Effective 1 January 2025, significant changes to Singapore’s transfer pricing and goods and services tax (GST) treatment of related party financial transactions will take effect. These changes require an arm’s length interest to be charged on related party inter-company loans, marking a departure from the previous practice where interest-free loans were permissible, and where the Inland Revenue Authority of Singapore (IRAS) would merely restrict the deduction of associated interest expenses from the lender’s corporate tax return.
This policy shift has critical implications for companies, particularly in terms of GST compliance and the potential GST impact of being a partial exempt person.
Key Changes Effective 1 January 2025
Mandating Arm’s Length Interest
Under the revised transfer pricing guidelines, companies must determine and charge an arm’s length interest on all related party inter-company loans. The arm’s length principle ensures that the terms of the loan mirror those that would have been agreed upon between unrelated parties under similar circumstances.
Prior to this change, companies were allowed to provide interest-free loans to related parties without immediate tax implications, except for restrictions on interest expense deductions. The new requirement removes this flexibility, standardising the approach to related party loans and aligning with international transfer pricing norms.
Based on the information published by the IRAS, for related party loan not exceeding S$15million, the indicative margin for loan provided in 2025 is Risk-Free Rates + 170bps. Assuming that the risk-free rate is 3.6% in 2025, the interest rate chargeable on loan provided in 2025 would be 5.3%.
GST Implications
Interest income from loans is classified as an exempt supply for GST purposes in Singapore. This presents a challenge for companies whose primary business activities are taxable, as charging interest on inter-company loans could:
1. Create a Partial Exemption Status: If the exempt supplies (including interest income) exceed the De Minimis threshold, the company may be classified as a partially exempt person for GST purposes. This status limits the ability to claim input tax credits on GST incurred.
2. Increase Compliance Burden: Companies will need to implement systems to track exempt and taxable supplies meticulously and set up a process for input tax apportionment to ensure accurate GST reporting.
Impact of Exempt Supplies and the De Minimis Rule
The De Minimis threshold allows companies to remain fully taxable for GST purposes if:
- The total value of exempt supplies does not exceed the average of $40,000 per month; and
- The exempt supplies do not exceed 5% of the total supplies made.
Exceeding this threshold due to inter-company loan interest income could:
- Significantly reduce the amount of GST input tax claimable on expenses.
- Require recalculations of input tax claims in the past if the threshold is breached on tax year basis.
What is the maximum amount of inter-company loan that you can provide and still be a fully taxable person for GST purposes?
This is a complicated calculation and every company would need to evaluate using the actual figures reported in their GST return. However, if we were to make a simplistic assumption that the Company doesn’t make any other exempt supplies (e.g. foreign exchange gains/losses or interest income from bank deposit) other than the interest income from inter-company loan and using the 5.3% interest rate mentioned above for 2025, any inter-company loan that is below S$9m would still meet the De Minimis threshold (5.3% x S$9million = S$477,000 of interest income, which is less than the average of $40,000 of exempt supplies a month) provided the interest income is also less than 5% of the total supplies made by the Company.
In reality, most multinational company would have some other form of exempt supplies like realised foreign exchange gains/losses and interest income from bank deposit and the magical inter-company loan amount that does not create an issue for GST would likely be significantly lesser than S$9m in order for the company to be a fully taxable person.
A GST Solution: Incidental Exempt Supplies
To mitigate the GST impact, businesses can explore whether the interest income from inter-company loan qualifies as incidental exempt supplies under Regulation 29(3) of the GST General Regulations. If the interest income from inter-company loan can be treated as incidental exempt supplies under regulation 29(3) of the GST General Regulations, it would simply mean that the input tax recovery rate for the Company will be increased.
Companies should evaluate the specific circumstances of their inter-company loan arrangements against the criteria outlined in Regulation 29(3). Seeking professional advice is recommended if you are not the GST expert.
Considerations for Compliance
1. Review Loan Agreements: Companies must assess all existing inter-company loan arrangements to ensure compliance with the new requirement. This includes determining the appropriate arm’s length interest rate based on benchmarking studies or external comparables.
2. Evaluate GST Implications: Businesses must estimate the potential value of interest income and its impact on GST reporting. Proactive measures, such as restructuring loan arrangements or managing exempt supplies, may mitigate partial exemption risks.
3. Maintain Robust Documentation: Comprehensive transfer pricing documentation will be critical to justify the arm’s length nature of inter-company loan interest rates. This includes maintaining records of benchmarking studies and the rationale for the selected rates.
4. Engage Professional Advice: Given the complexity of the intersection between transfer pricing and GST, consulting with tax professionals can help businesses navigate compliance requirements while optimizing their tax positions.
When Is It Considered a Loan from a Transfer Pricing Perspective?
From a transfer pricing perspective, a transaction is considered a loan when there is a contractual agreement or an implicit understanding between related parties to provide funds with an obligation to repay. Key indicators include:
● A defined principal amount to be repaid.
● Specific repayment terms and conditions.
● The expectation of an interest charge reflecting the risk profile of the borrower and market conditions.
Transactions without clear terms or that resemble equity contributions (e.g., perpetual funding without repayment terms) may not qualify as loans and should be reviewed carefully to determine their classification. This distinction is critical for applying the arm’s length principle and ensuring compliance with IRAS’ transfer pricing guidelines.
Strategic Implications for Businesses
The transition to mandating arm’s length interest on related party loans underscores Singapore’s commitment to aligning with international tax standards. However, the ripple effects on GST compliance introduce new challenges for businesses. Companies must strike a balance between meeting transfer pricing obligations and managing GST implications to avoid unintended financial and administrative burdens.
While the new rules may impose stricter compliance requirements, they also present an opportunity for businesses to strengthen their tax governance frameworks. By proactively addressing these changes, companies can minimise disruption and enhance their resilience in a rapidly evolving tax landscape.
Conclusion
The 1 January 2025 changes to related party financial transactions signal a significant shift in Singapore’s tax and GST policies. Businesses must adapt swiftly, ensuring that inter-company loan arrangements comply with arm’s length principles while managing the GST implications of exempt supplies. With proper planning and execution, companies can navigate these changes effectively, safeguarding their compliance and optimizing their tax positions in the long term.
I’m the GST expert. Buy me a coffee if you wish to discuss the above. We have many successful precedents.
