Introduction to Transfer Pricing

Transfer pricing is the pricing of transactions between related parties, such as sale or purchase of goods, provision of services, use or transfer of intangibles, etc. Taxpayers are to apply the arm's length principle to ensure the pricing of their transactions with their related parties reflects independent pricing. Taxpayers are to prepare and keep contemporaneous transfer pricing documentation to show that their related party transactions are conducted at arm’s length.

Overview of Transfer Pricing

Transfer pricing is the pricing of transactions between related parties, such as sale or purchase of goods, provision of services, use or transfer of intangibles, etc.

Two parties are related if either party controls the other, or they are under the common control of another party, whether directly or indirectly. Related parties include branches and head offices.

Related parties must transact with each other at arm's length.

The Arm's Length Principle

IRAS endorses the arm's length principle, an internationally endorsed standard, to guide the pricing of transactions between related parties. IRAS subscribes to the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created. A proper application of the transfer pricing rules would ensure this outcome. Where the pricing of related party transactions is not at arm's length and results in a reduced profit for the Singapore taxpayer, IRAS will consider increasing the profit of the Singapore taxpayer to the arm's length amount. Such adjustment will either increase the amount of income or reduce the amount of deduction or loss of the Singapore taxpayer. The arm's length principle requires that transfer prices between related parties are equivalent to prices that unrelated parties would have charged under the same or comparable circumstances

IRAS recommends that taxpayers adopt the following 3-step approach to apply the arm's length principle in their related party transactions:

Step 1 - Conduct a comparability analysis to identify situations or transactions undertaken by unrelated parties that are comparable to the situations or transactions undertaken between related parties.

Step 2 - Identify the most appropriate transfer pricing method and tested party.

Step 3 - Determine the arm's length results.

The application of the 3-step approach is summarised in the flowchart below:

App of three step approach

Legend:

CUP: Comparable uncontrolled price

TNMM: Transactional net margin method

For further information on each of the above steps, please refer to section 5 of the e-Tax Guide on  Transfer Pricing Guidelines (PDF, 1.48MB).

Transfer Pricing Documentation

Purpose of Preparing and Maintaining Transfer Pricing Documentation

Taxpayers are to prepare and keep contemporaneous transfer pricing documentation.

Transfer pricing documentation refers to the records kept by taxpayers to show that their related party transactions are conducted at arm's length.

The preparation and maintenance of transfer pricing documentation will facilitate review by tax authorities and therefore help resolve any transfer pricing issues that may arise. If taxpayers are unable to show that their transfer prices are at arm’s length through their TP documentation or they do not have TP documentation, they may suffer adverse consequences, such as double taxation arising from transfer pricing adjustment by IRAS or foreign tax authorities, penalties, etc.

Contemporaneous Documentation

Contemporaneous transfer pricing documentation refers to documentation and information that taxpayers have relied upon to determine the transfer price prior to or at the time of undertaking the transactions. IRAS will also accept transfer pricing documentation as contemporaneous when it has been prepared not later than the filing due date of the tax return for the financial year in which the transactions took place.

In preparing contemporaneous transfer pricing documentation, a taxpayer must use the latest available information and data to establish its transfer pricing.     

Transfer Pricing Documentation Requirements

With effect from the Year of Assessment 2019, taxpayers who have met certain conditions are required to prepare transfer pricing documentation under Section 34F of the Income Tax Act unless exemption for specified transactions applies. Taxpayers who are not required to prepare transfer pricing documentation under Section 34F of the Income Tax Act are nonetheless encouraged to do so to better manage their transfer pricing risks.

Summary of Transfer Pricing Documentation Requirements under Section 34F

Scope Transfer pricing documentation requirements 
Who must prepare

Taxpayers who met either of the following conditions:

  1. Gross revenue derived from their trade or business is more than $10 million for the basis period concerned; or
  2. Transfer pricing documentation was required to be prepared for the basis period immediately before the basis period concerned
What to prepare

Information as prescribed in the Income Tax (Transfer Pricing Documentation) Rules 2018 that covers:

