Looking to expand into Singapore? All you need to know about transfer pricing regulations

Lee Curthoys, corporate tax lead at Radius, looks at Singapore’s changing transfer pricing regulations and tells us what we need to know.

For a number of reasons, ranging from public safety to proximity to other Asian markets, Singapore is a popular destination for businesses looking to expand globally.

In fact, in a 2015 doingbusiness.org report, Singapore was ranked number one in ease of doing business in the East Asia & Pacific region. Unfortunately, with the introduction of some new transfer pricing guidelines, doing business in Singapore just became a little more complicated.

The basics of transfer pricing

Transfer pricing refers to the prices charged for the sales of goods, supplies of services, and cost of financing across borders between related parties in a single corporate group.

The tax authorities in each country involved will want to know that the corporate group is not setting its internal pricing incorrectly, or “creatively,” to avoid paying its fair share of taxes in its jurisdiction.

When transfer pricing is consistent with the pricing of other similar goods and services in a country’s open market, that pricing is said to be at “arm’s length” — that is, the pricing has been set without regard to creating tax advantages for the corporate group involved.

While there are differences from country to country as to how to manage the issue of international transfer pricing, the international trend over the last 40 years is for tax authorities to steadily increase the amount of documentation required to substantiate transfer pricing and to increase the penalties for getting the pricing and/or the documentation wrong per local authorities.

Recent changes

Until recently, foreign companies operating in Singapore have been expected to use arm’s-length transfer pricing practices, though there had been no actual requirement to prepare documentation that supported those practices.

On January 6, 2015, the Inland Revenue Authority of Singapore (“IRAS”) released an updated set of transfer pricing guidelines. These new guidelines maintained the expectation that foreign companies must use arm’s length transfer pricing practices, but they also introduced a requirement whereby most companies must possess transfer pricing documentation by the time they file their Singapore tax returns (normally due eleven months after year end).

These changes make Singapore’s transfer pricing guidelines consistent with many other countries, including for example the U.K. and Australia.

A critical item of the newly required Singapore documentation is a transfer pricing report. Transfer pricing reports are comprehensive and complex.

They support the pricing included in a corporate group’s intercompany agreement. And they include among other things: an overview of the group’s business, structure, and internal pricing policy; the method used to test the arm’s-length nature of the pricing; and an analysis of comparable transactions, including if necessary the benchmarking of the returns of comparable transactions from commercial databases.

What this means for you

If you are doing business internationally and have an entity in Singapore, you must have a set of transfer pricing documents prepared during 2015 to cover your Singapore operation.

The documents should justify your transfer pricing practices to local authorities as sufficiently robust and supportable.

At the same time, you will want to ensure that your transfer pricing practices do not place you at a competitive disadvantage.

This is sometimes a difficult balancing act, but given the potential penalties involved with Singapore’s new regulations, it is more important than ever to get it right.