Singapore
  • Hong Kong
  • UK
  1. Osome Blog Singapore
  2. How Does Transfer Pricing Work in Singapore?

How Does Transfer Pricing Work in Singapore?

How Does Transfer Pricing Work in Singapore?

Concluding a contract with a subsidiary, businessmen often hope to get a lower price, to reduce the costs and to keep the matter of the contract away from the eyes of the state. To prevent that, countries developed a system to control “family business” and internal deals, which is called transfer pricing rules. Let’s see how the transfer pricing influences taxation, how to obey the rules of transfer pricing and what documents to produce. You can also ask for our experienced accountants' help to make sure all your papers are in order and in compliance with all the rules.

What is transfer pricing in taxation?

Transfer pricing is a method that helps to determine how much goods and services must cost when the parties that buy and sell them are “related”. Persons or entities are related to each other if:

  • one of them directly or indirectly controls the other (branches and head offices)
  • or both are under common control of another person or entity (two subsidiaries having a common parent company).

Although the related parties are interdependent, they should play fair and maintain reasonable prices as if they were regular business partners. It means that no preferential pricing is allowed, and neither are hidden profits.

Preferential conditions mean that the parties underpay taxes. Of course, Singapore would like to prevent that. So, Inland Revenue Authority of Singapore (IRAS) controls related parties and fair pricing. IRAS also controls related party transactions with entities operating outside of Singapore. It ensures that profits are taxed in the same country where they were made.

How to define the arm’s length principle?

The arm’s length principle is an international standard of transfer pricing. It states that a company must sell goods or services to its related party for the same price as it would sell them to unrelated contractors in the same circumstances.

The arm’s length principle also applies to any case where different subsidiaries perform a variety of tasks to benefit the parent firm, such as conducting marketing campaigns or retail activity.

A shoe manufacturer may have several factories located on each continent, one plant producing laces. As the shoelaces move through the supply chain to a plant that would put laces and shoes into a finished product, the manufacturer needs to assess the value of each shoelace and how much profit was made by each party. According to the arm’s length rule, the price of the shoelace should be the same as the one the company would pay on an open market. If a similar shoelace costs S$1 elsewhere, the shoe manufacturer should set the price for the transfer of their shoelace at S$1 as well.

If an entity fails to comply with the arm’s length principle and illegally reduces the reported profits in Singapore, IRAS will unilaterally increase the taxable profits and decrease the deduction or loss. The company will have to pay additional taxes. Such enforced changes may also be accompanied by interest and penalties.

How to avoid the breach of the arm’s length principle?

IRAS advises that companies that want to comply with the rules to follow these 3 steps:

Step 1. Compare conditions of the related party transaction (RPT) with the same transactions between independent parties and the circumstances in which the transaction takes place.

The following aspects help to evaluate the transaction:

  • Terms of the transaction. Assess the written contract: the price, responsibilities and possible risks posed by the agreement. As long as the contract may not cover all the aspects of the deal, the actual conduct of the parties also matters. When there is no written agreement at all, consider how the parties actually transact, what goods and services they provide and at what price. For example, a restaurant purchases seafood from its subsidiary company without a contract in writing. It does not mean that they don’t have an agreement. Verbal deals also count for the purpose of transfer pricing. The authority will assess factual supply of the seafood and money paid.
  • Characteristics of products or services. All goods and services presented on the market differ in their features, quality and availability, so they cost differently. This determines the fair price. For example, you cannot sell brand new Gucci bags at the price of low-budget replicas.
  • Functions, assets and risks assessment. Analyse the responsibilities of the parties, the type of assets they use and the actual risks undertaken by the taxpayer. While it is obvious how functions and assets may influence the price, the risk is just as important. For example, a trader selling refrigerators with warranty bears higher risks in comparison to a trader selling the same refrigerators without warranty. Hence, the company granting warranty on the products must set higher prices.
  • Commercial and economic circumstances. The markets in every country have their specifics and restrictions that should be considered. For example, the country’s geographical position and availability of a product on the market cannot help but influence the prices. A mango in a northern country like Sweden will cost a lot more than in Thailand.

IRAS also suggests that companies consider additional factors to make an accurate assessment, like:

  • evaluating transactions on a separate or aggregate basis,
  • using data from several years,
  • considering losses,
  • selecting internal and external data for comparison.

Step 2. Identify the most suitable transfer pricing method

IRAS advises choosing any of the following methods for transfer pricing. The choice can depend on the circumstances and the available data.

Type Name Description
Traditional transaction methods (compare prices) Comparable uncontrolled price method (CUP) Compare the price in a related party transaction with the price stated for an independent party transaction. The characteristics of the goods and services and the circumstances must be the same.
Resale price method (RPM) The method applies when a company purchases a product from a related party and resells it to an independent party. Compare the gross profit margins obtained from both transactions to identify if the price is fair.
Cost plus method (CPM) The method usually applies to manufacturers. Compare the cost of manufacturing and the gross mark up in related and unrelated transactions. The selling of a product must not only cover the manufacturing costs itself but also generate additional profits to the company. Focus on the assessment of functions, assets, risks and economic environment of compared transactions, so far it mostly affects the gross mark up.
Transactional profits methods (compare profits) Transactional profit split method (TPSM) Compare how interrelated parties split the profits and losses depending on their relative contributions.
Transactional net margin method (TNMM) Compare the net profit obtained from transactions.

Step 3. Determine results and set a fair transfer price

As a result, you may apply the arms’ length rules to related transactions and justify the prices. You must adjust the arm’s length results annually.

