Transfer pricing refers to the pricing of goods, services, or intangible assets transferred within multinational enterprises (MNEs). It involves determining the appropriate prices or profit margins for cross-border transactions between related entities. In Singapore, transfer pricing is regulated by the Inland Revenue Authority of Singapore (IRAS), which follows the arm’s length principle based on international standards and guidelines set by the Organisation for Economic Co-operation and Development (OECD).
Read on as we explore the key principles of transfer pricing in Singapore and highlight the guidelines provided by the IRAS.
Arm’s length principle
The fundamental principle of transfer pricing in Singapore is the arm’s length principle. According to this principle, the prices or terms of transactions between related entities should be set as if they were unrelated parties dealing at arm’s length. In other words, the pricing should reflect the market conditions prevailing between independent entities engaged in similar transactions.
Transfer pricing documentation
Taxpayers are required to create and maintain records that demonstrate that the pricing of their transactions with related parties adheres to the arm’s length principle. These records, known as transfer pricing documentation or TP documentation, serve as evidence of the appropriate pricing of such transactions.
Taxpayers in Singapore are required to prepare local transfer pricing documentation (TPD) as well as the country-by-country (CbC) Report. Taxpayers do not need to maintain a separate Master File because some of the information that would normally be in the Master File is already included in the local transfer pricing documentation.
The documentation should provide detailed information on the business operations, functions performed, assets used, risks assumed, and the selection of appropriate transfer pricing methods.
Selection of transfer pricing method
Singapore transfer pricing services can assist in selecting the most appropriate transfer pricing method for a specific transaction. Singapore allows the use of various transfer pricing methods, including the comparable uncontrolled price (CUP), resale price method (RPM), cost plus method (CPLM), profit split method (PSM), and transactional net margin method (TNMM). The selection of the most appropriate method depends on the nature of the transaction, the availability of reliable data, and the level of comparability between related and unrelated transactions.
Determining the arm’s length range requires conducting a comparability analysis. This analysis involves identifying and comparing relevant factors, such as the functions performed, risks assumed, assets employed, and contractual terms of the controlled transaction, with those of comparable uncontrolled transactions. The IRAS emphasises the importance of using reliable and contemporaneous data to ensure a robust and accurate analysis.
Advance Pricing Agreements (APAs)
Singapore offers the option of entering into Advance Pricing Agreements (APAs) with the IRAS. APAs provide certainty and clarity to taxpayers by agreeing on an appropriate transfer pricing methodology and pricing for a specified period. The IRAS encourages taxpayers to engage in APA negotiations to minimise transfer pricing disputes and provide a transparent framework for cross-border transactions.
Transfer pricing penalties and dispute resolution
Non-compliance with transfer pricing requirements may lead to penalties, including transfer pricing adjustments and penalties for inaccurate documentation. The IRAS encourages taxpayers to resolve transfer pricing disputes through the Mutual Agreement Procedure (MAP) under tax treaties. MAP provides a mechanism for competent authorities of different jurisdictions to resolve disputes and eliminate double taxation.
Transfer pricing in Singapore adheres to the key principles outlined by the arm’s length principle and aligns with international standards set by the OECD. The IRAS emphasises the importance of accurate and contemporaneous transfer pricing documentation, conducting comparability analysis, and using appropriate transfer pricing methods. By maintaining robust transfer pricing practices, multinational enterprises can ensure compliance, mitigate risks, and foster transparency in cross-border transactions.
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*The above represents our opinions and views and does not necessarily reflect the position of any entities mentioned.