Transfer pricing issues in Singapore

Introduction

As the business environment becomes more complex, there is a need for organizations to expand beyond traditional boundaries. It is not uncommon for businesses to have operations in various countries and jurisdictions. For example one company may have a manufacturing base in China, a subsidiary in Singapore and other related companies in South East Asia and Europe.

Different countries have different tax regimes. If a company has operations in multiple countries it will quickly become evident that one could ‘manipulate’ the cost of a product or service between and among the operations in the various countries of a group of companies. Increasing the cost of a product artificially in a higher tax jurisdiction will thereby reduce profits and as a consequence reduces the tax liability. One could ‘transfer’ the profits by reducing the cost of goods and services to a lower tax jurisdiction or a country that has a low tax on corporate profit. Looked at on a global scale or regional scale, a company could actually be paying lower taxes than it should. It is not that inter company transactions are not allowed. On the contrary it makes business sense to have businesses located in various countries that provides economic advantages. Of concern with the tax authorities is how the companies with operations on a regional/global scale cost for the product or services between the companies in the various countries within the group.

What is the arm’s length principle?

This concern is referred to as inter company transaction and transferring of such goods and services requires a determination of price, which is known as transfer pricing. It is actually the price at which goods and services are transferred from one corporation to another. The standard rule for the transfer of costs between related parties in different tax jurisdictions is that of the ‘arm’s length principle’. The transfer price for inter company transaction is to be determined on the principle assumption of what price the receiving company has to pay for the services or products it procures in the open market. Another way of looking at it is if two companies are located in different tax regions, they would cost their products or services to each other (the transfer price) that two independent companies would follow if they were in a similar situation.

Issues with adherence to transfer pricing guidelines

The tax authorities acknowledge that fact that the issue of the arms’ length principle and hence the transfer price is not an exact science. What would happen if a company found that there is a lack of comparable condition available for it to determine what the ‘independent’ market would pay for the services or products it offered. Would it be justifiable for a company to incur exorbitant market research cost to be able to identify the market transfer price if the information is not available or worse if the information is confidential?

The Inland Revenue Authority of Singapore (IRAS) has recommended that the issues with regards to transfer pricing compliance require the exercise of judgment and advices that a pragmatic approach be adopted. Hence there are no rigid rules provided for adherence. What would be the best approach in determining the transfer prices at arm’s length will depend on the company’s nature of business.

There are 5 methods outlined by the IRAS in relation to determining transfer pricing and which method would be most suitable would depend on the individual company’s circumstances with an important proviso that whatever method adopted, the company is able and prepared to provide sufficient documentation to substantiate its claim.

The above is but a brief discussion and only some points have been highlighted. For a detailed discussion kindly call us.


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