Transfer pricing concerns the prices levied in the business transactions with related parties.
Generally, a transaction (between two unrelated parties) are conducted at a price approximating to the market price.
For related parties, this may not be necessary.
As such, it is important that the price recorded in the related party transaction approximates to the market price.
IRAS provides transfer pricing guidelines for Singapore business entities on the
a. Application of the arm’s length principle in conducting business transactions with related parties;
b. Application of the arm’s length principle for certain business transactions (for example related party loans & services);
c. Maintenance of proper and up-to-date Transfer Pricing documentation; and
d. Facilities provided under tax treaties.
IRAS may perform an audit of the related party transactions to verify if the price is reflective of the prevailing market prices.
When transacting with related parties, the pricing may not reflect the prevailing market conditions due to an absence of independence on the commercial and financial relationships.
As such, the taxable profits and liabilities of related parties may be distorted, especially if they conduct business in different tax jurisdictions.
The related parties may derive a tax advantage as a group as they may not be paying the correct tax amounts to the respective tax authorities.
IRAS applies the internationally endorsed arm’s length mechanism to ensure that transactions with related parties reflect independent pricing.
For non-compliance and understatement of profits, IRAS will upward adjust the profits as stipulated in the Income Tax Act.
For related parties transactions above the threshold (per financial year), the company must maintain a transfer pricing documentation (“TP documentation”) as documentary evidence that the company applies the arm’s length principle in all transactions with related parties.
The TP documentation should be written in English and serves to demonstrate the compliance with the arm’s length principle.
The company should retain the TP documentation for five (5) years from the relevant year of assessment.
The company should update the TP documentation when there are major changes to the operating models or at least once every three (3) years.