Singapore: GST implications of common transfer pricing adjustments
Inland Revenue Authority of Singapore updated its guidance to clarify the GST treatment of transfer pricing adjustments
Guidance to clarify the GST treatment of transfer pricing adjustments
It is common for a business to make transfer pricing adjustments to comply with the arm’s length principle for income tax purposes. However, transfer pricing adjustments may also have goods and services tax (GST) implications.
The Inland Revenue Authority of Singapore (IRAS) recently updated its guidance to clarify the GST treatment of transfer pricing adjustments and provided an administrative concession.
Transfer pricing adjustment for income tax purposes
The transfer pricing rules require that transactions between related parties are to be priced on an arm’s length basis. Transfer pricing adjustments may be required when related parties have not transacted with each other on an arm’s length basis, and therefore, the transfer price of the transaction is adjusted to bring it to arm’s length value.
A transfer pricing adjustment may arise in various scenarios, such as a voluntary transfer pricing adjustment (year-end adjustment or self-initiated retrospective adjustment), through a transfer pricing audit by the Comptroller of Income Tax, or an adjustment to effect the agreed outcome under an advance pricing arrangement or mutual agreement procedure.
Administrative concession provided
A transfer pricing adjustment for income tax purposes may indicate that a taxpayer may have understated or overstated the value of supply or import of goods or services for GST purposes.
From the GST perspective, when a transfer pricing adjustment is made, a corresponding GST adjustment is generally required if the transfer pricing adjustment results in a change in the original value of the supply of goods or services, or a change of price of imported goods or services.
In practice, before the updated guidance was issued, a business had to submit relevant information to and apply for a short-payment permit with Singapore Customs for a transfer pricing adjustment made if that adjustment resulted in an under-declaration of the value of goods imported before it could claim the additional GST paid. It could be administratively time-consuming and cumbersome for businesses to extract information for past imports and attribute the year-end transfer pricing adjustment to each individual batch of goods imported.
This administrative burden has been removed, provided the transfer pricing adjustment will not have an overall GST impact regardless of an increase or decrease in price. A business can also qualify for the concession if the goods are imported under an import GST suspension scheme (for instance, the “major exporter scheme”). However, goods imported under the “import GST deferment scheme” (IGDS) are excluded. If the business is under IGDS, it must be entitled to full input tax credit on the imported goods before it can enjoy the concession.
If the business is part of a GST group, the group is entitled to full input tax credit. Note that a partial exempt business can enjoy the concession, provided that it meets certain conditions. Businesses need to self-assess if they can meet the conditions. No separate application for the administrative concession is required to be filed with the IRAS or Singapore Customs.
If the conditions are not met, the GST adjustment will be required for any transfer pricing adjustment made when the change in the value of supply or import of goods and services is reflected in its financial statements and/or such transfer pricing adjustment is taxable or allowable for income tax purposes. In situations when a business under-declared the import value of goods as a result of the transfer pricing adjustment and needs to pay additional GST, Singapore Customs will now allow it to take up a single short permit for the transfer pricing adjustment, without tracing back to each import permit. When a business overpaid GST on goods imported, it can now claim the input tax, provided that it has not previously claimed the import GST in full.
The GST adjustment required following a transfer pricing adjustment depends on nature of the original supply made. When the original supply involves both standard-rated and zero-rated goods, a reasonable proxy can be used to apportion the value of supply for the purposes of the GST adjustment.
To further reduce the administrative burden, the IRAS will accept certain proxies to arrive at the value of supplies in managing transfer pricing adjustments. Note that the guidelines and administrative concession can also be applied retrospectively to transfer pricing adjustments made prior to the issuance of this guidance.
Read a June 2021 report [PDF 314 KB] prepared by the KPMG member firm in Singapore
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