The range of acceptable prices is the range of transfer prices within which the profits of
Transfer pricing is the pricing of transactions between related parties, such as sale or purchase of goods, provision of services, use or transfer of intangibles, etc. Taxpayers are to apply the arm's length principle to ensure that the pricing of their transactions with their related parties reflects independent pricing.
Two parties are related if either party controls the other, or they are under the common control of another party, whether directly or indirectly. Related parties include branches and head offices. Taxpayers are to prepare and keep contemporaneous transfer pricing documentation to show that their related party transactions are conducted at arm’s length.
The Arm’s Length PrincipleIRAS endorses the arm's length principle, an internationally endorsed standard, to guide the pricing of transactions between related parties. IRAS subscribes to the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created. A proper application of transfer pricing rules will ensure this outcome. The arm's length principle requires that transfer prices between related parties are equivalent to prices that unrelated parties would have charged under the same or comparable circumstances. IRAS recommends that you adopt the following 3-step approach to apply the arm's length principle in your related party transactions:
Legend: Learn more about the 3-step approach (PDF, 1.48MB) (refer to section 5). Transfer Pricing Adjustment and Surcharge for Non-Compliance with Arm's Length PrincipleWhere the pricing of related party transactions is not at arm's length and results in a reduced profit for the Singapore taxpayer, IRAS will consider increasing the profit of the Singapore taxpayer to the arm's length amount under Section 34D of the Income Tax Act 1947. Such adjustment will either increase the amount of income or reduce the amount of deduction or loss of the Singapore taxpayer. Effective from the Year of Assessment (YA) 2019, when IRAS makes a transfer pricing adjustment under Section 34D, a surcharge of 5% on the amount of transfer pricing adjustment will be imposed. The 5% surcharge will be imposed regardless of whether there is any additional tax payable resulting from the transfer pricing adjustment. IRAS may consider remitting wholly or in part the surcharge for any good cause. Learn more about the transfer pricing adjustment and surcharge for non-compliance with the arm’s length principle (PDF, 1.48MB) (refer to sections 8 and 9).
Transfer Pricing DocumentationYou must prepare and keep contemporaneous transfer pricing documentation to show that your related party transactions are conducted at arm's length. Contemporaneous transfer pricing documentation refers to documentation and information that you have relied on to determine the transfer prices for related party transactions prior to or at the time of undertaking the transactions. IRAS also accepts transfer pricing documentation as contemporaneous when the documentation has been prepared not later than the filing due date of the Income Tax Return for the financial year in which the transactions took place. In preparing contemporaneous transfer pricing documentation, you must use the latest information and data available at the time to show how the transfer prices for the transactions are determined or supported. The preparation and maintenance of transfer pricing documentation facilitate review by tax authorities and therefore help resolve any transfer pricing issue that may arise. If taxpayers are unable to show that their transfer prices are at arm’s length through their transfer pricing documentation or they do not have transfer pricing documentation, they may suffer adverse consequences, such as double taxation arising from transfer pricing adjustment by IRAS or foreign tax authorities, penalties, etc. Transfer Pricing Documentation RequirementsWith effect from the Year of Assessment (YA) 2019, you are required to prepare transfer pricing documentation under Section 34F of the Income Tax Act 1947 if you meet certain conditions, unless exemption for specified transactions applies. If you are not required to prepare transfer pricing documentation under Section 34F, you are nonetheless encouraged to do so to better manage your transfer pricing risks. A summary of transfer pricing documentation requirements under Section 34F is as follows:
Learn more about transfer pricing documentation requirements (PDF, 1.48MB) (refer to section 6). Penalty for Non-Compliance with Transfer Pricing Documentation RequirementsEffective from YA 2019, a taxpayer is liable to a fine not exceeding $10,000 if it commits the following offences:
Learn more about the penalty for non-compliance with transfer pricing documentation requirements (PDF, 1.48MB) (refer to section 9).
FAQS
Transfer Pricing Compliance
Transfer Pricing Audit (TPA)IRAS carries out TPA to review the transfer pricing and transfer pricing documentation of taxpayers to ensure they comply with the arm’s length principle and transfer pricing documentation requirements. The TPA process is illustrated in this flowchart: Learn more about the TPA process (PDF, 1.48MB) (refer to section 7). Dispute Prevention & Resolution
What is an Advance Pricing Arrangement (APA)APA is a dispute prevention facility under which IRAS and the taxpayer or relevant DTA partner agree in advance on a set of criteria to ascertain the pricing of a taxpayer’s related party transactions for a specific period of time. Learn more about APA.
What is a Mutual Agreement Procedure (MAP)MAP is a dispute resolution facility provided under the MAP article in our Avoidance of Double Taxation Agreements (DTAs). Under MAP, IRAS and the relevant foreign competent authority (CA) resolve disputes regarding the application of the DTA. Usually, a MAP is entered into between 2 CAs, but it is also possible for IRAS to enter into a multilateral MAP involving 3 or more CAs. Learn more about MAP. Other Matters
Applying the Arm’s Length Principle to Cost Contribution ArrangementsIn place of multiple intra-group arrangements, members of a group may enter into a cost contribution arrangement (CCA) to share the development of intangibles or tangible assets or to obtain services from each other. For a CCA to satisfy the arm’s length principle:
Learn more about the application of the arm’s length principle to CCAs (PDF, 1.48MB) (refer to section 17).
Attribution of Profits to Permanent Establishments (PEs)At times, the activities performed by a company in Singapore for its overseas related company may create for the overseas company a PE in Singapore. Profits that are attributable to the PE are liable to tax in Singapore. However, if all the following conditions are met, there will be no attribution of profits to the PE and thus, there will be no Singapore tax liability for the overseas company arising from the inter-company service arrangement:
Country-by-Country (CbC) ReportingSingapore-headquartered multinational enterprises (MNEs) meeting certain conditions are required to prepare and file CbC Reports with IRAS for financial years (FYs) beginning on or after 1 Jan 2017. These CbC Reports are supplementary to the transfer pricing documentation maintained by MNEs. Learn more about CbC Reporting. You may refer to other guidance relating to transfer pricing:
How do you calculate range of transfer pricing?A company may calculate the minimum acceptable transfer price as equal to the variable costs or equal to the variable costs plus a calculated opportunity cost. Most companies will set the minimum transfer price at greater than or equal to the marginal cost of the selling division.
What is the maximum of the transfer price range for a transfer between the two divisions?Usually, this rule is restated to say that the transfer price should be no greater than the net marginal revenue of the receiving division, where the net marginal revenue is marginal revenue less own marginal costs. Here, net marginal revenues = $80 = $90 – $10.
What is a transfer price What are the three main approaches to setting transfer prices?Generally, companies can determine transfer prices three different ways: market-based transfer prices, cost- based transfer prices, and negotiated transfer prices. Although each method provides a different “answer,” their commonality is that transfer prices represent an intracompany market mechanism.
What is transfer pricing explain with example the technique of transfer pricing?Transfer pricing refers to the prices of goods and services that are exchanged between companies under common control. For example, if a subsidiary company sells goods or renders services to its holding company or a sister company, the price charged is referred to as the transfer price.
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