Introduction to IRAS Transfer Pricing in Singapore
Territorial expansion of businesses that followed after globalization, has led to an increase in cross border transactions between related companies. For instance, while manufacturing activities are managed by an entity of a larger group in one country, marketing of the manufactured products in another country is being handled by a different subsidiary belonging to the same group. In such cases, the Transfer Pricing mechanism determines the price of the goods, services, funds, rights or intangible assets. Subsequently, they are transferred for sale or consumption to a related entity.
Transfer pricing is the pricing of goods, services, and intangibles between related parties. The arm’s length principle should be adopted for transfer pricing between related parties. Taxpayers should prepare and keep contemporaneous transfer pricing documentation. This indicates that their related party transactions are conducted at arm’s length.
What is the Arm’s Length Principle (‘ALP’) of transfer pricing?
The fundamental principle for transfer pricing is the “Arm’s Length Principle”. This indicates that the pricing of cross-border transactions between related entities must be market-based. It is also similar to the pricing that would have been charged if the parties were unrelated.
The arm’s-length principle of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s-length price for a transaction is therefore what the price of that transaction would be on the open market.
With businesses rapidly expanding beyond their domestic borders, there is a spike in cross border transactions between related parties. Tax authorities around the globe are stepping up their scrutiny on such transactions. Where a related party transaction is not in compliance with the arm’s length principle, tax authorities can make adjustments to the profits.
Therefore, multinational corporations should now approach transfer pricing in a structured manner by identifying the jurisdictions in which they operate, the related party transactions being undertaken, revisiting the structures to ensure that they are compliant with the arm’s length principle, aligning the returns of the group entities commensurate with the value creation and preparing a comprehensive Transfer Pricing Documentation to avoid tax adjustments and penalties.
Transfer Pricing should not only consider the compliance with the rules and regulations. It should also consider the reputational risk associated with non-compliance.
What is Transfer Pricing Documentation?
The Transfer Pricing Documentation (TPD) is prepared at the end of the financial year and is now taking center stage across jurisdictions.
The Transfer Pricing Documentation includes a description of supply chain, business models & strategies, value drivers of profit, industry analysis, description of intangibles assets and the related functions, financing arrangements, restructurings within the group and rationale for the same, assumptions behind the rejig of supply chains, commercial factors considered while taking decisions regarding shifting of functions and risks, basis of arriving at the arm’s length price, benchmarking analysis and economic adjustments.
The above-mentioned information is of paramount importance to support the arm’s length pricing of related party transactions. It also enables key stakeholders to regularly monitor the pricing.
Singapore Transfer Pricing Documentation
In 2018, there was an insertion of a new section in the Singapore Income Tax Act – Section 34F. It is mandatory for a Singapore Company to prepare Transfer Pricing Documentation. This is in accordance with the Income Tax (Transfer Pricing Documentation) Rules, 2018.
As per Section 34F, a Singapore Company must prepare Transfer Pricing Documentation for a particular financial year, if either of the following conditions are met:
- Gross revenue of the Singapore Company exceeds SG$10 Mn; or
- The Singapore Company had to prepare Transfer Pricing Documentation in the previous financial year.
COVID – 19 Support Measures by IRAS on Transfer Pricing
Information to be included* (to the extent applicable) in the Transfer Pricing Documentation. This is to substantiate the impact of COVID on profitability:
Effect on industry due to COVID and as a consequence how it has impacted the Group/ the Singapore entity.
For example, the tourism sector has been badly hit. Therefore, the Singapore entity should highlight the impact on industry and specifically the intensity of impact on the Singapore entity keeping in view the characterization.
Which entity in the Group is responsible for taking key decisions and accordingly is responsible for assuming the related risks.
For example, the key decisions regarding supply chain, go-to-market strategy, resumption of operations.
Functional, asset and risk analysis (‘FAR analysis’) of the Singapore entity and the related parties before COVID (financial year 2019 and for the first quarter of 2020) and for the period after April 2020, to highlight any reallocation of functions/ assets/ risks.
Detail of inter-company agreements specifically highlighting any changes to the terms and conditions as a result of Covid.
Budget Vs Actuals:
Comparison of budgeted vs the actual profit and loss numbers and explanation for the variance.
Reasons and explanations for the negative impact on profitability.
Details of assistance received from the Government and the impact on operations due to restrictions.
*The information is in addition to the requirements mentioned in the Income Tax (Transfer Pricing Documentation) Rules of 2018
Multiple year analysis in case of the tested party
- Multiple year data for the Singapore entity may be considered as a one-off approach for the Year of Assessment 2021 without consulting the IRAS.
- Data for the financial year 2018, 2019, and 2020 (of the Singapore entity) can be considered to calculate the appropriate profit level indicator.
- The rationale for the above approach is that the comparable data for the financial year 2020 shall be available only in the later part of 2021. Also that the financial data for 2019 of majority companies is still not available, therefore, to improve comparability and to ensure that the net result is within the arm’s length range, multiple-year analysis can be undertaken. Based on multiple-year analysis, appropriate adjustment can be done in the books of account for the financial year 2020 to reflect the arm’s length outcome.
- Transfer pricing in Singapore 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.
- IRAS does not have a specific preference for any one method. Instead, the method that produces the most reliable results, should be selected. Taxpayers may choose other appropriate methods or a combination of various methods to comply with the arm’s length principle. Whichever method the taxpayer chooses, IRAS transfer pricing documentation should be maintained to demonstrate that its transfer prices are established in accordance with the arm’s length principle. Transfer pricing guidelines OECD says that the selection of a 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 take into account are:(i) the degree of comparability between the controlled and uncontrolled transactions; and (ii) the coverage and reliability of the available data. Since the selection of the most appropriate method involves a test of relative merit, a not-so-perfect method is not considered inappropriate, unless some other method is shown as more reliable or provides a better estimate of an arm’s length result.
- Taxpayers do not need to submit the Transfer Pricing Documentation along with the annual tax return. IRAS requires TPD submission within 30 days.
- Where the Comptroller, in relation to the year of assessment 2019 or any subsequent year of assessment
– increases the amount of 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.
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