The corporate landscape has shifted dramatically over time. For example, while your business may be registered in one country, your marketing staff and manufacturing plant may be located in another. This is done to take advantage of the cost savings that outsourcing some processes to low-cost countries can provide.
To remain fully compliant with local rules, the company will establish subsidiary firms in each operating region. Setting up a Singapore organisation as a holding or subsidiary company in the overall business structure is typically a highly appealing alternative that can significantly reduce an enterprise’s total cost burden.
Introduction to Transfer Pricing
Taxpayers must apply the arm’s length concept to guarantee that the pricing of their transactions with linked parties reflects independent pricing.
Two parties are related if one of them dominates the other or if they are under the direct or indirect control of another party. Branches and corporate headquarters are examples of related parties.
To demonstrate that their related party transactions are performed at arm’s length, taxpayers must compile and preserve contemporaneous transfer pricing evidence.
What is the Arm’s Length Principle?
IRAS supports the arm’s length concept, an internationally approved standard, to govern the price of transactions between related parties.
The IRAS believes that profits should be taxed where genuine economic activities generate the profits and where value is created. This will be ensured by the proper application of transfer pricing rules.
According to the arm’s length principle, transfer prices between related parties must be equal to those paid by unrelated parties in the same or similar situations.
To implement the arm’s length principle in your related party transactions, IRAS recommends taking the following three steps:
Step 1: Conduct a Comparison Study
This helps to discover scenarios or transactions carried out by unconnected parties that are comparable to those carried out by related parties.
It is essential to examine the comparability of transactions in the following four aspects and make comparability adjustments for material differences.
- Contractual terms of the transaction
- Characteristics of goods, services or intangible properties
- Functional analysis
- Commercial and economic circumstances
You should also consider other relevant aspects such as;
- Evaluate transactions on a separate or aggravated basis
- Use multiple year data
- Consider loses
- Select comparables;
- Internal comparables
- External comparables;
- Commercial databases
- Comparables with publicly available information
- Non-local comparables
- Loss generating companies.
Step 2: Choose the Best Transfer Pricing Method and a Tried and True Party
You need to identify the transfer pricing method that produces the most reliable results.
1. Traditional transaction method;
- Comparable Uncontrolled Price (CUP) method
- Resale Price Method
- Cost Plus Method
2. Transactional profit method;
- Transactional Net Margin Method (TNMM)
- Transactional profit split method;
- Residual analysis approach
- Contribution analysis approach
3. Other more appropriate methods or a combination of various methods.
NOTE: Determine the choice of tested party where necessary.
Step 3: Estimate the Findings at Arm’s Length
You will have to apply the most appropriate transfer pricing method on the data of comparable independent party transaction(s).
You have to consider using the interquartile range to enhance the reliability of results.
Documentation for Transfer Pricing
You must compile and preserve contemporaneous transfer pricing paperwork to demonstrate that your related party transactions are handled at arm’s length.
Paperwork and information used to determine transfer prices for related party transactions before or at the time of the transactions are referred to as contemporaneous transfer pricing documentation. IRAS also considers transfer pricing documentation to be contemporaneous if it was created before the Income Tax Return filing deadline for the financial year in which the transactions occurred.
You must utilise the most up-to-date information and data available at the time to show how the transfer prices for the transactions are derived or supported when preparing contemporaneous transfer pricing paperwork.
Transfer price document preparation and maintenance facilitate scrutiny by the tax authorities and, as a result, aids in the resolution of any transfer pricing issues that may emerge.
Taxpayers who are unable to demonstrate that their transfer prices are at arm’s length through their transfer pricing documentation or who do not have transfer pricing documentation may face negative consequences, such as double taxation if IRAS or foreign tax authorities adjust their transfer prices or penalties.
What Documents are Required?
If a Singapore corporation fits either of the following circumstances, it must prepare and preserve the transfer pricing documentation:
- For the tax basis period, gross revenue arising from its trade or business exceeds S$10 million; or
- The previous basis period’s transfer pricing documents were required to be prepared.
The following documents should be collected and kept by your company:
- An overview of the group in which the company is a member that is related to the business operations in Singapore; and
The company’s operations and transactions with connected parties, as well as functional and transfer price analyses.
- To get the comprehensive document requirement list, you can refer to The Second Schedule of the Income Tax (Transfer Pricing Documentation) Rules 2018.
Companies in Singapore must complete transfer pricing paperwork within the deadline for filing their tax returns.
When filing a tax return, you do not need to include the transfer pricing documentation. However, you must send appropriate papers to IRAS within 30 days of receiving a request for them.
Documents should be kept for a minimum of 5 years after the end of the base period in which the controlled transaction occurred.
Exemptions from Transfer Pricing Documentation
A general exemption applies when a company’s yearly gross revenue from its trade or business for the basis period does not exceed S$10 million or when the firm was not explicitly instructed to do so by IRAS.
Related-party domestic transactions subject to the same tax rate or related-party transactions with a value below particular thresholds are examples of specific exemptions. Section 4 of the Income Tax (Transfer Pricing Documentation) Rules 2018 contains the entire list of exemptions.
What is the Indicative Margin for Group Loans?
IRAS has also developed indicative margin rates for related-party loans, which corporations can utilise to charge the interest rate on such loans. The suggested margins are applied on any related-party loan of less than S$15 million.
These margins are based on worldwide rate standards like LIBOR (London Interbank Offer Rate) and SIBOR (Singapore Interbank Offered Rate).
Companies who elect to use the indicative margin for related party credit do not need to prepare transfer pricing documentation for these loans.
For each calendar year, IRAS introduces indicative margins. For example, in 2021, this rate was the LIBOR or SIBOR rate + 2.75%.
What Consequences Do You Face If You Don’t Follow the Transfer Pricing Rules?
If your organisation fails to prepare the transfer pricing documentation, it may be considered a violation, with a penalty of up to S$10,000 imposed for each non-compliance offence.
Furthermore, you will be obliged to replace the non-compliant transaction’s transfer price with the price determined by the authorities, as well as pay taxes based on the new price.
The following offences attract penalties;
- Failure to complete transfer price documentation on time or with the required content;
- Failure to provide IRAS with transfer pricing documentation within 30 days of receiving a request;
- Failure to keep transfer pricing records for a minimum of 5 years; or
- Provision of any incorrect or deceptive documentation.
If you run a group of firms in multiple countries, and one of them has a connection to Singapore, you should be aware of the transfer pricing requirements in Singapore.
These regulations establish a framework for determining the price of products, services, or intangible assets transferred for sale or consumption between related parties in your organisation.
The essential idea is that no preferential pricing or hidden profits are permitted. Preferential conditions would allow the parties involved to underpay their taxes.
Singapore’s Inland Revenue Authority (IRAS) supervises related firms and guarantees that their intercompany transactions, including related-party deals with corporations based outside of Singapore, are reasonably priced.
To ensure that your controlled transactions are carried out lawfully at arm’s length, you should examine them using the aforementioned transfer pricing analysis methods and prepare the required paperwork on time.