Service Companies
A service company in this section refers to a company that renders services to its related parties. The types of services that the service company may provide include:
- Management services
- Technical support services
- Procurement
- Administrative support services
- Customer support services
Types of Service Arrangement
Generally, a service company may provide services to its related parties:
- For free
- At cost
- At arm's length prices (i.e. the price that would have been charged if the service company had been an independent third party)
- At non-arm's length prices
Services Provided for Free, at Cost or at Non-Arm’s Length Prices
IRAS endorses the arm's length principle as it ensures that prices on transactions with related parties reflect the true economic value. For more information on the arm's length principle approach, please refer to the IRAS e-Tax Guide on Transfer Pricing Guidelines (1.46MB)
Where services are provided for free, at cost or at non-arm's length price to related parties (e.g. at a rate lower than the industry norm), IRAS requires that the arm’s length price for the services be determined and used for computing the profit from rendering of the services.
This is on the premise that had the service company been an independent party (i.e. not related to the parties to which it provides services to), the services would have been transacted at arm's length price.
Services Provided at Arm’s Length Prices
Where services are provided to related parties on an arm's length basis, IRAS will accept the fees charged and not make transfer pricing adjustments on the transaction.
5% Cost Mark-Up for Certain Routine Support Services
It is common for parent companies or group service companies to provide certain routine services to related parties. Strictly, these companies should perform a proper transfer pricing analysis to determine the arm's length price for providing such services.
To ease companies’ compliance burden, IRAS is prepared to accept a 5% mark-up on costs as a reasonable arm’s length charge for certain routine support services, if the following conditions are satisfied:
- The routine support services fall within Annex C of the e-Tax Guide on Transfer Pricing Guidelines (1.46MB);
- The service provider does not offer the same services to an unrelated party; and
- All costs including direct, indirect and operating costs relating to the routine support services performed are taken into account in computing the 5% mark-up.
Service companies providing routine support services may also adopt a mark-up that is different from 5% if they are able to demonstrate that this is the arm's length charge. In this regard, they should:
- Support their basis with detailed transfer pricing analysis;
- Apply the mark-up consistently year-after-year throughout the group until there are material changes to the circumstances or services provided; and
- Review the mark-up regularly to ensure that it continues to reflect the arm's length conditions.
Basis of Assessment
"Normal Trading Company" Basis of Assessment
The assessment of a service company does not differ from that of other companies. Its chargeable income will be ascertained after detailed examination of its accounts and tax computation in accordance with the provisions of the Income Tax Act. This basis of assessment is commonly known as the “normal trading company” basis of assessment (“NTC basis”).
To arrive at the income chargeable to tax, the company would need to make the following tax adjustments:
- Deducting income that is not taxable
- Adding back disallowed expenses
- Claiming enhanced deduction under the Productivity and Innovation Credit (PIC) scheme
- Deducting capital allowances, losses, donations and deduction under the Business and IPC Partnership Scheme
For more information on the type of adjustments, please refer to
Preparing a Tax Computation.
| Profit and loss account for the year ended 31 Dec 2019 | ($) | (S) |
|---|
| Service revenue | | 50,000 |
| Wage credit scheme | | 200 |
| | | |
| Operating expenses | | |
| Audit, accounting and secretarial fee | 30,000 | |
| Bank charges | 100 | |
| Depreciation | 32,000 | |
| Foreign exchange gain | (4,000) | |
| Salaries, CPF and bonus | 870,000 | |
| Rental expenses | 50,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | |
| Transport expenses | 18,900 | |
| Total operating expenses | 1,000,000 | |
| Expenses reimbursed | (1,000,000) | 0 |
| Net profit before tax | | 50,200 |
| Tax Computation under the NTC basis (YA 2020) | ($) | ($) |
|---|
| Net profit as per accounts | | 50,200 |
| Add: Depreciation | 32,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | 35,000 |
| Adjusted profit | | 85,200 |
| Less: Capital allowances | | |
| S19A | (35,000) | |
| Balancing Charge | 2,000 | (33,000) |
| Chargeable income before exempt amount | | 52,200 |
| Less: Exempt amount | | (28,600) |
| Chargeable income after exempt amount | | 23,600 |
| | | |
| Tax @ 17% | | 4,012.00 |
"Cost Plus Mark-Up" Basis of Assessment
The “cost plus mark-up” basis of assessment (“CM basis”) is strictly meant for a group of service companies that:
- Provide routine support services as listed in Annex C of the Transfer Pricing Guidelines to only their related parties; and
- Adopt a 5% mark-up on costs as the arm’s length charge for the routine support services.