  • An overview of the businesses of the group in which the taxpayer is a member, that is relevant to the business operations in Singapore and
  • The taxpayer's business and the transactions with its related parties, including functional analysis and transfer pricing analysis
Exemption from documentation requirements The exemptions are prescribed in the Income Tax (Transfer Pricing Documentation) Rules 2018. Such exemptions include related party domestic transactions subject to the same tax rate, related party transactions with value not exceeding certain thresholds, etc. 
When to complete documentation By the filing due date of the tax return 
When to submit Taxpayers do not need to submit the transfer pricing documentation when they file their tax returns. They are, however, required to submit the transfer pricing documentation within 30 days from a request by IRAS
When to refresh TP documentationAs long as the details in the TP documentation remain accurate, taxpayers may refresh their TP documentation once every three years if they meet the conditions for simplified transfer pricing documentation.
How long to retain documentation At least 5 years from the end of the basis period in which the transaction took place 
Penalty for non-complianceA fine not exceeding $10,000

Please refer to Part I, section 6 of the e-Tax Guide on Transfer Pricing Guidelines (PDF, 1.48MB) for more details including the information and exemptions prescribed in the Income Tax (Transfer Pricing Documentation) Rules 2018.

  • A Singapore company is part of a multinational corporate group and its transfer pricing policy is determined by the overseas headquarters. The Singapore company may not be involved in the determination of its transfer prices. Moreover, as its related party transactions are relatively insignificant compared to those of other group members, there is no transfer pricing study conducted specifically for the Singapore company. The Singapore company’s transactions do not qualify for exemption from transfer pricing documentation.  Could the Singapore company rely on the transfer pricing documentation pertaining to the group’s overall transfer pricing policy for purpose of section 34F of the Income Tax Act?

    Although the Singapore company is not involved in determining the group's overall transfer pricing policy, it must seek to understand how that transfer pricing policy is applied to its related party transactions, determine if that transfer pricing policy is consistent with IRAS’ transfer pricing guidelines and hold regular reviews with its headquarters or other relevant group members to ensure compliance with the arm's length principle.  

    The Singapore company must ensure the transfer pricing documentation prepared by the corporate group supports the arm's length pricing of the Singapore company's related party transactions and contains details similar to those prescribed in the Income Tax (Transfer Pricing Documentation) Rules 2018. If not, the Singapore company must either prepare transfer pricing documentation in accordance with the Income Tax (Transfer Pricing Documentation) Rules 2018 or supplement the transfer pricing documentation prepared by the corporate group with information required by IRAS at the Group and Entity levels if such information have not been included. 

  • A Singapore company regularly pays an overseas related party for the costs of performing administrative services. What is the transfer pricing documentation required for such an arrangement?

    Assuming that the Singapore company met the conditions under section 34F of the Income Tax Act for the preparation of transfer pricing documentation, the information to be included in its transfer pricing documentation are as prescribed in the Income Tax (Transfer Pricing Documentation) Rules 2018. It will also be useful if the Singapore company keeps records to explain the services provided by the overseas related party, the benefits it received and the basis used to compute the billed amount.  Otherwise, there would not be clarity on the services the Singapore company is paying for and whether the amounts charged are reasonable.  The Singapore company should enter into a written contract with the overseas related party detailing the services to be provided and how the amount of service charge is determined.  There should also be checks in place to make sure that the terms of the contract are adhered to before paying each bill.

  • A Singapore company provides services to its overseas related parties. The remuneration for these services is bundled together with the price of goods supplied by the Singapore company to the same overseas related parties. Is such a practice acceptable to IRAS for transfer pricing purposes?

    In this case, IRAS will review whether the price of goods sold, reduced by an arm's length remuneration for the provision of the services, is at arm's length.  In other words, there should be evidence to show that there is indeed a component embedded in the price of goods sold that represents the value of the services provided by the Singapore company to its overseas related parties.  Alternatively, if similar goods bundled with services are provided by the Singapore company or its related entities to independent parties under similar circumstances, the bundled price of such unrelated party transactions can be used for comparison.

     

  • A Singapore company has a transfer pricing study in place and has prepared proper documentation on the transfer pricing study. Does the Singapore company need to seek IRAS’ agreement before implementing the transfer price established in the transfer pricing study?

    The Singapore company does not need to seek IRAS' agreement to implement the transfer price established through its transfer pricing study. The Singapore company is also not required to submit the transfer pricing documentation with its tax returns unless IRAS requests for it. In which case, the Singapore company is to submit the transfer pricing documentation within 30 days from IRAS’ request.