Transfer Pricing in Singapore
Transfer Pricing (TP) is one of the main tax requirements you should consider when you choose to expand your business outside of Singapore. If you are leading operations in more than one country, is it enough for a business to be caught under the transfer pricing regulations.
To explain this article in more detail, we have partnered up with Transfer Pricing Solutions Asia. They are a team of expert advisors and consultants that can assist you with transfer pricing. They are located in Singapore to service companies located in Singapore and in the Asia Pacific!
When is transfer pricing applicable to a company?
Transfer pricing applies to companies that enter into transactions between companies that are part of the same group (related parties) located in different countries. Singapore included, some countries have transfer pricing regulations for domestic transactions between related parties, especially when the particular country has different tax rates.
Related parties are parties who control one another or who are under the common control of another party, whether directly or indirectly. This includes – branches and head offices.
Who does transfer pricing apply to?
SMEs and entrepreneurs often have these questions – does this apply to them as it is all under one company? Or they may own all companies, so transfer pricing does not apply to them. In fact, it does apply to them. The tax authorities do not see the group as one company; in fact, it is the opposite. Transfer pricing is about the pricing transactions based on the market assuming that two or more companies of the same group are independent and separate. This is also known as the arm’s length principle.
The Inland Revenue Authority of Singapore (IRAS) endorses this principle as the standard to guide transfer pricing. Profits should be taxed where the real economic activities generating the profits are performed and where value is then created. You can click here to have a better understanding. Organisation for Economic Co-operation and Development (OECD) also endorses the arm’s length principle as the standard to guide transfer pricing.
How can you comply with transfer pricing rules?
It is important to make sure that related party transactions are at arm’s length (in layman’s term – market price), right from the moment the transaction has been set up. The following documents are recommended to show evidence of compliance:
- Transfer pricing documentation to facilitate any reviews by tax authorities
- The contract covering the transaction entered between related parties
Transfer pricing documentation
Transfer pricing documentation refers to the records kept by taxpayers to show that their related party transactions are conducted at arm’s length. In Singapore, the documentation has to cover the following:
- Overview of the businesses of the group in which the taxpayer is a member that is relevant to the business operations in Singapore
- Taxpayer’s business and the transactions with its related parties (including functional analysis and transfer pricing analysis)
Do not fall under the perception that transfer pricing only affects large MNEs only. It is important for entrepreneurs, startups and SMEs to adopt transfer pricing as well. It is advised to start managing your transfer pricing compliance from the beginning to avoid any hiccups in the future.