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Singapore Issues TP Guidance For Commodities Traders

by Mary Swire,, Hong Kong

05 June 2019

The Inland Revenue Authority of Singapore has released new transfer pricing guidance on determining the economic value of taxpayers' commodity marketing and trading activities in Singapore.

The guide covers the obligation on multinational groups (MNEs) to ensure their related-party transactions are undertaken at arm's length and the documentation requirements on taxpayers.

The guidance is intended for business entities incorporated or registered in Singapore that are involved in the business of marketing and/or trading in commodities. It is intended to supplement the information on the territory's transfer pricing rules in the IRAS Transfer Pricing Guidelines, and is generally based on the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations.

The guidelines explain how multinational should undertake a functional analysis, to be determine the value of transactions based on the functions, assets, and risk of the entities taking part in transactions. It also covers the transfer pricing methods to be used and how to identify relevant comparables.

The guidelines prescribe that "when selecting the most appropriate method to price a related party commodity transaction, besides considering the availability of reliable independent comparables, it is important to consider industry practices. Common industry practices provide indications of what independent parties would have agreed to pay or receive under comparable circumstances." It discusses how to reliably apply the five available transfer pricing methods in the IRAS Transfer Pricing Guidelines.

On documentation requirements, the guidance notes, to comply with the TP documentation requirement, IRAS expects a commodity marketing/trading entity to include the following information in its TP documentation:

  • (a) Economic circumstances and business strategies for the related party commodity transaction.
  • (b) Details on how value is generated by the MNE group as a whole, the inter-dependencies of the functions performed by the commodity marketing/trading entity and its related parties with the rest of the group and the contribution that the commodity marketing/trading entity and its related parties make to that value creation.
  • (c) A thorough functional analysis, including a detailed analysis on risks assumption and how those risks are managed and controlled.
  • (d) Reliable evidence (such as actual examples on risk materialization) and documents to support the commodity marketing/trading entity's assumption and management of risks. It is possible that a commodity marketing/trading entity assumes certain risks but the effect of those risks is not apparent in its financial statements. This may be due to the commodity marketing/trading entity has effectively managed them or the risks have not been played out. In such situation, the commodity marketing/trading entity must be able to explain in detail with documentation how it manages and controls those risks.
  • (e) Price-setting policy, including the appropriate transfer pricing method used, basis of selecting the method, and information and document needed to justify the pricing.
  • (f) Where CUP method is applied, information is needed to justify pricing based on the comparable independent party transactions or quoted price CUPs, as well as any other relevant information, such as:
    • Pricing formulas used,
    • Third party end-customer agreements,
    • Premium or discount applied,
    • Supply chain information,
    • Information prepared for non-tax purposes,
    • If there are different indices or different ways of using indices to price a commodity in the industry, a detailed explanation with proper documentation on the basis of using one index or formula over another index or formula to price the commodity, and
    • Reliable evidence of the pricing date agreed in the related party commodity transaction at the time the transaction was entered into and it is consistent with their actual conduct or with other facts of the case.
  • (g) Comparison of terms and conditions agreed between the commodity marketing/trading entity and its related parties with industry practices and terms and conditions agreed between independent parties, and the basis for the difference.
  • (h) Information and document needed to justify the comparability adjustments, such as reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. For example, if comparability adjustment is made for the assumption of risks or performance of certain functions, information and document relating to the basis of such comparability adjustment must be provided.

The guide also includes information on avoiding and resolving transfer pricing disputes. It concludes with examples of different theoretical circumstances and transactions and discusses how to ensure an arm's length result.

TAGS: Transfer Pricing | tax | business | mining | Singapore | agreements | transfer pricing | Tax

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