How do related entities decide on the appropriate prices for business transactions that take place internally?
One internationally used method to determine this is transfer pricing. Let us look at how this practical mechanism works in detail!
What is Transfer Pricing in Singapore?
Transfer pricing refers to an accounting method involving the setting of prices for goods and services traded between and within related parties. It enables prices to be established for this exchange between divisions, subsidiaries, or companies that are commonly controlled as part of the same bigger entity.
Companies may engage in transfer pricing to lower the parent firm’s overall tax burden.
What is an Example of Transfer Pricing?
An example of transfer pricing would be a company selling goods to a subsidiary in a low-tax country at a price that allows the subsidiary to make a profit.
Does Transfer Pricing Apply to Domestic Transactions in Singapore?
Transfer pricing applies to domestic transactions in Singapore as well.
It is because Singapore has a bilateral tax treaty with many other countries, which allows for the sharing of tax information between governments.
It also means that the IRAS can examine domestic transactions to ensure they are in line with transfer pricing regulations.
What is Transfer Pricing Risk?
Transfer pricing risk is the potential for increased taxes or penalties if the prices set for goods and services traded between related companies are found to be unreasonable.
It can happen if, for example, the prices favour one company over another or if they are not in line with market rates.
Transfer pricing risk is a particular concern for multinational companies, as different countries may have different tax rates and regulations governing transfer pricing.
What Are the Transfer Pricing Guidelines in Singapore?
The Inland Revenue Authority of Singapore (IRAS) usually obtains its guidelines from the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TPG).
The 6th edition of Singapore’s transfer pricing guidelines released in August 2021 provided updates and more transfer pricing guidance in more areas, like the conditions for mitigating a TP surcharge.
The 3-Step Approach to the Arm’s Length Principle
IRAS supports the Arm’s Length Principle legally recommended in the Singapore Income Tax Act.
It is a globally endorsed standard that guides how transactions are priced between related entities. These entities can be related via control, capital, or management.
It backs the principle that profits must be taxed if the real economic activities that create the profits are carried out, and value is produced. Applying transfer pricing rules will help to make sure that this result happens.
You can avoid violating the arm’s length principle by evaluating your controlled transactions with IRAS’ 3-step approach:
Step 1: Carrying Out a Comparability Analysis
This analysis will discern situations or transactions that unrelated entities have attempted. They should be comparable to the situations or transactions related parties have tried.
The examination should be based on these 4 areas:
- The transaction’s contractual terms
- The features of the goods, services, or intangible properties
- Functional analysis
- Commercial and economic situations
These are 4 additional aspects that can be considered:
- Using multiple-year data
- Assess transactions separately
- Choose from different comparables
Step 2: Determining the Most Suitable Transfer Pricing Method and Tested Party
This step involves choosing from the most widely used ways of transfer pricing.
What are these 5 common methods of transfer pricing?
- Comparable Uncontrolled Price (CUP) Method
- Cost Plus Method (CPM)
- Resale Price Method (RPM)
- Profit Split Method (PSM)
- Transactional Net Margin Method (TNMM)
Step 3: Assessing the Results of the Arm’s Length Principle
After considering one of the 5 listed methods, you can apply it to related-party transactions and support your prices to tax authorities.
You must modify the results every year.
Transfer Pricing Adjustment for Non-Compliance
If the transfer pricing fails to be at arm’s length and causes a lower profit for a taxpayer, IRAS may enhance the Singapore taxpayer’s profit to the arm’s length amount.
When transfer pricing adjustments are made, it will impose a 5% surcharge on the adjustment amount.
What is Transfer Pricing Documentation?
Transfer pricing documentation is a set of concurrent records that show that the prices for goods and services traded between related companies are fair and reasonable and that transactions are made at arm’s length.
It includes information about the products or services being traded, the companies involved, and the prices used.
Transfer pricing documentation ensures that profits are taxed in the appropriate countries.
Is Transfer Pricing Documentation Mandatory in Singapore?
Taxpayers must prepare contemporaneous transfer pricing documentation as stipulated under the Income Tax Act as of the Year of Assessment (YA) 2019 if certain conditions are met.
The IRAS accepts transfer pricing documentation as ‘contemporaneous’ if it is prepared earlier than the due date of filing the annual tax return for the basis period.
Even if you are exempted, you are still encouraged to prepare transfer pricing documentation to handle transfer pricing risks better.
What Are Some Transactions That Qualify for Exemption?
Taxpayers can refrain from preparing transfer pricing documentation for certain transactions if they fall under any of these examples:
- Related party loans where an indicative margin is applied
- Routine support services where a 5% cost markup is applied
- Related party domestic loan
- Related party transaction that is covered by an advance pricing arrangement (APA)
What is the Penalty for Non-Compliance?
A taxpayer may be required to pay a fine of not more than S$10,000 if they are non-compliant in these aspects:
- Failure to create transfer pricing documentation
- Failure to present documentation within 30 days of IRAS’ request
- Failure to keep transfer pricing documentation for a minimum of 5 years, or
- The creation of false or misleading documentation
What Are the Requirements of Transfer Pricing Documentation?
Here is a table that lists out the requirements in transfer pricing documentation:
|Who Prepares the Documentation?||Taxpayers who fulfil one of these conditions:
|What is Required in the Documentation?||
|Who is Exempted?||Exemptions of transfer pricing documentation are stated explicitly in the Income Tax (Transfer Pricing Documentation) Rules of 2018|
|When Must Documentation Be Complete?||Transfer pricing documentation must be complete by the Income Tax Return’s filing due date|
|When Must Documentation Be Submitted?||Taxpayers must submit the transfer pricing documentation within 30 days of IRAS’ request|
|When Must Transfer Pricing Documentation Be Refreshed?||Taxpayers can refresh their documentation once every 3 years if details remain accurate and if the conditions for simplified transfer pricing documentation are met|
|How Long Must Documentation Be Kept For?||A minimum of 5 years from the end of the basis period where the transaction occurred|
|What is the Penalty for Non-Compliance?||A fine of not more than S$10,000 will be imposed|
Transfer Pricing Audit
IRAS performs transfer pricing audit that involves assessing the transfer pricing and documentation of taxpayers.
The audit ensures that companies adhere to the arm’s length principle and transfer pricing documentation requirements.
Get a Transfer Pricing Expert to Advise You and Stay Compliant
A transfer pricing expert can help to recommend and ensure that you stay within the relevant guidelines and requirements.
Have more questions? Let us know how we can help with your transfer pricing needs!
FAQs on Transfer Pricing
- Transfer pricing is how transactions between related entities are priced.
- Some examples include:
- The provision of services
- The sale of goods or services
- The use or transfer of intangibles
- The purpose of transfer pricing is to ensure that profits are allocated in a rational and fair manner across the various parts of the enterprise.