Speech by Mr. Louis Ng Kok Kwang, MP for Nee Soon GRC at the Second Reading of the Income Tax (Amendment) Bill [Bill No. 36/2017]
Sir, I welcome the amendments introduced by this Bill, and in particular the shift from a guidance-based approach to a formal transfer pricing regime with the introduction of a mandatory transfer pricing documentation (TPD) requirement.
This is a significant step in deterring and addressing profit-shifting behaviour, and would align our practices more closely with international tax developments under the OECD BEPS initiative.
I have a number of clarifications to seek on the application and penalties of the proposed legislative regime.
Application of the arm’s lengths principle
Section 34D has been expanded to clarify how IRAS will determine whether transactions are conducted at arm’s length.
In practice, such determination may be difficult as there may be different interpretations when applying the principle to specific facts and circumstances of multinational enterprises’ operations.
There may be legitimate commercial and risk management reasons for conducting business activities within different affiliates.
In addition to the guidance provided in the TP Guidelines, will IRAS be providing reasons where it makes the determination that a transaction was not conducted at arm’s length?
I understand that to assist companies in complying with the arm’s length principle, IRAS has introduced an indicative margin for related party loans obtained or provided from January 2017.
Would the Minister also consider prescribing a safe harbour margin for guarantees since, conceptually speaking, returns on guarantee represent the credit risk premium in a borrowing arrangement?
Penalties for non-compliance with documentation requirements
The new section 34F(8) deems the failure to meet certain TPD requirements as offences and provides for a fine of up to $10,000.
As the TPD requirement only applies to businesses with gross revenue exceeding $10 million, a fine of up to $10,000 may not represent a significant cost. How was the quantum of the fine determined, and how does it compare to similar provisions on reporting requirements?
Under the same Section, the company as an entity would be guilty of the offence of failing to meet TPD requirements. Has personal liability for officers of the company been considered as a more effective method for ensuring compliance with TPD requirements?
Finally, the failure to prepare contemporaneous and adequate TPD, the failure to submit TPD within the 30 days’ notice, and the failure to retain TPD for 5 years attract the same maximum fine as submitting false or misleading TPD.
However, the latter act arguably should attract higher culpability because of the element of dishonesty. For comparison, the offence of falsification of accounts under section 477A of the Penal Code may attract imprisonment for a term of up to 10 years, a fine, or both.
Would it be appropriate to impose higher penalties for providing false or misleading TPD to reflect the higher degree of culpability? Can the Minister provide some clarifications on this?
Notwithstanding the clarifications sought, I stand in support of these amendments which signals Singapore’s commitment as a responsible member of the international tax community, and deters profit-shifting behaviour that undermines the integrity of the tax system, erodes tax revenues, and distorts the incidence of tax burden.
(Photo credit: iras.gov.sg)