Transfer Pricing in Singapore
Businesses around the world enter into contracts with group companies, wholly or partially owned subsidiaries. They tend to charge low prices to generate more profit or high prices to show a loss, ultimately affecting the bottom line. In order to prevent these practices, countries have adopted a set of rules known as transfer pricing to control these activities. Continue reading, to develop an understanding of the rules as to how it influences taxation, complying with the rules and documents required to maintain.
How Transfer Pricing Influence the taxation in Singapore?
It identifies how products should be priced, if the transaction is done between the parties who are directly or indirectly related. Inland Revenue Authority of Singapore (IRAS) states that the parties to the transaction are said to be related if they meet any of the following conditions:
- Either the persons or entities to the transaction are under common control, for instance, two companies having a same parent company.
- One of the person or entity to the transaction, directly or indirectly controls the other, for instance, subsidiaries, group companies and branches.
If the parties are found to be related, they should transact on the fair market price as it should have been under regular business transactions. To be precise, there should be no preference over price and cost due to their relation.
Preferential pricing means that parties have under or over priced the goods and services, ultimately resulting in under payment of taxes by controlling profits through these preferential transactions. Singapore has always worked on preventing it. Therefore, IRAS controls related parties’ transactions within and outside Singapore, to ensure that profits generated are properly taxed.
Identifying the Arm’s Length Principal
This principle is internationally adopted for measurement of transfer pricing. It states that a company is supposed to sell their products at the same price to both related and unrelated parties.
This can be easily understood by looking at the following illustration
A motorcycle manufacturer has several plants located around the world. One of the plants is producing motorcycle seats, which are then imported by another plant, in another country where, the seat together with other motorcycle parts are assembled into a final product. Here, the principle states that the price charged for the motorcycle seat should be in line with price of similar products available in the market. For Instance, a motorcycle seat of the same quality and specification costs S$25 in open market, then the motorcycle seat manufacturer should also charge the same price when selling the product to their other plant.
Where an entity does not comply with the principle and reduces or increases the profits by manipulating the prices, IRAS will recalculate the profits by deducting the profits/(loss) generated on those transactions and charge additional taxes on the recalculated profits as determined by the IRAS. These additional taxes may be subject to penalties and interest charged.
Avoidance of the Breech of the Arm’s Length Principal
Following are the advisory rules which are in line with IRAS, in order to avoid the breach of the arm’s length principle
1) Comparison of the terms and circumstances of the related and non-related party transactions
Following are the methods to evaluate the transaction:
Assessment of agreements and conduct of parties.
Terms of the agreement. To assess the terms of the agreement on which the transaction took place, in addition to the price associated with these transactions. However, there are situations when there is no written agreement available, as some business tends to do transactions on verbal agreements. For instance, if a company situated in Singapore, purchases mangoes from its subsidiary located in Pakistan and that too in absence of written agreement, then the actual conduct of the parties will do the needful. The IRAS will look forward to assess how much mangoes are supplied and at what price.
Independence of goods and services. Asses how the same products available in the market have been priced. This act concludes the fair price to trade. For instance, an original product could not be priced the same of a replica.
Risks assessment. Analyze the risk associated to it is also important. For instance, a company selling mobile phone without any warranty will charge low price than the company selling the same phone with warranty.
Other circumstances. Every country around the world have local laws which restricts their market practices, there type of laws also need consideration. For instance, a country’s local law controls price of their agriculture products and restricts determination of price through open market.
IRAS also recommends that companies should also consider other factors while making an assessment, like, data of past years, loss declaration, etc.
2) Adopting appropriate transfer pricing method
IRAS recommends on adopting the following methods to determine the transfer pricing.
Comparable pricing method: Compare the price of related and non-related party. When comparing prices of goods and services, the characteristics and circumstances need to be the same.
Resale pricing method: When a group company or a subsidiary is indulged in the business of commercial purchase from an intergroup company and re-selling the same product without any value addition. In this case the profits are split between the companies. Comparison of the gross profit margins from these transactions can help identify, whether the fair price or not.
Cost plus method: When a group company or a subsidiary is indulged in the business of manufacturing. In this case, we can compare the gross profits generated from transactions with related and non-related parties. The selling prices in both cases must cover the manufacturing costs.
Profit split method: Comparison of the profits and losses generated by the related parties. These should reflect their respective contributions.
Net margin method: Comparison of net profit generated from related and non-related parties.
Documents Required to Confirm the Validation of Transfer Pricing
When the gross revenues of a business exceed S$10 million in a tax year, then IRAS requires that businesses should keep records of all transaction with the related party along with the documentary evidences. The taxpayer is also required to submit the Form for Reporting of RPT together with Form C if the transactions between the related parties exceeds S$15 million. The taxpayer is required to keep the documents for a period of at least 5 years, and is liable to provide transfer pricing documents to IRAS upon their request.
IRAS has produced list of required documents in the (Transfer Pricing Documentation) Rules 2018, Second Schedule of the Income Tax.
- How to lay down a reasonable price when transacting with a related party.
- Comparison of transactions under the guidance of IRAS between related and non-related parties.
- Keeping records of transactions with related parties and filing of prescribed forms in response to the same.