The CbCR is required to be submitted electronically in specified format. The Comptroller will provide CbCR to jurisdictions covered in the CbCR as per Automatic Exchange of Information agreements with those jurisdictions. The Tax Authorities intend to use the CbCR for transfer pricing risk assessment, evaluating BEPS related risks and for economic and statistical analysis. The CbCR format contains three tables as follows: Table 1: Information about income, taxes, employees and assets of the MNE Group allocated to the different tax jurisdictions that the MNE Group operates in, i.e. each line reports the aggregate numbers relating to a particular tax jurisdiction. Table 2: Overview of entities (including Permanent Establishments) of the MNE Group organized according to tax jurisdictions that the entities are resident in. The main business activities of each entity are also to be included. Table 3: This table allows the MNE Group to provide any additional information that may be relevant or useful to understand the data provided in CbCR. The failure to submit CbCR within specified time may attract penal implications under Section 105M of the Singapore Income Tax Act. Importance of Transfer Pricing Documentation A taxpayer engaging in related party transactions must maintain documentary proof to demonstrate that adequate analysis and efforts have been undertaken to confirm to the arm’s length principle. Such adequate documentation will facilitate reviews by tax authorities on taxpayer’s transfer pricing analysis and hence assist in resolving any transfer pricing issues that may arise. Therefore, the Transfer Pricing Documentation helps manage the Transfer Pricing risk effectively. Copyright © 2019 In.Corp Global Pte Ltd All rights reserved. Last updated Apr 2019 | 10

13. IN.CORP GLOBAL PTE LTD 30 Cecil Street, #19-08 Prudential Tower, Singapore 049712 Phone: WhatsApp: Fax: E-mail: Website: +65 6320 1888 +65 8699 8821 +65 6438 2436 info@incorp.asia incorp.asia OUR REGIONAL PRESENCE The information contained herein is intended for general information purposes only and shall not be regarded as professional advice. Readers are therefore advised that before acting on any matter arising from these notes, they should discuss their particular situation with the Firm. No liability can be accepted for any action taken as result of reading the notes without prior consultation with regard to all relevant factors. FOLLOW US ON: Copyright © 2019 In.Corp Global Pte Ltd. All rights reserved.