Accounting and Finance Tax And Legal

Workflow of Transfer Pricing in Singapore

Workflow of Transfer Pricing in Singapore

Transfer Pricing was established as the practice to control the Family business and internal pacts, which people have to keep away from the eyes of the government. The MNCs are legally allowed to practice transfer pricing in Singapore. This will also help them move profits away from the parent company to the holdings and associates to ensure that funds are evenly distributed.

Singapore, known for its dynamic business environment and good tax policies, has formed comprehensive transfer pricing rules to ensure fair taxation and obedience to international standards.

Rules of Transfer Pricing in Singapore

The Inland Revenue Authority of Singapore (IRAS) provides rules that must be followed while conducting transfer pricing transactions. The IRAS also provides an E-tax guide for taxpayer accessibility.

The IRAS recommends three steps for approaching the Arm’s length principle in Transfer pricing in Singapore transactions, which are as follows:

Comparability Analysis  

The comparability analysis examines the equivalence of transactions in some elements and adjustment for material differences. The elements are mentioned below:

  1. Transaction Contractual terms
  2. Functional analysis
  3. Goods, service characteristics
  4. Aspects of commercial and economic

Some other factors are also there, which are included but are not limited to:

  1. Should the transaction that is examined be evaluated on a separate or aggregate basis
  2. Whether you should use one-year or multiple-year data
  3. How to consider the loses
  4. Internal or external comparable what should be selected

Transfer pricing Methods

You have to find the most suitable transfer pricing method and tested party. The categories for transfer pricing methods are three from which you can choose from:

Category 1: Traditional Transaction Methods

The Transfer Pricing methods in These are the comparable uncontrolled prices (CUP) methods, Cost-plus, and resale prices. To compare the related-party transactions, these methods are compared with those of transactions that are formed between the autonomous parties.

Category 2: Transactional Profits Methods

This includes the transactional profit split and net margin methods (TNMM). The profits made for the related party transactions are compared with transactional profits made from the independent-party transactions.

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Category 3: Alternative methods

Whenever it is needed, the accurately tested party will also be determined.

Arm’s Length Result

The final step is to regulate the Arm’s length results. This will be done by smearing the correct transfer pricing method to the data on comparable independent-party transactions. This will lead to generating a result which produces a range of prices.

IRAS suggests that you use an interquartile range to prevent the problem because the results cannot always be reliable. Where there is a wide range of prices, this situation can be true, especially in those cases, because it implies that comparability issues or defects are neither identified nor quantified, which makes them remain unadjusted. In cases like these, the minimum and maximum data points have to be excluded because they are outliers.

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Documents needed for the Transfer Pricing in Singapore

The IRAS can specifically ask you to prepare the documents for the basis of the previous period, or if the Gross revenue from your activity exceeded S$ 10 million for the tax basis Period, then you should collect and keep with you all the relevant documents that are regarding the related party transactions for the Transfer pricing in Singapore.

In Singapore, the Transfer Pricing documentation should adhere to the Income Tax (Transfer Pricing Documentation) Rules 2018 that came into operation on 23 February 2018.

The taxpayers of Singapore who have met some conditions will now be needed to prepare the Transfer Pricing documentation starting from the 2019 year of Assessment, which is mentioned in Section 34F of the Income Tax Act.

The Taxpayers who should prepare Transfer pricing Documentation are as follows:

  1. Who have derived more than S$ 10 million in gross revenue from their business over the basis period
  2. Those who need to prepare transfer pricing documentation for the basis period instantly before the basis period concerned.

What information must be included in the following documents?

  1. Overview of the businesses of the group in which the Singapore business operations are relevant to the taxpayer who is a member
  2. With the related parties, the taxpayer business and the transactions, which includes the transfer pricing analysis and functional analysis. The documents should be complete with the filing due date of the tax return.

Taxpayers are not required to submit the Transfer Pricing documents while filing their tax returns, but if IRAS requests, they will have to submit the required tax returns Transfer pricing documents within 30 days of their requests. Taxpayers have to retain the documents for a period of at least five years from the last of the basis period at which the transaction took place.

In Singapore’s latest transfer pricing guidelines, every taxpayer has to update the transfer pricing documentation whenever there are material changes to the functioning conditions that will affect the transfer pricing.

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The taxpayer should also update the Transfer Pricing documentation at least once every three years, which the IRAS recommends, even if there are no material changes. The guidelines also said that the taxpayer should review their pricing documents once a year. So, the taxpayer has to prepare documents for the basis period.

What transactions qualify for exemption?

For preparing Transfer pricing Documentation, some taxpayers can refrain from preparing documents they have to fall under any of the particular examples mentioned below:

  1. Where an indicative margin is applied to related party loans
  2. The routine support services in which there is 5% cost markup applied
  3. Associated party domestic loan
  4. Related party transactions which are shielded by the advance pricing arrangement (APA)

Penalties for non-compliance

A taxpayer is needed to pay a fine of a maximum of S$10,000 if these are non – complaints on the particular aspects:

  1. If there is a Failure to form Transfer Pricing Documentation
  2. If there is a Failure to present the documents within 30 days of the IRAS request
  3. If there is a Failure of Transfer Pricing Documentation for at least 5years
  4. There is false documentation created

What is the Arm’s Length Principle?

