Transfer Pricing Compliance

What is Transfer Pricing

Transfer pricing refers to the rules and methods for setting the prices charged for transactions between related parties, including sales and purchases of goods, provision of services and loans between related parties.

For transfer pricing purposes, two persons are related parties with respect to each other if:

1. Either person, directly or indirectly, controls the other person; or
2. Both persons are, directly or indirectly, controlled by a common person.

Related parties are also referred to as “associated enterprises” by the OECD.

The standard for transfer pricing adopted by OECD member countries, which is also endorsed by the Singapore tax authority, is the arm’s length principle. This means that the conditions (including price) for transactions between related parties should be the same as those for transactions between independent parties.

What is Transfer Pricing Documentation

Transfer pricing documentation is a record to show that the transactions between related parties are conducted on arm’s length basis. This documentation comprises the following:

1. Documentation of the Group (also referred to as the Master File),
2. Documentation of the Entity (also referred to as the Local File), and
3. Country-by-Country Report (required for certain Singapore-based MNE groups)

A key component of transfer pricing documentation is the transfer pricing analysis to determine (or demonstrate) that the conditions for the transactions between related parties (including pricing) are compliant with the arm’s length principle – that the conditions are what independent parties would have agreed to in comparable circumstances.

Transfer pricing analysis includes a comparability analysis, selection of transfer pricing method, reasons for selecting or rejecting any transfer pricing method, identification of the tested party, analysis of information from comparable companies or transactions and the analysis to derive the arm’s length price for the related party transaction.

Transfer pricing documentation has to be prepared contemporaneously which means that it has to be prepared by the time the related party transaction takes place.

Who needs to prepare Transfer Pricing Documentation

Transfer pricing document is compulsory with effect from Year of Assessment 2019 (YA 2019, for basis periods or financial years ended in 2018) and subsequent years.

Unless exempted, Companies, firms or trusts (hereinafter referred to collectively as “entities”) that meet the following criteria are required to prepare transfer pricing documentation:

1. Companies with turnover of more than S$10 million per year, or
2. Those companies which were required to prepare transfer pricing documentation in the previous basis period (hereinafter referred to as “financial year”).

The second criterium above would mean that, once an entity is required to prepare transfer pricing documentation, it will continue to be required to do so.

Exemption if Revenue is consistently below S$10 million

However, an entity will be exempt from preparing transfer pricing documentation if its revenue is consistently below S$10 million for the current basis period (financial year) and the previous two basis periods.

Exemptions for certain transactions

Entities will also be exempt from preparing transfer pricing documentation for specified related party transactions including the following:

1. Provision of routine support services to entities within the same group for which a mark-up of 5% is applied to the cost of the service,
2. Sales to or purchases from a related party not exceeding S$15 million during the basis period,
3. Loans to or from a related party not exceeding S$15 million,
4. Provision to or receipt of services from a related party not exceeding $1 million (for YA2025 and before) or $2 million (from YA2026), and
5. Other specified transactions with related parties.

Penalties for not preparing Transfer Pricing Documentation

There are penalties of up to $10,000 if the transfer pricing documentation cannot be produced within 30 days upon request by the tax authority.

Validity of a Transfer Pricing Documentation

The full Transfer Pricing Documentation (“TP Documentation”) is valid for 3 years if there are no changes in the details contained in the TP Documentation – i.e. same type of transaction undertaken with same related party with no changes in the commercial or financial relationship, conditions made or imposed between the related parties and the transfer pricing method used to price the transaction. Where full TP Documentation is not required – i.e. reliance is placed on a qualifying past TP Documentation, a “simplified” TP Documentation is required for the transactions.

The Transfer Pricing Documentation must be retained for at least 5 years from the end of the basis period in which the transaction took place. This means that, if the related party transaction took place on 1 March 2019, an entity with a 31 December financial year end must retain the transfer pricing documentation up to 31 December 2024.