The Inland Revenue Authority of Singapore (IRAS) on 24 May 2019 released guidelines—"Transfer Pricing Guidelines Special Topic – Commodity Marketing and Trading Activities" (First Edition)—for commodity marketing and trading activities. The release of the guidelines follows a two-year consultation process.
The purpose of the guidelines is to assist taxpayers that have commodity marketing and/or trading operations in Singapore to comply with the arm's length principle. The guidelines pertain to "hard commodities" (e.g., metals), "soft commodities" (e.g., agricultural products), and "transformed commodities" (e.g., LGN).
In line with the IRAS common practice, the guidelines defer to the Transfer Pricing Guidelines of Singapore, as well as those from the Organisation for Economic Cooperation and Development (OECD) in areas where the IRAS guidelines are silent.
While the IRAS guidelines outline the commercial reasons for setting up trading operations in Singapore, emphasis is placed on providing guidance with regard to how to align various business models and the selection of appropriate transfer pricing methods. It is acknowledged that commodity marketing/trading can have very different levels of value-add that need to be delineated by way of proper functional and risk analyses. The guidelines aim to provide some guidance by using the following business models which are often observed in practice as examples:
The guidelines endorse established concepts with respect to the assumption and allocation of risks (i.e., ability to control risk taken and financial capacity to address outcomes). They also provide some examples of relevant risks and how such risks may be controlled.
Based on the experience of transfer pricing professionals in Singapore, a key area of contention for commodity trading operations is the transfer pricing method to be applied—this is addressed in detail in the guidelines.
The guidelines emphasize that "every effort should be made" to apply one of the five established transfer pricing methods. Singapore taxpayers applying a different transfer pricing method will likely be expected to provide convincing reasons as to why the traditional methods cannot be applied. In addition, taxpayers are expected to consider common pricing conventions in their industry when setting transfer pricing prices (e.g., MOPS for refined oil products, JCC or Henry Hub pricing for LNG, etc.). This aligns with the recent amendments to section 34D of the Singapore Income Tax Act and the introduction of the concept of "arm's length terms and conditions.”
The IRAS has not expressed a clear preference for any of the five transfer pricing methods. Instead, it has highlighted the scenarios/business models for which a particular transfer pricing method may be considered appropriate.
Given that there is extensive guidance with regard to the comparable uncontrolled price (CUP) method, it would appear that taxpayers need to consider its applicability before falling back on other transfer pricing methods. While taxpayers can use quoted prices on commodity exchange markets (e.g., London Metal Exchange) as a reference price, the actual pricing date as agreed between the transaction parties can often be an area of dispute. Taxpayers are expected to have proper evidence on the pricing data because in its absence, the IRAS may deem a transaction date based on other information. This approach is in line with recent revisions to the OECD Transfer Pricing Guidelines regarding commodity transactions.
In general, the IRAS appears to be somewhat cautious with regard to the use of cost-based transfer pricing methods or profit level indicators, unless trading/marketing activities are akin to that delivered by service providers. In other words, cost-based methods would unlikely be appropriate for sales agents, buy-sell distributors or sophisticated trading operations. Notably, the Australian Taxation Office (ATO) uses a cost-based approach for all types of foreign marketing/trading operations as an initial risk assessment tool. This is done by calculating a mark-up on the costs of the offshore marketing/trading operation and classifying the entity in a risk category from green (low risk) to red (high risk) accordingly.
The release of the IRAS guidelines reflects the importance of the commodity trading industry for Singapore, as well as the increasing international debate on how to value the activities of intermediate marketing companies. In some way, it can be seen as Singapore's response to the guidelines published by the ATO on the same matter, and that may prove useful for the IRAS when engaging in bilateral negotiations in the future. It is unclear if and how the guidelines will affect the IRAS positions for ongoing transfer pricing audits of commodity trading companies (which have increased recently).
From a technical perspective, transfer pricing professionals believe that the views expressed by the IRAS in the guidelines are by design not prescriptive. This might be intentional, so that the uniqueness of business models adopted by multinational companies can be properly considered.
Read a June 2019 report [PDF 611 KB] prepared by the KPMG member firm in Singapore
For more information, contact a KPMG tax professional in Singapore:
Geoffrey Soh | +65 6213 3035 | firstname.lastname@example.org
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