Transfer pricing essentially occurs when multinational companies (MNCs) enter into buy and sell transactions or send loans to their related companies. The concept of transfer pricing may also cover the situation in which a parent company in Singapore pays management fees to a parent company abroad or royalties to some related companies. Regardless of how transfer pricing is carried out, one aspect of this process that needs to be conducted at all times is documentation.
Transfer pricing documentation is an essential requirement when carrying out transfer pricing. There are several advantages that come with performing transfer pricing documentation. Conversely, neglecting documentation can potentially lead to costly penalties, time-consuming disputes, and even litigation.
And in matters of transfer pricing – it’s equally crucial to be updated about the latest changes to the e-Tax guide, so as taxpayers and businesses, one understands how to reevaluate transfer pricing models.
Below, we will further discuss what taxpayers should know about the transfer pricing documentation requirement.
What is transfer pricing documentation?
Transfer pricing documentation is a report that analyses how the arm’s length principle is applied by the taxpayers in their related party transactions. In other words, it examines whether or not such transactions between related companies are at arm’s length.
The term “arm’s length” essentially means that the prices or margins of these intercompany transactions that take place between related companies are comparable to those that would have occurred between unrelated or outside companies.
What is the importance of transfer pricing documentation?
Preparing transfer pricing documentation is important for two main reasons: it provides assurance, and it mitigates risks. Transfer pricing documentation is basically comparable to an insurance policy that covers related party transactions in case an “incident” takes place. The incident being referred here is any possible assessment by the tax authorities.
Since transfer pricing essentially entails a diminution of profits that would otherwise have been taxed, an increasing number of tax authorities is coming up with various measures to regulate this business method. An international group named the Organisation for Economic Cooperation and Development (OECD) has particularly established guidance on a series of transfer pricing rules to govern its covered transactions and even the playing field. Numerous tax authorities, including the Inland Revenue Authority of Singapore (IRAS), have used this guidance from OECD as reference in implementing their own transfer pricing rules.
With these rules in place, it has become the primary aim of the taxpayers to defend their transactions with the help of transfer pricing documentation when times get difficult with the tax authorities. The tax authorities generally view documentation as a good practice. It is especially necessary since it usually takes several years from the occurrence of a transaction before an assessment or review is carried out. Without transfer pricing documentation in place, it can be hard to explain to the tax authorities the reasons for the transaction. As such, some businesses may consider getting transfer pricing advisory for professional advice and assistance.
Who are required to prepare transfer pricing documentation?
In general, the preparation of transfer pricing documentation is expected from all taxpayers that enter into related party transactions in order to show evidence on how the pricing of their transactions is consistent with the arm’s length principle. Particularly, however, transfer pricing documentation is required from those companies with an annual revenue of at least $10 million for every financial year, related party transaction value of more than $1 million, and transaction value for loan of over $1.5 million.
Nonetheless, in certain instances, several tax authorities also provide relief measures based on materiality and transaction type. The IRAS, particularly, has spelled out in its guidelines specific cases in which taxpayers are not expected to carry out transfer pricing documentation. These include:
- Domestic transactions that occur between related parties in Singapore when both parties are subject to the same tax rate in the country.
- Domestic loans between related parties in Singapore when the lender is not involved in the business of borrowing and lending.
- Loans in which taxpayers apply the indicative margin as published by the IRAS and the loan is compliant with every condition found under the transfer pricing guidelines.
- Routine services that comply with all the conditions in the transfer pricing guidelines, specifically when a 5% markup is applied by the taxpayers on cost for services deemed as “routine or low-value added.”
- Related party transactions that are covered by an advance pricing agreement (APA)
- Related party transactions whose total amount for the financial year does not exceed the thresholds set out in the transfer pricing guidelines.
Transfer pricing documentation is undoubtedly very useful in keeping evidence of the history of the transactions that occur between related companies. Especially these days when transfer pricing aggression is on the rise, it is quite necessary for companies to keep track of their related party transactions. In doing so, the reviewing or investigating done by the tax authorities will go smoothly.
Aside from transfer pricing, we at Max Lewis Consultants Pte Ltd also deliver a great variety of other services, including business and asset valuation, local and international tax planning, and GST Assisted Self Help Kit. Through our highly trusted services, we can help your business develop in the most professional and efficient way. To learn more about our breakthrough offers, do not hesitate to enquire with us today.