Transfer Pricing in Singapore
Transfer pricing issue arises when a related party (e.g. subsidiary and parent company) sells to or buys from another related party because the price or cost of goods and services can be easily influenced by these parties to achieve certain accounting or tax advantage. In other words, a related company in a country with low tax rate buys at a lower price from related company in another country with high tax rate so that most profits of the group are recognized in the country with low tax regime and therefore save the overall taxes of the group.
Why Transfer Pricing is a Concern to Many Countries?
Transfer pricing becomes a great concern to countries with high tax rate because profits are shifted to countries with low tax rate or from one entity with higher tax to another entity with lower tax. This reduces the tax revenue of countries with high tax rate. With this concern in mind, transfer pricing guidelines emerged to ensure that related parties’ transactions should be priced at arm’s length (i.e. should be priced at the rate which the transaction is between non-related parties).
IRAS Guide on Transfer Pricing
IRAS e-tax guide provides recommendation for related parties transactions and urge businesses to adopt the 3-step approach to justify that transactions take place at arm’s length:
- First Step: Perform a Comparability Analysis where characteristics of transacted item are compared to determine the differences between this item and what is offered in the the market and to what extent it is differentiated from the usual item in the market to be priced differently. In addition to the differences, the brand name, risk assume and additional function performed (e.g. Warranty) in respect of the transactions should be considered. The economic, political and commercial circumstances must be considered like the location where the goods and services are provided (i.e. demand and supply of market may be different), the political stability of the country, the extent of competition. Moreover, comparison must be made across multiple years and must consider any other relevant factors.
- Second Step is to decide which is the most suitable and relevant method (i.e. method which produces the most reliable results) for evaluating prices or margins of related parties against the prices or margins of independent parties in respect of similar transactions. There are 5 methods recommended by IRAS which are accepted internationally and they are:
- Comparable uncontrolled price (CUP) method
- Resale price method
- Cost plus method
- Transactional profit split method
- Transactional net margin method (TNMM)
- Third Step – After the method has been decided, you apply the most suitable and reliable transfer pricing method to determine the transaction price and/or margin as if it is an arm’s length transaction.
For detailed understanding of each method mentioned in point 2 above, please download a copy of IRAS e-tax guide on transfer pricing.
Transfer Pricing Documentation
If you have related parties transaction (especially cross border transactions), it is important for you to get a tax advisor to prepare a transfer pricing documentation to show that the prices given or received from related parties are at arm's length.
Corporate Tax and GST
Payment to Non-Resident is always an issue because there may be withholding tax implication. Consult us to determine if withholding tax is necessary. If yes, we will be glad to file the withholding tax form for you.
If you are a Sole Proprietor or a Partner of a Business, we can help you with your Individual Tax Filing. For employees who may qualify with Not Ordinarily Resident Scheme (NOR) , you may wish to engage us to apply for the concession under NOR.
Voluntary Disclosure of Transfer Pricing and Tax Issues
If there is any incorrect tax filing relating to tax or transfer pricing, we can represent you to disclose to IRAS voluntarily and request for reduced penalty. Discuss with our experienced tax advisor and you will be able to stop worrying about the possibility of IRAS knocking on your door.
Our Transfer Pricing Team and Service
Our Transfer Pricing Team is made up of a few strategic partners who work together to give you the best advice. Email us to get a fee quote for transfer pricing advice and transfer pricing documentation.