The international custom of transfer pricing in Singapore is the Arm’s Length Principle, which states that a company’s goods and services should be charged to the related party at the same price, which would sell them to unrelated contractors in similar circumstances.   

The custom is applied to cases where different subsidiaries have to perform different tasks to profit from the parent firm, such as conducting marketing campaigns or retail activity.

For example, a shoe industrialist can have several factories that are located on a continent, and one of them produces laces. Then, shoelaces will move through the supply chain to the plant that will manufacture a finished product; the company will have to assess the value of every shoelace and how much profit will be completed to each related party.

In accordance with the Arm’s Length rule, a shoelace will charge the same as it will for a company on the Open Market. If a similar shoelace costs S$1 anywhere, then the shoe manufacturer will also be charged for the transference of their shoelace S$1.

If anyone fails to fulfil the Arm’s length principle and reduces the reported profits illegally in Singapore, then the IRAS have to unilaterally increase the taxable profits and also decrease the deduction.

What is Transfer Pricing Risk?

The probability of increased taxes or penalties in the prices set for goods and services that are traded between related companies and that are found to be unreasonable is called the Transfer Pricing Risk.

It may happen, for example, when the prices favour one company over another or if there is no line with market rates.

The particular concern of multinational companies is the transfer pricing risk, as the different countries will have different tax rates and regulations that govern transfer pricing.

What are the Transfer Pricing Methods?

The IRAS has five international methods accepted for evaluating the company’s transfer pricing in Singapore, and the best custom will depend on your circumstances and available data. Methods to check and control your financial transactions are mentioned below.

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Comparable Uncontrolled Price Method

The methods will compare the price charged for goods and services moved in a controlled transaction from the amount charged for the goods or services in the uncontrolled transactions between the same independent parties in the same circumstances.

If there is a particular difference between the two parties, it will indicate that the similar parties are not dealing at Arm’s length. Authorities can control the price of similar party transactions with the price of sovereign party transactions for transfer pricing in Singapore.

Resale Price Method (RPM)

This is the process where the product which has been purchased from the related parties is resold to the independent parties. The two prices are associated with the establishment of whether the initial price was fair and whether the later transactions would make economic sense.

Cost Plus Method (CPM)

The Cost-plus method mostly applies to the manufacturers, and also where you can make a comparison with the cost of the manufacturing and the gross markup in related and unrelated transactions. Sales not only have to cover the manufacturing costs but also the additional profits should be generated for the company.

You should focus on the assessment of the functions, assets, risks and the economic environment of transactions compared so far. It will affect the gross-up the most.

Transactional Net Margin method (TNMM)

For the Transfer pricing in Singapore, this is the step where you have to make the comparison with the net profit margin of a company from the non-arm’s length transactions of the margins realised by Arm’s length transactions.

It will also examine the net profit margin to the suitable base, such as costs, sales or assets, which will help you establish the best product prices.

Profit Split method

The profit split method is where the related parties split their profits and losses of each transaction, which depends on their contributions.

Conclusion

A strategic approach and good attention to detail are required to navigate the details of transfer pricing in Singapore. Once you understand the workflow of Transfer pricing in Singapore, businesses will ensure compliance with regulations while optimising their tax positions when You establish appropriate Transfer Pricing policies by conducting thorough documentation and periodic reviews. With the commitment to transparency in Singapore and an alignment with international standards, businesses can navigate the complexities of transfer pricing and enhance their global operations.

FAQs

  1. Why Singapore tax is so low?

    Singapore's taxes are low compared to the other countries because competitiveness is the conclusive consideration bracing up its tax policy.

  2. What is the corporate tax rate in Singapore?

    In Singapore, there is 17% corporate tax.

  3. Which Southeast Asia country imposes the lowest corporate income Tax?

    Among ASEAN member states, Singapore has the lowest corporate income tax.

  4. What are the thresholds for transfer pricing documentation in Singapore?

    The threshold of the Transfer pricing documentation in Singapore is S$ 10 million.

  5. What is the process of taxing a company in Singapore?

    Income accruing in
    From outside Income received in Singapore

  6. How to assess the Income?

    Income will be assessed on the previous year's basis, meaning that the basis period of any assessment year will refer to the financial year ending.

  7. What is the best transfer pricing method?

    The Transactional Net Margin Method is the best method for the Transfer Pricing Method in Singapore.

  8. What is the Transfer Pricing in Singapore?

    Transfer pricing is the way transactions between related entities are priced.

  9. What is the example of Transfer Pricing in Singapore transactions?

    Examples of the Transfer pricing is:
    The services provision.
    The sale of goods
    The use of intangible transfer

  10. What is the purpose of transfer Pricing?

    The purpose of transfer pricing is to make sure that profits will be allocated in a rational and fair manner across the various places of the enterprise. 

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