As a mandatory requirement by IRAS under section 34F of the Singapore Income Tax Act, the Transfer Pricing Documentation is significant for taxpayers.
Taxpayers are required to keep records to prove that their related party transactions are always conducted at arm’s length.
Applicable from Year of Assessment (YA) 2019 onwards, here’s everything you need to know about the mandatory Transfer Pricing Documentation in Singapore.
- What is Transfer Pricing?
- What is contemporaneous Transfer Pricing Documentation?
- Is Transfer Pricing Documentation mandatory from YA2019?
- What is the threshold to prepare Transfer Pricing Documentation for a Singapore Company?
- What is the penalty for not preparing or retaining Transfer Pricing Documentation?
- What is the threshold for related party transactions to be exempt from Transfer Pricing Documentation?
- What are the Transfer Pricing methods?
- Does IRAS have a preference for a Transfer Pricing Method?
- What is the form and content of the Transfer Pricing Documentation?
- What are the provisions for Transfer Pricing audit by the IRAS?
- Is there a surcharge on Transfer Pricing adjustments made by the IRAS?
- What is the mark-up for ‘routine’ support services rendered by a related party to another related party?
What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services and intangibles between related parties. The arm’s length principle has to be adopted for determining the pricing of transactions between related parties. Taxpayers should prepare and keep contemporaneous Transfer Pricing Documentation to show that their related party transactions are conducted at arm’s length.
What is contemporaneous Transfer Pricing Documentation?
Contemporaneous Transfer Pricing Documentation refers to documentation and information that taxpayers have relied upon to determine the pricing of a related party transaction, prior to or at the time of undertaking the transactions with related parties.
The IRAS also accepts Transfer Pricing Documentation as contemporaneous when it has been prepared not later than the due date of filing of the annual tax return for the financial year in which the transactions took place.
Is it mandatory to prepare Transfer Pricing Documentation for a Singapore Company from Year of Assessment 2019?
In 2018, the IRAS made it mandatory for a Singapore Company to prepare Transfer Pricing Documentation. A new section i.e. Section 34F was inserted in the Income Tax Act and is applicable from YA 2019 and every subsequent year of assessment.
What is the threshold to prepare Transfer Pricing Documentation for a Singapore Company?
As per Section 34F, a Singapore entity is required to prepare Transfer Pricing Documentation for a particular financial year, if either of the following conditions are met:
- Gross revenue of the Singapore entity exceeds SG$10million; or
- The Singapore entity was required to prepare Transfer Pricing Documentation in the previous financial year.
What is the penalty for not preparing or retaining Transfer Pricing Documentation?
Taxpayers who do not prepare Transfer Pricing Documentation in accordance with section 34F of the Income Tax Act shall be liable to a penalty up to SG$10,000.
What is the threshold for related party transactions to be exempt from Transfer Pricing Documentation?
- Where the taxpayer transacts with a related party in Singapore, and such local transactions (excluding related party loans) are subject to the same Singapore tax rates for both parties;
- A related domestic loan is provided between the taxpayer and a related party in Singapore, and the lender is not in the business of borrowing and lending;
- Where a taxpayer applies the indicative margin for a related party loan not exceeding SG$ 15 million;
- The taxpayer applies a 5% cost mark-up for routine services in relation to the related party transactions concerned;
- Where the related party transactions are covered by an agreement under an Advance Pricing Agreement;
- The value or amount of the related party transactions (excluding the value or amount in sub-paragraphs (a) to (d) above) that have been disclosed in the current year’s financial accounts do not exceed the thresholds shown in the following table:
|Category of transaction||Value (S$ million)|
|Purchase/ sale of goods||15|
|Loan given/ availed||15|
|All other related party transactions||1|
What are the Transfer Pricing methods?
The internationally accepted Transfer Pricing methods to evaluate the related party pricing against a benchmark based on prices/ margins adopted under independent transactions are as follows:
- Comparable Uncontrolled Price (‘CUP’) Method
- Resale Price Method (‘RPM’)
- Cost Plus Method (‘CPM’)
- Profit Split Method (‘PSM’)
- Transactional Net Margin Method (‘TNMM’)
Does IRAS have a preference for a Transfer Pricing Method?
IRAS does not have a specific preference for any one method. Instead, the method that produces the most reliable results, taking into account the quality of available data and the degree of accuracy of adjustments, should be selected.
Whichever method the taxpayer chooses, the Transfer Pricing documentation should be maintained to demonstrate that its transfer prices are established in accordance with the arm’s length principle.
As per the OECD guidelines, the selection of method should always aim for the most appropriate method for a particular transaction. The most appropriate method is that method which, given the facts and circumstances of the transaction under review, provides the most reliable measure of an arm’s length result. In determining the reliability of a method, the two most important factors to be taken into account are:
(i) the degree of comparability between the controlled and uncontrolled transactions; and (ii) the coverage and reliability of the available data.
What is the form and content of the Transfer Pricing Documentation as per the Income Tax (Transfer Pricing Documentation) Rules, 2018?
The Income Tax (Transfer Pricing Documentation) Rules, 2018 (‘the Rules’) came into operation on 23 February 2018.
As per the Rules, the Transfer Pricing Documentation:
- Contain information as per the Second Schedule of the Rules
- Must be dated
- Should be in English
The broad contents as per the Second Schedule are as follows:
- Organisation structure
- Business profile
- Intangible assets
- Financial activities
- Unilateral Advance Pricing Arrangements
- Business activities and related party transactions
- Functional, Asset and Risk analysis (‘FAR analysis’)
- Comparability analysis (benchmarking of related party transactions)
What are the provisions for Transfer Pricing audit by the IRAS?
As per Section 34D of the Singapore Income Tax Act, the Comptroller may make adjustments to the income of the Singapore taxpayer if the arm’s length principle has not been followed. In other words, the IRAS, based on the audit of the taxpayer, may make an adjustment to the income of the taxpayer by any of the following ways:
- increase the amount of the income for the year of assessment;
- reduce the amount of the deduction allowed for the year of assessment;
- reduce the amount of the loss for the year of assessment.
Is there a surcharge on Transfer Pricing adjustments made by the IRAS?
Where the Comptroller, in relation to the year of assessment 2019 or any subsequent year of assessment-
- increases the amount of the income;
- reduces the amount of any deduction allowed; or
- reduces the amount of any loss,
a surcharge equal to 5% of the amount of the increase or reduction (as the case may be) shall be applied by the Comptroller.
What is the mark-up for ‘routine’ support services rendered by a related party to another related party?
The related party rendering routine support services may apply a mark-up of 5% on the fully loaded cost base. The conditions for the application of such a mark-up are as follows:
- Routine support services should be within the prescribed list given in Annexure C of the e-tax guide on Transfer Pricing
- Related party does not provide similar routine support services to any unrelated party
- Mark-up is applied on all costs (direct costs and indirect costs incurred in rendering services)
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