Essential information for businesses to remain compliant on transfer pricing

According to IRAS, transfer pricing refers to the price charged between related parties for various transactions, such as sale/purchase of goods, provision of services, usage of intangibles, and provision of loans. In simple terms, if a business were to charge $X for a product/service to a third party, it is also expected to charge the same price, or more, to its related parties.

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

1. Section 34D – Related party transactions (RPTs) 
2. 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.

1. Section 34D - Related party transactions (RPTs)¹

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 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. In addition, IRAS will also impose a 5% surcharge on the upward TP adjustments, which are non-deductible for tax purposes.

2. Section 34F - Preparation of a transfer pricing documentation (TPD)²

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

1. Related party domestic transaction subject to same tax rate.
2. Related party domestic loan.
3. Related party loan on which indicative margin is applied.
4. Routine support services on which a 5% cost mark-up is applied.
5. Related party transaction covered by Advance Pricing Agreement.
6. RPTs not exceeding the thresholds as per the table below. 

A business, that is required to prepare a TPD, must ensure that the TPD is ready and 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 vital 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 surprises or fines from IRAS.

At Hawksford, we are able to review and advise if the RPTs are in compliance with Singapore’s tax laws and, if not, propose viable solutions. We are also able to assist businesses on the requirements for preparation of a TPD (where required).*