IRAS is prepared to allow the adoption of the CM basis, in lieu of the NTC basis, for such service companies on account that their affairs are simple and their expenses are typically operating expenses of a revenue nature with no major tax adjustments expected to be made
to their tax computations.
Where the CM basis is adopted, the chargeable income is computed based on 5% mark-up on the total cost incurred by the service company. The total cost is the amount (before offsetting revenue grants received, if any) as shown in the profit and loss account and as determined
according to the Singapore Financial Reporting Standards, without further adjustments.
In adopting the CM basis, the service company will not be able to make the following claims, as the chargeable income of the company is already net of all available deductions, allowances and tax credits:
- Double or further tax deductions
- PIC enhanced deduction and cash payout
- Capital allowances and losses
- Donations
- Deductions under the Business and IPC Partnership Scheme
- Foreign tax credit
| Profit and loss account for the year ended 31 Dec 2019 | ($) | ($) |
|---|
| Service revenue | | 50,000 |
| Wage credit scheme | | 200 |
| | | |
| Operating expenses | | |
| Audit, accounting and secretarial fee | 30,000 | |
| Bank charges | 100 | |
| Depreciation | 32,000 | |
| Foreign exchange gain | (4,000) | |
| Salaries, CPF and bonus | 870,000 | |
| Rental expenses | 50,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | |
| Transport expenses | 18,900 | |
| Total operating expenses | 1,000,000 | |
| Expenses reimbursed | (1,000,000) | 0 |
| Net profit before tax | | 50,200 |
| Tax computation under the CM basis (YA 2020) | ($) |
|---|
| Service income | 50,000 |
| Wage credit scheme | 200 |
| Chargeable income before exempt amount | 50,200 |
| Less: Exempt amount | (27,600) |
| Chargeable income after exempt amount | 22,600 |
| | |
| Tax @ 17% | 3,842.00 |
Transition out of the "Cost Plus Mark-Up" Basis of Assessment
Service companies that do not qualify for the CM basis and have been adopting the CM basis will have to transit to the NTC basis, latest by the Year of Assessment 2020.
In addition, service companies on the CM basis that seek to make tax adjustments and tax claims should also transit to the NTC basis as the CM basis is not applicable to these companies.
Companies transiting to the NTC basis should apply these transition rules in the transition Year of Assessment.
| Tax item
| Bases / Tax Treatment in the transition Year of Assessment (“transition YA”) and after |
|---|
Section 14Q deduction for renovation or refurbishment expenditure incurred prior to the transition YA. | - Where the expenditure has been capitalised in the accounts, section 14Q deduction will be computed based on the opening net book value (“NBV”) at the start of the transition YA and the relevant 3-year period will commence from the transition YA.
- Where the expenditure has been expensed off previously, no section 14Q deduction will be allowed.
|
| Capital allowances on qualifying plant & machinery acquired prior to transition YA. | - Capital allowances will be computed based on the opening NBV of the qualifying plant & machinery at the start of the transition YA, such that the opening NBV is deemed the tax written down value.
- In the event of disposal of the qualifying plant or machinery in or after the transition YA, any balancing charge made shall not exceed its cost.
- If the transition YA is YA 2018, no enhanced capital allowances (PIC
claim) can be allowed, as PIC claim must be made in the year of acquisition.
PIC claim can only be made for PIC automation equipment acquired in YA 2018.
|
| General provisions (e.g. provision for staff leave) made prior to the transition YA. | The general tax treatment will apply to provisions utilised and provisions written back to the accounts in the transition YA or after. This means that provisions utilised will be allowed deduction and provisions written back will not be taxed.
|
Specific provisions made prior to the transition YA such as:
- Specific provision for doubtful debts
- Provision for contractual bonus
- Provision for non-contractual bonus where payments are made in the following year
- Provision for directors’ fees approved in arrears which should be tabled and put to vote at the annual general meeting (AGM) in which the financial accounts for the accounting year concerned are voted and approved
| No tax adjustment will be made on provisions utilised and provisions written back to the accounts in the transition YA or after. This means that the provisions utilised will not be allowed deduction and provision written back will be taxed. It is because the
provisions would be considered to have been claimed in the year the provision was made. |
| PIC claim brought forward and unutilised donation. | There is no PIC claim brought forward or unutilised donation since under the CM basis, chargeable income computed based on 5% mark-up on total cost is taken to be net of all available deductions, allowances and tax credit. |