singapore transfer pricing guide

7/31/2019 Singapore Transfer Pricing Guide

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TRANSFER PRICING

IN SINGAPORE
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2/11Copyright 2011 Rikvin Pte LtdLast updated on July 6, 2012

OVERVIEW

Territorial expansion of businesses that followed aer globalizaon, has led to an increase in intra company

transacons and cross border transacons between related companies. For instance, while manufacturing

acvies are managed by an enty of a larger group in one country, markeng of the manufactured

products in another country are being handled by a dierent subsidiary belonging to the same group.

In such cases, Transfer Pricing mechanism determines the price of the goods, services, funds, rights or

intangible assets that are thus transferred for sale or consumpon to a related enty.

Transfer pricing is not limited to just pricing but also includes terms and condions of such transacons

between related pares. It is important to understand the transfer pricing mechanism because it largely

determines the revenue of related enes and therefore their taxable prots under their respecve tax

jurisdicon. The fundamental guideline for transfer pricing is Arms Length Principle, that is, the pricing

of cross-border transacons between related enes must be market based, and similar to the pricing that

would have been charged if the pares were unrelated.

In the case of unrelated enes the market forces such as demand and supply largely determine the

commercial pricing of such cross border transacons, but in the case of related enes, because of theelement of associaon and relaonship, there is a propensity to set prices that are deviant from the actual

market price. The selling enty may undercut the price, or the buying party may set a higher cost in order

to lower their prots thereby aecng their taxable income. Such distoron of prices will impact the tax

liability of the enes in their respecve jurisdicon.

With businesses rapidly expanding beyond their domesc borders, leading to a spike in cross border

transacon between related pares, tax authories around the globe are stepping up their scruny on

such transacons. Where a related party transacon is idened to be not in compliance with the arms

length principle, tax authories would make adjustments to the prots and tax liabilies. Such adjustments

along with interest and in some cases penalty will always amount to increased tax liability of the enty.

Therefore it is of utmost importance to familiarize with the transfer pricing regulaons of the local tax

jurisdicon as well as that of the related partys jurisdicon.



This is an overview of transfer pricing mechanisms, providing guidelines to follow arms length principle

and documentaon to be maintained for the purpose of audits.

Due to the nature of relaonship that exists between related companies there is a potenal for arcially

shiing prots from an enty in higher tax jurisdicon to a related enty in lower tax jurisdicon, in

order to reduce the overall tax liability. To prevent the pracce of such tax reducon strategies by related

enes engaging in cross border transacons, tax authories of various countries required a regulatory

framework. Following the inial eorts by United Naons, the Organizaon for Economic Cooperaon

and Development (OECD) Council originally approved the Transfer Pricing Guidelines for Mulnaonal

Enterprises and Tax Administraons in 1995. The OECD transfer pricing guidelines, is widely acknowledged

by tax authories around the globe to determine transfer pricing. It is a powerful tool for the tax authories

to aribute taxable prots to their jurisdicon.

The OECD guidelines recommend several methods that taxpayers may use to derive an arms length

price or allocaon, for the valuaon, for tax purposes, of cross-border transacons between associated

enterprises. In 2010 there were some elaborate addions to the guidelines on the selecon of the mostappropriate transfer pricing method, on how to apply transaconal prot methods and on how to perform

a comparability analysis. Many OECD member countries and non-member countries follow the OECD

guidelines on transfer pricing, it must be noted that although the OECD guidelines are widely adopted, its

interpretaon, applicaon and emphasis may vary between jurisdicons.

The OECD guidelines are based on arms length principle dened in Arcle 9 of the OECD Model Tax

Convenon, which also forms the basis of many bilateral tax treaes involving OECD member countries and

non-member countries. The applicaon of the arms length principle is generally based on a comparison

of the prices or margins used by related pares with those used by arms length pares engaged in similar

transacons.

BACKGROUND



TRANSFER PRICING METHODS

The OECD guidelines provide for several methods to determine the arms length price or allocaon and

these methods can be classied into two groups namely tradional methods and transaconal prots

methods. Tradional methods include the Comparable Uncontrolled Price (CUP) method, the Resale

Price Method (RPM), and the Cost Plus Method (CPLM). The transaconal prots methods are the

Prot Split Method (PSM) and the Transaconal Net Margin Method (TNMM).

Each method has its own merits and demerits and choice of the right method depends on the

following factors

Nature of transacon

Tax jurisdicons local tax laws & guidelines

Availability of accurate data

Possibility to make accurate adjustments

Transfer PricingMethods

Tradional

Methods

Resale Price

Method

Comparable

Uncontrolled

Price Method

Cost Plus

Method

Profit Split

Method

Transaconal

Net Margin

Method

Transaconal

Profits Methods



Comparable Uncontrolled Price Method

The price charged in controlled (related party) transacons is matched against a comparable uncontrolled

transacon, that is, a similar transacon between unrelated pares. It is considered as the most eecve

method as it involves direct price comparison, and it is applicable for transacons involving goods,

service, funds or other intangibles. Where strong comparability of product, is established CUP provides

a good indicaon of transfer pricing. The comparability of transacon is determined based on analysis

of the following aspects

Characteriscs of goods, services and intangible properes;

Analysis of funcons, assets and risks undertaken;

The terms and condions of the contract; and

Commercial and economic circumstances pursuant to the transacons.