What documents should I prepare for transfer pricing?

If the gross revenue from your activities exceeds S$10 million for the tax basis period or IRAS specifically request to prepare the documentation for the previous basis period, you must collect and keep all relevant documents in regard to related party transactions. Your accounting company in Singapore must be in the know.

Tip

Incorporate your company in Singapore. Let Osome guide you trough the process.

The documentation should contain an overview of the business group, especially on entities dealing in Singapore, and description of taxpayer’s transactions with related parties alongside the transfer pricing analyses. Find a complete list of requirements to documentation in the Second Schedule of the Income Tax (Transfer Pricing Documentation) Rules 2018.

Provide transfer pricing documents only upon IRAS request. Even if IRAS does not ask for them for the relevant basis period, keep them safe for at least 5 years.

If the value of related party transactions (RPT) for the last financial year exceeds S$15 million, a company must also submit the Form for Reporting of RPT (ZIP, 1.70MB) together with Form C.

Key Takeaways

  • Set a reasonable price when contracting a related party.
  • Compare related party transactions with similar independent transactions. Use a step-by-step guide and methods proposed by IRAS.
  • Collect all documents relevant for transfer pricing and control the value of transactions in order not to miss filing of additional forms.

See also

Share this post:

Tips to run your business smarter.
Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

You might like it

Should You Consider Using Cryptocurrency in Your Business Operations?
Running My Business

Should You Consider Using Cryptocurrency in Your Business Operations?

There are more than 4,000 cryptocurrencies that exist. Before you jump on the bandwagon, assess whether cryptocurrencies are suitable to be used in your business.

7 Ways To Accept Payments For Your Online Store
E-commerce

7 Ways To Accept Payments For Your Online Store

Many payment options allow you to accept credit cards and other payment types. How do you choose which method to include on your website?

Customer Retention: How To Keep Customers Coming Back Repeatedly
E-commerce

Customer Retention: How To Keep Customers Coming Back Repeatedly

Every business likes new customers, especially when the customer uses their services again and again. Existing customers help in creating a solid foundation of your business that provides a steady revenue stream that costs less than acquiring new customers.

5 Tips for a Streamlined Payroll Process for SMEs
Payroll

5 Tips for a Streamlined Payroll Process for SMEs

For a business to run smoothly, the payroll process must be streamlined and error-free. It is easy to streamline and optimize your payroll and other back-office processes within your SMB. Did you know that this can improve your cash flow?

Phase 2 Heightened Alert Support Package for SMEs (July to August 2021)
Government Grant

Phase 2 Heightened Alert Support Package for SMEs (July to August 2021)

From 22 July 2021, Singapore has reverted to Phase 2 (Heightened Alert). Fortunately, the Singapore Government will be cushioning the impacts of the harsher COVID-19 restrictions with a $1.1 billion support package.

How To Offer Free Shipping Profitably
E-commerce

How To Offer Free Shipping Profitably

Should a customer or seller bear the shipping cost? Let’s explore how a profit margin can still be maintained while offering free shipping.

What Is a Register of Controllers and Why Singapore Companies Now Have To Submit This Document
Secretary

What Is a Register of Controllers and Why Singapore Companies Now Have To Submit This Document

In April 2020, Singapore businesses will have to submit the Register for Registrable Controllers to ACRA. Before, your company was only obliged to maintain it internally. Now you will have to file the Register with ACRA electronically and maintain it updated at all times.

SG Govt Will Extend Loans for SMEs by 6 Months as Part of Heightened Alert Support Measures
Government Grant

SG Govt Will Extend Loans for SMEs by 6 Months as Part of Heightened Alert Support Measures

Singapore's Phase 2 and 3 periods of heightened alert have undoubtedly affected many businesses, especially Small- and Medium-sized Enterprises (SMEs). As such, Finance Minister Lawrence Wong has announced additional support measures for these Singapore-registered companies on 5 Jul 2021.

Clickshare Media Ventures Scales Up E-commerce Operations With Osome as Accounting Partner
Customer Stories

Clickshare Media Ventures Scales Up E-commerce Operations With Osome as Accounting Partner

Clickshare Media Ventures (CSMV) is one of the fastest-growing e-commerce companies in Southeast Asia. In just 3 years, CSMV has built itself to be an 8-figure business with more than 10 direct-to-consumer e-commerce brands in the baby, beauty, and personal care industries.

The 10 Best E-Commerce Payment Gateway for Online Sellers
E-commerce

The 10 Best E-Commerce Payment Gateway for Online Sellers

Other than branding and marketing, these technologically savvy consumers are well acquainted with the Internet and convenient payment gateways and demand nothing less than a seamless e-commerce transaction.

SMEs Can Apply for Relief Measures and Delay Full Loan Repayments till 30 Sep
Government Grant

SMEs Can Apply for Relief Measures and Delay Full Loan Repayments till 30 Sep

As the pandemic gradually transitions to an endemic, the Monetary Authority of Singapore (MAS) has announced the 'final extension' of relief measures for small and medium-sized enterprises (SMEs) affected by the COVID-19 situation to resume full loan repayments.

8 Tips to Improve Your E-commerce Photos
E-commerce

8 Tips to Improve Your E-commerce Photos

Want to kickstart your start-up or bolster an existing online business? These 8 e-commerce photography tips could have a direct impact on small businesses owners in Singapore, take a look.

Tips to run your business smarter. Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

We’re using cookies! What does it mean?