Transfer Pricing in Singapore: A Guide for Foreign Investors
The Singapore government has developed a comprehensive system for transfer pricing to prevent the abuse of intracompany transactions by companies in the city-state. Being a regional hub for multinational companies, the country’s transfer pricing regulations ensure that relevant parties do not underpay taxes and as well as prevent the distortion of taxable income.
What is Transfer Pricing?
Transfer pricing applies to companies that transact between companies from the same group, such as a subsidiary, or other ‘related’ parties. The persons or entities are related if:
- One party has direct or indirect control of the other (e.g. head offices or branch offices); or
- Both parties are under the control of the same persons or entity (e.g. several subsidiaries being owned by the same parent company).
Such conditions can give rise to preferential pricing between the parties, which could lead to the hiding of profits and underpaying taxes. The key principle to transfer pricing is that although these parties are related, they should interact as if they were independent business partners.
The Arm’s Length Principle
The Inland Revenue of Singapore (IRAS) endorses the arm’s length principle as its standard guide to transfer pricing. Under this principle, profits should be taxed where the real economic activities have occurred and where profits are generated.
The principle requires that transfer prices between related parties are equivalent to prices that unrelated parties would have charged under the same circumstances. This involves identifying situations where transactions between unrelated parties, that are comparable to the transactions being undertaken between related parties. This is known as comparability analysis.
There is a three-step approach to applying the arm’s length principle:
- Conduct the comparability analysis;
- Identify the most appropriate transfer pricing method; and
- Determine the arm’s length analysis.
Conduct the Comparability Analysis
Under this principle, businesses should examine the comparability of transactions following four aspects:
- Contractual terms of the transaction;
- The characteristics of the types of goods, services, or intangible properties;
- Commercial and economic circumstances; and
- Functional analysis.
Identifying the Most Appropriate Transfer Pricing Method
The possible transactional methods are:
- CUP method;
- Resale price method; and
- Cost-plus method.
The possible transactional profit methods are:
- Residual analysis approach; and
- Contribution analysis approach.
What Documents Need to Be Prepared?
Businesses should prepare information as prescribed in the Income Tax Act, which includes:
- An overview of the business group that is relevant to the business operations in Singapore; and
- The taxpayer’s transaction details with its related parties, including the transfer pricing analysis.
Taxpayers are not required to submit their transfer pricing documentation when they file their tax returns but are required to submit their documents within 30 days upon request by the IRAS.