Resale Price Method

The resale gross margin percentage of related party transacon is compared with the resale gross margin

percentage realized in a comparable arms length transacon. This method is parcularly useful in

determining transfer pricing in distribuon transacons, where the reseller has not made any alteraon

or value addion to the product involved. An arms length gross margin percentage is applied to the

net sales of the taxpayer in order to determine the arms length cost of goods sold. The comparability

analysis focuses more on funcons performed, risks undertaken, and assets used by each transacng

party. The similarity of product is of less relevance in this method.

Cost Plus Method

This method determines transfer pricing by comparing gross returns on costs of related party transacon

with gross returns on costs of comparable independent/unrelated (arms length) party transacons.

Gross cost-plus margin of a comparable arms length transacon is applied to the cost of goods of a

taxpayers related party transacon to determine the transfer price. This method is usually applied in

contract manufacturing / service scenario.

Product comparability is of least signicance, whereas the comparability of funcons performed and

risks undertaken is emphasized. Likewise comparability of cost base terms of contract and commercial

circumstances surrounding the transacon is of relevance for applying this method.



Prot Split Method

The method is applied to evaluate if the allocaon of combined prot/loss to related pares is in

concurrence with arms length principle. The relave value of contribuons made by each related enty

is taken into account, in order to split the combined prot/loss resulng from the whole transacon

between related enes.

The method is used when transacons are highly integrated, complex or involves non-roune intangible

assets. Careful evaluaon of informaon is required from all dimensions of the transacon to determine

the relave value of contribuons made by each related party, and it requires informaon from all levels

of the supply chain. It must be noted that the method will not yield a highly accurate result.

The prot can be split based on two approaches:

Contribuon analysis

Residual analysis

Contribuon analysis relies largely in third-party data to generate contribuon data and it is complex

and dicult to implement. Residual analysis basically looks at spling the residual prots, that is, the

prots that remain aer allocang the roune prots aributable to each enty. The residual prots

that remain aer such allocaon is assumed to be arising from non-roune intangibles, and it is splitbased on allocaon factors such as the capitalized cost of intangibles, discounted cash ow etc.

Transaconal Net Margin Method

This method compares the operang net prot arising from an arms length transacon to that of a

related-party transacon. It examines the net prot margin relave to an appropriate base such as costs,

sales or assets. It requires a level of comparability similar to that required for the applicaon of the cost

plus and resale price methods, but while the focus there is on gross prot, this method focuses on the

net prot. It must be noted that the management eciency and other factors may distort the net prot

of the enes that are being compared so the method requires a highly accurate data.

The choice of appropriate base will depend on the nature of business, availability of reliable data and

special circumstances surrounding each case. Comparisons at the net prot level can be made on a

single transacon or in relaon to some aggregaon of dealings between associated enterprises.



SINGAPORES TRANSFER PRICING REGIME

Legislaon Overview

Singapore does not have specic transfer pricing legislaon. Secons 33 and 53(2A) of the Singapore Income

Tax Act may be applied to transfer pricing. Secon 33 has provisions relang to general an-avoidance and

endorses the arms length principle. It empowers IRAS to disregard or reverse any arrangement in order to

counteract any tax advantage obtainable under the current arrangement.

Secon 53 applies where a resident and a non-resident are closely connected and conduct business in such

a way that produces prots to the resident that are less than the ordinary prots that might be expected

to arise in such transacons. Where the prots cannot be accurately determined IRAS is empowered to

assess tax on a fair and reasonable percentage of the turnover of the business done between the resident

and the non-resident.

The Inland Revenue Authority of Singapore (IRAS), issued The Singapore Transfer Pricing Guidelines on

23 February 2006, and they are consistent with the OECD Transfer Pricing Guidelines. The guidelines are

applicable where at least one related party is subjected to tax in Singapore. The guidelines reinforce the

OECD stand on transfer pricing that requires adherence to arms length principle. Singapore endorsed the

OECD guidelines realizing that concurrence and compliance with this internaonally accepted principle

would reduce the incidence of transfer pricing adjustments and improve the resoluon of transfer pricing

disputes. As a result, the potenal for double taxaon would also be reduced. The guidelines help to clarify

Singapores posion on Transfer Pricing and promote voluntary compliance by spreading awareness aboutrisks of non-compliance while operang across borders.

