Essential information for businesses to remain compliant on transfer pricing

Transfer pricing (“TP”) is becoming increasingly important for many multinational corporations, as well as medium-sized international corporations, operating in Singapore and elsewhere. The essence of transfer pricing is the application of the ‘arm’s length principle’ in all related party transactions (RPTs). In short, the arm's length principle requires that transfer prices between related parties are equivalent to prices that are charged to third parties under the same or similar circumstances.

According to IRAS, transfer pricing refers to the price charged between related parties for various transactions, such as sale/purchase of goods, provision of services, usage of intangibles, and provision of loans. In simple terms, if a business were to charge $X for a product/service to a third party, it is also expected to charge the same price, or more, to its related parties.

Transfer pricing

In Singapore, businesses are required to comply with two important sections of the Income Tax Act in relation to its TP matters. 

  1. Section 34D – Related party transactions (RPTs) 
  2. Section 34F – Preparation of a transfer pricing documentation (TPD)

The following is a summary of the essential aspects of compliance required under the above sections respectively.

1. Section 34D - Related party transactions (RPTs)1

Under Section 34D, businesses are required to ensure that all its RPTs are conducted on an arm’s length basis. However, for certain RPTs, such as provision of routine support services and intercompany loans below SG$15 million, safe harbour rules may be applied as a proxy to charging arm’s length prices and these are accepted by IRAS.

IRAS carries out TP audits frequently to review intercompany transactions and to ascertain whether the RPTs adhere to the arm’s length principle.

If IRAS detects that RPTs were not conducted at arm’s length prices, it is empowered to make upward TP adjustments, which may result in additional tax liabilities and, in some instances, penalties. In addition, IRAS will also impose a 5% surcharge on the upward TP adjustments, which are non-deductible for tax purposes.

2. Section 34F - Preparation of a transfer pricing documentation (TPD)2

Under Section 34F, businesses are required to prepare a TPD if it meets either of the following conditions:

  • Gross revenue from trade is more than SG$10million; or
  • A TPD was required to be prepared in the previous period.  

The above requirement has been mandated from the Year of Assessment (YA) 2019. Some businesses may be exempted from preparing a TPD if its RPTs falls within the IRAS’ list of specified scenarios, or below the thresholds provided for specific RPTs.

Specified RPTs qualifying for exemption from TPD

  1. Related party domestic transaction subject to same tax rate.
  2. Related party domestic loan.
  3. Related party loan on which indicative margin is applied.
  4. Routine support services on which a 5% cost mark-up is applied.
  5. Related party transaction covered by Advance Pricing Agreement.
  6. RPTs not exceeding the thresholds as per the table below. 
a Purchase of goods from all related parties  SG$15 million
b Sales of goods to all related parties SG$15 million
c Loans owed to all related parties 
SG$15 million
d Loans owed by all related parties SG$15 million
e Service fee income
SG$1 million
f Service fee expenses 
SG$1 million
g Royalties or license fees income
SG$1 million
Royalties or license fees expenses
SG$1 million
i Lease/Rental income of any property SG$1 million
Lease or rental income of any property SG$1 million
k Guarantee fee income received / receivable
SG$1 million
l Guarantee fee expenses paid / payable
SG$1 million
m Any other RPT not covered by the above
SG$1 million

A business, that is required to prepare a TPD, must ensure that the TPD is ready and completed before the tax return filing due date, i.e. on 30 November annually. Failure to prepare a TPD in accordance with IRAS guidelines, or non-submission of the TPD upon IRAS request, may result in a fine of up to SG$10,000 being imposed.

It is vital that every business that is part of a group, continues to review its RPTs and evaluate if it is in compliance with Sections 34D and 34F to avoid any unwarranted surprises or fines from IRAS.

At Hawksford, we are able to review and advise if the RPTs are in compliance with Singapore’s tax laws and, if not, propose viable solutions. We are also able to assist businesses on the requirements for preparation of a TPD (where required).* 

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