FAQs About Transfer Pricing Documents in Singapore
Transfer pricing is an essential component of organizations that deal with transactions involving multiple departments or a group of companies.
Official authorities and the government have created a reliable mechanism in the form of a transfer pricing document to regulate the internal dealings of a business.
Companies often outsource accounting services in Singapore to ensure experts can deal with these measures in the best way possible. Nevertheless, the concept of transfer pricing documentation should be clear to every business owner.
Let’s discuss the answer to some of the major FAQs about transfer pricing documents in Singapore.
What is Transfer Pricing?
Transfer pricing is the process of determining the cost of goods and services when they are related to a party that is buying and selling them. Individuals or entities are related to each other when:
- One company is in control of the other company directly or indirectly.
- Another individual or entity is under the common control of a parent company.
Generally, related companies have to design and implement comprehensive transfer pricing policies to make sure they comply with the legal requirements and also handle cross-border transactions in an efficient manner.
What does the arm’s length principle mean in transfer pricing?
Transfer pricing follows the arm’s length concept as a general rule. According to the idea of “arm’s length,” transfer prices between related parties must be comparable to those paid by unrelated parties in the same or comparable situations.
This involves identifying instances or transactions that are carried out by unaffiliated parties but are functionally identical to those that take place between linked parties. This concept is also known as a comparability analysis
What is meant by a transfer pricing document?
In order to elaborate on the rules and regulations of transfer pricing used by a company, it must create a comprehensive document called the transfer pricing document. It includes all of the information about the pricing of a related party transaction.
The Inland Revenue Authority of Singapore (IRAS) also accepts the transfer pricing document in matters related to taxation and compliance with the transfer pricing rules.
Is it mandatory to prepare a transfer pricing document for a Singapore company?
Yes, it is mandatory for companies in Singapore to go through the transfer pricing documentation and prepare a transfer pricing document. These IRAS regulations went into effect in 2018.
This is the reason why it is highly recommended that companies outsource accounting services in Singapore to comply with such requirements.
Nevertheless, not every company is required to set transfer pricing rules. Section 34F was added to the Income Tax Act in 2019 to specify the threshold to prepare transfer pricing documents:
- The gross revenue of the Singapore company should be greater than SG$ 10 million.
- The Singapore entity was required to prepare transfer pricing documentation in the preceding financial year.
What is the penalty for not preparing a Transfer Pricing Document?
If a company does not prepare a transfer pricing document as per the legal rules and regulations, it can be held liable for a penalty of up to S$10,000.
What is the importance of transfer pricing documentation?
In order to protect your related party transactions in the event of an “incident,” a transfer pricing document might be compared to an insurance policy. The goal is to use the transfer pricing document to justify the transaction when dealing with tax authorities.
Tax authorities view transfer pricing documents as “good practice,” and it will undoubtedly be helpful in answering their inquiries. Given that related party transactions are examined some years after the transaction has taken place, this is very significant.
Otherwise, without a proper transfer pricing document, it could be challenging to explain to tax authorities why the transaction occurred, particularly if the parties involved have left the organization or the nature of the firm has changed. Therefore, it will help to preserve proof of the transaction’s history and what occurred at the time the transaction was recorded.
What are the popular transfer pricing methods?
The exact transfer pricing methods can vary from company to company. However, some of the commonly accepted transfer pricing methods are the resale price method, the cost plus method, the comparable uncontrolled price method, the profit split method, and the transactional net margin method.
All in all
Overall, setting transfer pricing rules and creating a transfer pricing document are vital parts of the organization. Businesses are legally bound to complete the transfer pricing documentation.
Therefore, every company in Singapore should be familiar with transfer pricing to make sure they comply with the legal requirements.
Choosing to outsource accounting services in Singapore is one of the best ways of completing all transfer pricing and financial procedures, including transfer pricing documentation.