Goods and Services Tax (GST) on transfer pricing adjustments

On 9 November 2020, the Inland Revenue Authority of Singapore (IRAS) published an e-Tax guide titled: GST: Transfer Pricing Adjustments. The guide explains the GST treatment for adjustments on the transfer prices of transactions between related parties.

Transfer pricing adjustments

Generally, at the year-end closing of its accounts, a company may make transfer pricing (TP) adjustments to arrive at the arm’s length outcome. This exercise may indicate that the company has understated or overstated the value of the supply or import of goods or services for GST purposes. Therefore, the company may be required to make certain GST adjustments.

Where a supply exists (consideration is received in return for the provision of goods or services) and a TP adjustment is made, a corresponding GST adjustment is required. The TP adjustment could:

• Result in a change in the original value of the supply of goods or services (other than out-of-scope supplies). The nature of the GST adjustment will depend on whether the original supply is zero-rated, standard-rated, or exempt; or
• Result in a change in the original value of imported goods or services.

GST adjustments for TP Adjustments

Generally, a company may need to make a corresponding GST adjustment where the TP adjustment results in:

• An increase in the price of the supply or import of goods or services and:
  • The TP adjustment is effected through the financial statements; or
  • The TP adjustment is taxable or allowable for income tax purposes.
• A decrease in the price of the supply or import of goods or services and:
  • The TP adjustment is effected through the financial statements; and
  • The TP adjustment is taxable or allowable for income tax purposes.

Administrative concession

To ease business compliance, the Comptroller of GST will waive the requirement for GST adjustments under the circumstances stated below, regardless of an increase or decrease in transfer prices:

• If the TP adjustments affect the taxable imports, the company is entitled to full input tax credit on the import, or the imported services are not subject to reverse charge;
• If the TP adjustments affect the value of standard-rated supplies, both the company and its related party customer are entitled to full input tax credit (so long as the companies are not partial exempt traders); or
• If the TP adjustments affect the value of zero-rated supplies or exempt supplies, the company is entitled to full input tax credit (so long as the company is not a partial exempt trader).

Conclusion

In summary, fully taxable GST-registered businesses that are entitled to full input tax credits will not be required to make GST adjustments arising from TP adjustments as the GST adjustments would not have an overall tax impact. Partial exempt businesses may still adopt the concession provided the conditions stated above are met.

Chin Sien Eu
chinsien@bdo.com.sg

Shy Zing Ng
shyzing@bdo.com.sg
 

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