Every business and accounting firm in Singapore must be aware of the necessary transfer pricing document as failure to fulfil these requirements can result in penalties and extra charges.
Inland Revenue Authority of Singapore (IRAS) had revised its rules and regulations of transfer pricing in 2015 to add documentation requirements. The following are the latest modifications made in this document and a short description of the transfer pricing concepts in Singapore.
Transfer pricing fundamentals
Transfer pricing refers to the rules and methods for pricing transactions between related parties.
Such transactions can be sale or purchase of goods, provision of services, borrowing or lending of money, use or transfer of intangibles, etc.
Two persons are related parties with respect to each other if:
(a) Either person, directly or indirectly, controls the other person; or
(b) Both persons are, directly or indirectly, controlled by a common person.
For example, two different organizations operating in different countries can be owned by an identical parent organization. Cross-border transactions are usually impacted by transfer pricing. However, this concept is applicable to related party transactions in the same country as well.
The majority of the countries, including Singapore, rely on the arm’s length principle to set transfer pricing rules. It simply means that the pricing between related parties should be established after assuming that they are not affiliated with each other. The cost should reflect the current market prices. They should not be set artificially to get unfair tax advantages on the basis of tax regulations of the country in which the company is based.
On the other hand, if the arm’s length principle is not followed and pricing is set randomly, the danger of getting penalized for tax evasion increased. In this situation, the relevant tax authorities will impose the transfer pricing modifications, which can prove to be challenging for the taxpayers as more liabilities will be added in the final transfer pricing document.
It should be kept in mind that exemptions for companies are based on certain criteria.
Transfer pricing variations in Singapore
Before 2019, transfer pricing documentation was not a legal requirement for the taxpayers in Singapore. The documentation was part of the guidelines related to tax payment and not the actual law. However, Singapore’s Income Tax Act has made it a new legal requirement through section 34F.
Taxpayers who meet either of the following conditions must prepare their transfer pricing documentation for their related party transactions undertaken in a basis period:
- Gross revenue derived from their trade or business is more than $10 million for that basis period; or
- Transfer pricing documentation is required to be prepared for the previous basis period.
From 2020, it was made obligatory for the Singapore organizations to inspect the transfer pricing status of the previous year. As a result, the process of transfer pricing has become complicated. Any company found in the violation of the new regulations of transfer pricing documentation can be penalized up to SG$10,000.
Section 34E has also been included in the Income Tax Act. This section allows the Singapore Tax Authority Comptroller to levy a 5 per cent extra tax on transfer pricing adjustments.
Steps you should take to fulfil new requirements
According to the new rules, transfer pricing requirements only apply to taxpayers whose income is more than $10 million and fulfils the requirement that was mentioned above.
However, all the businesses and taxpayers should have proof and proper documents to prove that the transactions of their companies are according to the arm’s length principle. Ignoring the scale of the company or total revenue generated per year, IRAS can modify the transfer pricing for related-party dealings, if they are not at arm’s length.
All the organizations should be aware of the fact that transfer pricing documentation requirements vary from country to country as every tax authority has its own rules and regulations.
Such authorities are responsible for performing a large number of database searches to assess the arm’s length transactions made by the companies and check any non-compliant activities.
All businesses must be able to defend their transfer pricing strategies. For comparatively forthright transactions concerning things or services, this is achieved through a transfer pricing benchmarking analysis.
A benchmarking analysis usually contains the following main elements:
- Functional analysis on Functions performed, Assets used and Risks assumed also know as FAR
- Finding out the details of the similar companies in the same area to estimate the margin.
- A mathematical analysis of the estimated margins to calculate the arm’s length range of the revenue that facilitates transfer pricing policy.
Taxpayers are often dependent on benchmarking analysis to formulate the transfer pricing policy and to facilitate it during an audit. Transfer pricing documentation is needed at the group and entry-level in Singapore as the organizations have not adopted local file and master file requirements. If you still have any doubt left regarding transfer pricing, feel free to get in touch with us.