How to remain compliant on transfer pricing in Singapore

Hawksford

17 April 2024 |

Insights

Transfer pricing (“TP”) is becoming increasingly important for many multinational 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.

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

Section 34D – Related Party Transactions (RPTs)
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.

Section 34D

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 during the TP audit, 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, if it involves prior years. In addition, IRAS will also impose a 5% surcharge on the upward TP adjustments, which are non-deductible for tax purposes.

Section 34F

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

Related party domestic transaction subject to same tax rate
Related party domestic loan
Related party loan on which indicative margin is applied
Routine support services on which 5% cost mark-up is applied
Related party transaction covered by Advance Pricing Agreement
RPTs not exceeding the thresholds as per 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
h	Royalties or license fees expenses	SG$1 million
j	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 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 critical 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 surprise or fines from the IRAS.

How can we help?

At Hawksford, we are able to review and advise on general transfer pricing compliance requirements and potential tax implications arising from related party transactions. If you’d like to speak to one of our experts about your business expansion plans, please get in touch today.