The term transfer pricing can be defined as the valuation of intangibles, goods, and services, between associated parties. The principle of arm’s length should be utilized for transfer pricing or valuation between associated parties. Taxpayers should be made to organize and keep current transfer pricing documentation as proof that their related party negotiations were carried out at arm’s length.
Related parties are referred to as parties who manage one another, or who is managed by another party, directly or indirectly. These parties include head offices, and branches. Associated parties must conduct business with each other at arm’s length.
1. The Arm’s Length Principle
IRAS approves the arm’s length principle as the standard which will act as a guide to transfer pricing. This standard is an internationally approved standard which is used for transfer pricing between associated parties. IRAS believes in the principle that profits should be taxed where the actual economic activities creating the profits or gains are carried out and where profit is made. An ideal usage of this rule would ensure that this result is observed.
In situations where the pricing of a related party transaction fails to be in arms length and leads to a deduction in profit for the Singapore taxpayer, IRAS may choose to modify the profit of the Singapore taxpayer upward. The modification to display the outcomes of the arm’s length may lead to an increase of a decrease in the amount of income of the Singapore taxpayer.
A requirement of the arm’s length principle is that the transfer prices between related parties are equal to the prices that unrelated parties would have in a similar situation. This is usually regarded as “Comparability analysis.”
It is recommended by IRAS that taxpayers use the following 3-step measures to apply the arm’s length principle in the transaction of their related party.
- Step 1- Carry out a Comparability analysis
- Step 2- Determine the best transfer pricing strategy and tested party.
- Step 3- Identify the results of the arm’s length
2. Transfer Pricing Documentation
Purpose of Preparing and Maintaining Transfer Pricing Documentation
It is crucial that a taxpayer has a current transfer pricing documentation. What are transfer pricing documentation? These documents are the records kept by taxpayers as proof that their related party transactions were carried out at arm’s length. The preparation and handling of these documents will bring about reviews from tax authorities, and this could assist in taking care of any transfer pricing problem that may arise.
Without this document which serves as a proof that the transfer prices were made at arm’s length, taxpayers may lose the privilege to deal with transfer pricing enforcement actions by tax officials and double taxation resulting from those acts. A company or an organization that fails to tend its transfer pricing documentation may lose its business valuation after being punished with the necessary sanctions.
Also, it is very important for a company secretary to fully grasp certain terms relating to transfer pricing regulations; as this will enable them to indicate all the Associate enterprise with which the company has done business with during the year.
3. Contemporaneous Documentation
This document is regarded as the documentation and information that taxpayers depend on to ascertain the transfer price before or at the time of carrying out the transactions. IRASS will also tolerate transfer pricing documentation as contemporaneous when it has been made not later than the date due for the tax return for the financial year in which the transaction happened.
In making this document, a taxpayer must adopt the current available information including date to set-up its transfer pricing.
Reminder: Requirements For Transfer Pricing Documentation
Starting from the year in which it was assessed in 2019, taxpayers who met some criteria are to make a transfer pricing documentation under the section 34F of the income Tax Act unless there are some exemptions for certain stated transactions.
Taxpayers who aren’t required to prepare this document under section 34F of the income act tax are motivated to handle their transfer pricing risks well. For more information, feel free to get in touch with us.