The IRAS does not have a specic preference for any of the ve prescribed methods outlined in the OECD

guidelines. Although the IRAS guidelines does not explicitly approve a parcular method, in pracce the

regulator is recepve towards the tradional methods and accepts the Cost Plus Method for transacons

relang to services and Comparable Uncontrolled Price method for all other transacons.
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IRAS Requirements

IRAS recommends that taxpayers adopt the 3-step approach to apply the arms length principle in their

related party transacons:

Step 1 Conduct a comparability analysis

Step 2 Idenfy the appropriate transfer pricing method and tested party

Step 3 Determine the arms length results

Comparability Analysis

To comprehensively assess the transacons of related and independent pares being compared, to

ensure that they have substanally similar economic characteriscs. The objecve of the step is to

determine that:

None of the dierences (if any) between the situaons being compared can materially aect the

price or margin being compared, or

Reasonably accurate adjustments can be made to eliminate the eect of any such dierences.

Idenfy the appropriate transfer pricing method and tested party

The guidelines recommend the adopon of the method that produces the most reliable results, taking

into account the quality of available data and the degree of accuracy of adjustments. A tax payer is also

allowed to adopt even a modied version of a method listed above to comply with the arms length

principle, as long as the taxpayer maintains and is prepared to provide sucient documentaon to

demonstrate that its transfer prices are established in accordance with the arms length principle.

The use of the transfer pricing methods, excluding the Prot Split Method, would rst require idenfying

the party on which to apply the transfer pricing analysis. This party is known as the tested party. IRAS

recommends that the party with the smaller scope of funcons and less complex operaons be used as

the tested party. Such a decision will make it easier to nd comparable data and require fewer adjustment

and greater accuracy.

Determine the arms length results

Once the appropriate transfer pricing method has been idened, the method is applied on the data

of independent-party transacons to arrive at the arms-length result. More likely, the transfer pricing

analysis would lead to a range of prices or margins. IRAS is prepared to accept the use of ranges, to

determine an arms length range provided that the comparables are reliable. The outcome of this last

and nal step will then be used to guide or jusfy taxpayers transfer pricing pracces.



DOCUMENTATION

A taxpayer engaging in related party transacons must maintain documentary proof to demonstrate

that adequate analysis and eorts have been undertaken to conform to the arms length principle. Such

adequate documentaon will facilitate reviews by tax authories on taxpayers transfer pricing analysis

and hence assist in resolving any transfer pricing issues that may arise.

The extent of documentaon required is solely le to the taxpayers discreon, and the taxpayer must

take into consideraon the substanality and complexity of the related party transacons as well as the

costs of compliance arising from such documentaon.

IRAS does not impose penalty specically for the lack or insuciency of documentaon but nevertheless

quality and mely documentaon pracce will facilitate easy discharge of proof of compliance and also

determine the outcome of the taxpayers applicaon for the mutual agreement procedure (MAP) with

the IRAS.

There is no specic requirement regarding disclosures in tax returns. Records of documents must be kept

in accordance with the record keeping requirements, which also includes transfer pricing documentaon.

From year of assessment 2008, the statute of limitaon is reduced from 7 to 5 years.

Documentaon is not required to be prepared by a certain me, however, the IRAS does recommend

that documentaon be prepared in a mely manner, parcularly to support the transfer pricing posion

in the event of a future dispute with the IRAS or with overseas tax authories.

Typical transfer Pricing Documents includes the following:

GROUP INFORMATION

Worldwide organisaonal structure

Groups line of business

Groups business models and strategies

Principal business acvies and funcons of each party in the group

The business relaonships amongst all related pares; and

Groups consolidated nancial statements of the group

SINGAPORE ENTITY INFORMATION

General informaon such as company registraon number; address, etc.

Entys line of business

Entys business models and strategies

Entys funcons, risks and assets employed; and Entys nancial statements



Audit & Penalty

The risk of transfer pricing audit is only moderate in Singapore at present but with the neighboring

economies and key trading partners ghtening their transfer pricing requirements, it is likely that over

me there will be an increase in the number of tax audits that involve transfer pricing.

There are no specic penales regarding transfer pricing. Under general tax provisions relang to

understatements of income, the penalty range is from 100% to 400% of the tax underpaid.

TRANSACTION INFORMATION

Detailed informaon on all transacons with related pares;

Contracts or agreements to show the terms of the transacons; and

Segmented nancial accounts with respect to the transacons, including

explanaons on the assumpons used.

TRANSFER PRICING ANALYSIS

The choice of the tested party and reasons supporng the choice;

Details on comparables and the screening criteria for choosing the

comparables;

Comparability analysis of the related party transacons and the

comparables;

Details of the adjustments to be made to achieve comparability;

The transfer pricing method chosen and raonale for the choice The determinaon of the arms length price/margin, with computaon

and explanaons.


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