While establishing a business in Singapore is relatively easy and straightforward, there are compliance procedures and regulations to comply with.
Transfer pricing is the pricing of goods, services and intangibles between related parties. Related parties are parties who control one another, or who are under the control of another party. Examples of related parties include branches, subsidiaries, parent companies and head offices.
Transfer pricing is important because it affects the amount of tax paid to tax authorities. As such, when transacting with related parties, your business should apply the arm’s length principle.
The Arm’s Length Principle
The Arm’s Length Principle is an international standard adopted to guide transfer pricing. It requires that transfer prices between related parties must be equivalent to prices that unrelated parties would have otherwise charged. This is so that prices would reflect the true economic value of the contributions made by each party in a transaction.
Hence, if a transaction between related parties is not conducted at arm’s length, parties may derive a different profit amount solely because of their special relationship. In such a case, tax authorities can make the necessary adjustments to the taxable profits of the taxpayer. This is to reflect the true price that would have otherwise been derived.
To apply the arm’s length principle correctly, follow this 3-step approach:
Step 1: Conduct comparability analysis
Determine the type of relationship between your business and the related party, and compare your transaction with a similar transaction between non-related, independent parties. Questions to ask yourself include:
- How does your business and the related party relate to each other?
- Are there differences between what is in the contract, and what actually transpired?
- What are the characteristics of goods or services provided? Are they comparable with that of transactions between independent parties?
- What were the functions performed and risks assumed by each party?
Step 2: Identify the most appropriate Transfer Pricing method and tested party
There are five internationally accepted methods for evaluating transfer prices:
- CUP method
The CUP method simply compares the prices charged between related parties and between independent parties. This method works best for transactions involving products with very similar characteristics.
- Resale price method
The resale price method can be used when your business buys a product from a related party, and resells it to an independent party. Under arm’s length conditions, your resale price margin should allow your business to recover its selling and operating costs, and earn a reasonable profit.
- Cost plus method
The cost plus method compares the gross mark-up added for transactions between related parties and between independent parties. If the gross-mark up for both transactions do not seem comparable, adjustments must be made.
- Transactional profit split method
The transactional profit split method considers if the total profit earned by your business and the related party is divided based on each party’s contributions to the earning of that profit.
- Transaction net margin method
The transaction net margin method compares the ratio of net profits to a choice of base (such as costs, sales or assets) as attained by each party in a transaction. As net profits can be affected by factors such as efficiency of plant and machinery used or workforce capabilities, this method is usually unreliable.
Step 3: Determine the arm’s length results
By applying the best method(s) from Step 2, you can guide your transfer pricing for any related party transactions. You may also consider using interquartile range to enhance the reliability of results.
What Information Must I Report?
If the total value of related party transactions for your business exceeds $15 million in any financial year, it must fill up a form to provide the Inland Revenue Authority of Singapore (IRAS) with information such as:
- Name of your group’s holding company
- Details of related party transactions
- Names of related party and relationship type
This form must be submitted together with Form C.
What Transfer Pricing Documents Must I Keep?
Businesses in Singapore with a gross revenue exceeding $10 million a year must prepare and keep transfer pricing documentation for all their related party transactions. Businesses who are not required to prepare transfer pricing documentation are nevertheless encouraged to do so to better manage their transfer pricing risks.
These documents will show that your related party transactions are conducted at arm’s length. Without the documentation, you may have difficulty proving to IRAS that the transfer was conducted at arm’s length.
What if I Fail to Comply?
If IRAS has to make transfer pricing adjustments, a surcharge of 5% on the amount adjusted will be imposed.
In addition, businesses who fail to prepare transfer pricing documentation or provide false or misleading documentation to IRAS will face a fine of up to $10,000.
How Do I Avoid Double Taxation?
When two or more tax authorities take different positions in determining arm’s length prices, double taxation may occur. If your business suffers double taxation from transfer pricing adjustments made by IRAS or a foreign tax authority, you can resolve the issue by either taking legal remedies or requesting for IRAS to resolve the double taxation through the Mutual Agreement Procedure (MAP).
Your business may also choose to avoid transfer pricing disputes by applying for an Advance Pricing Arrangement (APA) for its related party transactions in the future. An APA is an arrangement between your business and a tax authority that agrees on a set of criteria for transfer pricing in advance to avoid double taxation.
Engage a One-Stop Corporate Solutions Provider
Instead of navigating through such transfer pricing requirements on your own, it is a good idea to engage a professional corporate services provider who can you help you save valuable time and keep your business on track.
At Corporate Services Singapore, we help businesses be effective at governance. Our services extend beyond the keeping and maintaining of statutory books and registers to help you stay ahead of the various statutory compliance deadlines and requirements. To keep up with the latest regulatory updates, give us a call at 6602 8286 or email us at email@example.com today.