Aims and Objectives of Transfer Pricing in Singapore
Transfer pricing is one of the most critical aspects of a multinational enterprise and business that deal with imports and exports. Yet, many organizations and individuals are not fully familiar with the aims and objectives of transfer pricing in Singapore.
Therefore, this article aims to provide you with complete information about the fundamentals of transfer pricing and its aims and objectives.
What is Transfer Pricing?
The value of products transferred between two related parties is referred to as transfer pricing. The monetary value so affixed may be applied to both commodities and services.
When items are moved from one unit to another, particularly when the two units are in separate nations, the notion of transfer pricing comes into play.
Because this transfer occurs between two parts of the same company, it is an internal transfer rather than a sale. It might be one of the most essential aspects in assessing the flow of products and services across a company’s many divisions.
Transfer pricing document is highly useful in measuring the performance of various divisions and units of a large organization. It is important to consider multiple internal transfers to design a reliable transfer pricing document.
Aims and Objectives of Transfer Pricing
The fundamental aim of transfer pricing is to allocate the profits between an organization and its branches. Moreover, if a multinational enterprise operates in multiple countries, transfer pricing will also affect the tax calculations.
Following are the major objectives of transfer pricing:
Transfer pricing influences taxation and tax compliance in many different ways. A solid transfer pricing strategy will allow you to balance one division’s tax burden with a tax liability on the other.
One of the most important goals of transfer pricing is to increase your company’s total tax earnings. Open market factors have no bearing on the transactions. This aids you in improving tax compliance and making sure you submit the required documents on time.
2. Profits Sharing
Profit shifting is a strategy for lowering one’s tax liability in a certain nation. This may be accomplished by artificially lowering profitability. It also aims to decentralize production so that earnings are concentrated sufficiently in the area where things are manufactured.
3. International Trading
Another important goal of transfer pricing is to assess the current state of international commerce. Pricing should be in line with import and export regulations, and it should be precise.
A price that is too low might skew international trade statistics even further. The transfer pricing costs should be set in such a way that the international trade data are not distorted.
4. Internal Goals
The transfer price should be set up in such a way that the divisional profits of each division are in line with the parent company’s objectives. The goal should be to raise the profit margins of the subdivisions without affecting the parent company’s overall profitability.
5. Economic Viability
The profitability of both the organization’s divisions should be taken into account when determining transfer price. Both divisions are owned by the same company. As a result, the objects, goods, and services may be designed at any price.
However, if you want both divisions’ profit margins to remain unchanged, it’s a good idea to maintain the pricing as near to market prices as feasible. Transfer pricing must be set up so that the company’s overall profitability increases.
Since creating the transfer pricing document involves many different factors, most companies choose to rely on professional accounting firms in Singapore to get through this process easily.
Thorough transfer pricing documents also increase the company’s chances of getting Singapore tax incentives.
6. Performance Evaluation
Transfer pricing is one of the most effective ways to arrive at the most accurate valuation of particular divisions. This may assist in making more efficient decisions.
Appraising the managerial performance of the divisions, evaluating the contributions of individual entities to the overall profits of the company, and assessing the worth of each division as an individual unit are some of the areas where transfer pricing can help with performance appraisal and management.
All in All
Deciding on a suitable transfer price is critical for large-scale organizations because it affects their taxation processes, import-export regulations, and several other similar rules.