Impact of Covid-19 and Covid-19 support measures on Transfer Pricing

The Inland Revenue Authority of Singapore (“IRAS”) has regularly been publishing updates on tax considerations related to the Covid-19 measures. Recently, the IRAS had published some which are specifically related to Transfer Pricing. Many taxpayers have been affected by the ongoing pandemic in terms of their business operations or revenues/profitability and how would such impact the interpretation of current or past data in regards to the Transfer Pricing Documentation for past years and or for Financial Year 2020, the appropriate consideration of testing of the related party transaction and the impact on Advanced Pricing Agreement etc.

In this regard, we have captured below the key points for your ready reference:

Information to be captured in the Transfer Pricing Documentation for Financial Year 2020, depending upon the facts and circumstances of the business and the transaction:

A broad analysis of how the industry in which the Company operates in has been affected by the pandemic and whether there has been any direct impact of the pandemic on the Company’s business
Details of the relevant entity who took the decision for management of risks arising out from the pandemic. This is to indicate which entity was the decision maker during the pandemic to allocate the relevant risk(s) to such entity
Detailed functional analysis of the Company and its related parties before and after the pandemic. This is to indicate if there has been any re-allocation/transfer of functions, assets and risks and any possible recharacterization of the Company
Details of the contractual arrangements between the Company and its related parties. The objective is to highlight whether any contractual obligations or material terms and conditions have got varied, amended, or terminated due to the pandemic
A brief comparison of budgeted (pre Covid-19) and actual results of profit and loss analysis of the Company with proper justifications and documentary evidence to support variances (if any)
Reasons and supporting documentary evidence(s) to justify how Covid-19 has negatively impacted the Company’s profitability
Details of specific Covid-19 government assistance that the Company might have received, or any government regulations imposed that has impacted the operations of the Company (if applicable)

Approach towards “term-testing”

As per the current IRAS Transfer Pricing Guidelines (fifth edition), term-testing (i.e. testing of related party transactions using a multiple-year financial period for the tested party) is allowed in exceptional circumstances, after having a prior detailed consultation with the IRAS.
However, the term-testing approach has been allowed by the IRAS for Financial Year 2020 as a once-off application and there would be no need for the taxpayer to consult IRAS prior to the application, for the specified year.
Nevertheless, few important points that need to be taken into consideration before applying the term-testing approach for Financial Year 2020 include:

The taxpayer should carefully evaluate and demonstrate if the normal annual testing approach is actually resulting in volatile results due to the impact of the pandemic or not;
The taxpayer should also take into account the corresponding impact of the term-testing approach on its related parties in other jurisdictions (to avoid any potential tax disputes); and
Further, the taxpayer must clearly explain how the term-testing was applied and highlight that this is a once-off event, in the Transfer Pricing Documentation

Impact on Advanced Pricing Agreement (APA)

New APA application/Renewal of an existing APA

As per the IRAS, Companies can file a new APA application or request for renewal of an existing APA if the Company’s business operations and economic performance are not significantly impacted by the pandemic.
In all other cases, Companies should only contemplate the above approach when there is a greater level of certainty on factors that might affect the determination of arm’s length prices between related parties.

APA application under review/consideration

In case of APA applications which are currently under review/consideration, the Company should assess if there are any Transfer Pricing implications arising due to Covid-19 which may impact the APA application. If so, Companies would need to provide the relevant details to the IRAS so as to undertake an overall review and conclude whether the APA application can be processed or put on hold or even terminate (as the case may be)

Existing APA with the IRAS

In case of ongoing unilateral APAs, the Company should review and assess whether there is any breach of the terms and conditions in the existing APA because of the pandemic. If so, the Company should notify the IRAS and provide an analysis of the impact as a result of Covid-19 along with an explanation as to why the terms and conditions have been breached and also suggest the next course of action. Accordingly, the IRAS will evaluate the best possible outcome or solution.
For ongoing bilateral or multilateral APAs, the IRAS would discuss the case with other Competent Authority(ies) before coming to a mutually acceptable conclusion.