Businesses have long made adjustments to their transfer pricing strategies as a way to stay compliant with the arm’s length principle for the purpose of income tax. However, it is important to note that adjustments on transfer pricing could also have implications on GST. Last year, the IRAS published updated guidance to clarify the treatment GST for such adjustments and issued an administrative concession.
Income Tax Transfer Pricing
Adjustments Established rules on transfer pricing dictate that transactions occurring among related parties must be priced according to the arm’s length basis. A transfer pricing adjustment could prove necessary among related parties which have not yet made transactions based on this arm’s length principle, and thus the transaction’s transfer price is further amended to be brought to an arm’s length value.
There are various scenarios which would give rise to the need for transfer pricing adjustments, such as in noncompulsory transfer pricing adjustments (self-initiated retrospective or year-end adjustment, via a Comptroller of Income Tax transfer pricing audit, or adjustments to bring forth an agreed end result of a mutual agreement procedure or advanced pricing arrangement.
The IRAS’ Administrative Concession
Income tax transfer pricing adjustments could stipulate that a given taxpayer potentially overstated or understated the value of import or supply of goods or services for GST purposes. From a GST viewpoint, whenever transfer pricing adjustments occur, an equivalent GST adjustment must also typically be made if the former adjustment leads to changes towards either the initial value or price of the supply or imported goods or services, respectively.
Prior to the updated guidance, it was common practice for businesses to provide the relevant information when applying for a short-payment permit for a transfer pricing adjustment with Singapore Customs. This applied to adjustments that led to an under-declaration in the value of imported goods before it could lay claim to the additional GST paid. It is more often than not cumbersome and time-consuming administrative-wise for businesses to take such information for previous imports and attribute every single batch of imported goods with the year-end transfer pricing adjustment.
Now, this burden has been lifted given that the transfer pricing adjustment will not incur a GST impact overall regardless of an increment or decrement in price. Businesses may also qualify for the concession mentioned above, provided that the goods are imported via import GST suspension schemes but not import GST deferment scheme (IGDS) since they are excluded. If the business is under the latter scheme, it is entitled to full input tax credit on the goods imported before it can benefit from the concession.
If a business is included in a GST group, said group is qualified for a full input tax credit. It is important to note that partial exempt businesses may also enjoy the concession given that they meet specific conditions. It is vital to first self-assess to accurately determine whether they can meet said conditions. Filing of separate applications with Singapore Customs or the IRAS will not be necessary to enjoy the concessions.
However, suppose businesses do not meet the criteria. In that case, the GST adjustment will be necessary if such transfer pricing adjustments are allowable or taxable for income tax purposes and/or any adjustments made when the value change in the import or supply of goods or services gets reflected in the financial statements. Moreover, Singapore Customs now allows for the acquisition of single short permits for a transfer pricing adjustment without the need to trace back to every import permit. This applies to situations wherein businesses under-declare the import value of goods due to transfer pricing adjustments and must pay for additional GST. On the other hand, if businesses overpay GST on their imported goods, they are now eligible for an input tax claim provided that they have not claimed the full import GST before.
The required GST adjustment after a transfer pricing adjustment will solely depend on the original supply’s nature and when it was made. If the supply includes both zero-rated and standard-rated goods, it is possible to use a reasonable proxy to apportion its value for GST adjustment purposes. In addition, the IRAS will allow certain proxies to reach the value of supplies during the management of transfer pricing adjustments as a way to further lessen the administrative burden. Lastly, it is important to be aware that the administrative concession and guidelines can also be retrospectively applied to transfer pricing adjustments well before the arrival of this guidance.
This new development between GST and transfer pricing adjustments certainly benefits many businesses, but fully comprehending the details may prove to take some time. So if you are looking for professional assistance to guide you on taking full advantage of these changes sooner than later, Max Lewis Consultants Pte Ltd is the firm you are looking for. Our GST assisted self-help kits in Singapore will help you meet all the GST-related needs of your businesses.
On top of GST compliance, we can aid in enhancing and expanding your business operations with our wide range of other services, including local and international tax planning, transfer pricing advisory, and asset and business valuation services in Singapore. If you wish to know more, contact us today to learn more about our highly trusted services.