Singapore Issues TP Guidance For Commodities Traders
Wednesday, June 5, 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
(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
- 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,
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.