Over two-thirds of world trade today involves multinational enterprises, and well over 50% of world trade comprises related party transactions. 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 handled by a different subsidiary belonging to the same group.
In such cases, Transfer Pricing mechanism determines the price of the goods, services, funds, rights or intangible assets that are thus transferred for sale or consumption to a related entity.
According to the IRD Singapore, Transfer Pricing is the pricing of goods, services and intangibles between related parties, and ‘the arm’s length principle’ should be adopted for transfer pricing between related parties.
It is the taxpayers’ responsibility to prepare and keep contemporaneous transfer pricing documentation to demonstrate their related party transactions are conducted at arm’s length.
How are Related Parties are defined in Singapore
Related parties are parties who have control over one another, or who are under the common control of another party, whether directly or indirectly. They include branches and head offices.
How the Arm’s Length Principle is defined in Singapore
It is the internationally accepted standard adopted for transfer pricing between related parties, which means that the profits should be taxed where the real economic activities generating the profits are performed and where value is created.
Transfer prices between related parties are required to be equivalent to prices that unrelated parties would have charged in the same or similar circumstances. It involves identifying situations or transactions undertaken by unrelated parties that are comparable to the situations or transactions between related parties, a process commonly known as comparability analysis.
Thus, the three-step process IRAS in Singapore adopts to implement the transfer pricing mechanism is as follows:
1. Do a thorough comparative analysis using the following four aspects
- contractual terms of transactions
- characteristics of goods, services, and intangible properties
- functional analysis
- commercial and economic circumstances
2. Identify the most appropriate transfer pricing method
CUP Method, Resale Price Method, Cost Plus Method, either of transactional profits methods, or any of these combined. Then, determine the choice of tested party where necessary.
3. Apply the most appropriate transfer pricing method on the data of comparable independent party transactions, and determine the arm’s length results.
Where the pricing of related party transactions is not at arm’s length and results in a reduced profit for the Singapore taxpayer, IRAS may adjust the profit of the Singapore taxpayer upward. The adjustment to reflect the arm’s length results may increase the amount of income or reduce the amount of deduction or loss of the Singapore taxpayer.
Consult a qualified expert on transfer pricing services in Singapore to get clarity on how to go about calculating it.
Transfer Pricing documentation requirements
With effect from the Year of Assessment 2019, taxpayers who have met certain conditions are required to prepare transfer pricing documentation under Section 34F of the Income Tax Act unless an exemption for specified transactions applies. Taxpayers who are not required to prepare transfer pricing documentation under Section 34F of the Income Tax Act are nonetheless encouraged to do so to better manage their transfer pricing risks.
Understand how transfer pricing affects your tax requirements
Engage our Singapore transfer pricing experts to know how IRAS define ‘related parties’ and how it applies the ‘arm’s length principle’.