Transfer Pricing
What is Transfer Pricing About?
Cross-borders transactions? Sales or purchases from a related party overseas? Loans or transfers of assets from your foreign HQ?
Your entity may face transfer pricing risks.
Transfer pricing refers to the pricing of goods, services, or intangible assets exchanged between related entities within a multinational group. The pricing for these intercompany transactions must adhere to the Arm's length principle, which ensures that the terms and conditions of such transactions are the same as those that unrelated parties would agree upon in an open market.
Simply put, transfer pricing helps allocate profits and expenses across different jurisdictions where a business operates. The goal is to ensure that the pricing is fair and complies with tax regulations in the countries involved. This prevents businesses from manipulating prices to shift profits to jurisdictions with lower taxes, thus avoiding higher tax liabilities.
To be compliance, a company should have:
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Clear Transfer Pricing policies
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Transfer Pricing documentation (As per required by different jurisdiction)
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On-going review of related party transactions
Why is Transfer Pricing Important?
Transfer pricing plays a key role in international tax compliance. Incorrect pricing of intercompany transactions can lead to tax adjustments, penalties, or disputes with tax authorities in multiple countries. Proper transfer pricing documentation and practices are vital to mitigate the risk of audits and penalties from tax authorities like the Inland Revenue Authority of Singapore (IRAS).
Related party transactions may be significant in quantum. Hence, the risk of non-compliance and tax adjustment are huge concerns for the international tax department of a Multinational firm.
4 key aspects of Transfer Pricing
Arm's Length Principle
Transfer pricing must reflect what independent parties would agree to in a similar transaction. Related party transactions are expected to be conducted at Arm's length. This ensures that profits are taxed where economic activities occur, reducing the potential for tax avoidance. Having an arm's length transaction is fundamental for transfer pricing compliance.
Tax Transfer Pricing Documentation
Proper Documentation is crucial for transfer pricing compliance. It serves as evidence that the prices for intercompany transactions align with the Arm’s length principle. In Singapore, businesses must maintain transfer pricing documentation and submit it upon request by tax authorities.
Transfer Pricing Methodologies
Various methods are used to determine the appropriate pricing for intercompany transactions. These include:
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Comparable Uncontrolled Price (CUP) Method
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Cost-Plus Method
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Transactional Net Margin Method (TNMM)
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Profit Split Method
Each method is applicable depending on the nature of the transaction and the availability of comparable data. Choosing the right method is critical to ensuring compliance and minimizing the risk of tax adjustments.
Local Regulations and Global Standards
Transfer pricing rules differ across countries. Singapore follows the OECD guidelines. However, international businesses must also follow transfer pricing rules in other countries. Being familiar with local and global regulations is essential to avoid cross-border issues.
Inadequate Documentation and compliance
IRAS requires Contemporaneous Transfer pricing documentation if your company’s related party transactions reach a certain threshold. One of the biggest challenges is failing to maintain sufficient Documentation for intercompany transactions. Incomplete or inaccurate Documentation can lead to tax audits, adjustments, and potential penalties.
Failure to Apply the Arm's Length Principle
Suppose the intercompany pricing does not reflect market conditions or independent third-party pricing. In that case, the Inland Revenue Authority of Singapore (IRAS) tax authorities can adjust transfer pricing, leading to unexpected tax liabilities.
Not Updating Transfer Pricing Policies
Transfer pricing policies should be reviewed regularly to account for changes in business operations, economic conditions, or tax regulations. Failure to keep transfer pricing policies up-to-date can result in non-compliance with current tax laws.
Transfer pricing pitfalls
With effect from the Year of Assessment (YA) 2019, companies that meet certain conditions are required to prepare transfer pricing documentation.
In recent years, Singapore has enacted the Multinational Enterprise Act 2024 to implement BEPS 2.0 Pillar Two measures. These measures, including the Global Anti-Base Erosion (GloBE) rules, aim to ensure a minimum tax rate of 15% for large multinational enterprises.
This move by Singapore is seen by many as being aligned with international tax developments.
Singapore’s Commitment to Transfer Pricing Arrangements
How We Can Help with Transfer Pricing
As experts in transfer pricing, we provide a range of services to help businesses navigate the complexities of international taxation:
Transfer Pricing Documentation
We can assist you in preparing and maintaining detailed transfer pricing reports that meet regulatory requirements.
Transfer Pricing Analysis and Strategy
Our team can help you design an effective transfer pricing strategy that aligns with your business objectives while ensuring compliance with international tax laws.
Transfer Pricing Audit Support
We provide expert support if you are amidst a Transfer Pricing audit. We will work with you to resolve audit queries, reply letters, and resolve issues efficiently.