Is it a must to prepare Transfer Pricing (TP) documentation?
Majority of the countries in the world are committed or have implemented Base Erosion Profit Shifting (BEPS) action plans. One of the action plans that was proposed is transfer pricing.
Transfer pricing is the pricing of transactions between related parties. In Singapore’s context, related parties are defined as parties who control one another, or who are under the common control of another party, whether directly or indirectly. There is no specific shareholding threshold.
Why do tax authorities want companies to prepare TP documentation?
In a nutshell, tax authorities do not want companies to perform profit shifting on their Related Party Transactions (RPT) from high tax jurisdiction to low tax jurisdiction.
For example, A Singapore company (“S co”) sold goods to its related party in Country X (“X co”). The corporate tax rate for Singapore and Country X is 17% and 30% respectively. In order to maximise tax saving, S co would charge his related party at a higher price. The reason is that X co can claim higher deduction, while S co would get taxed at a lower tax rate.
Assuming the profits for both company before the RPT is S$10 million and the initial RPT is S$100,000.
| Scenario 1: S co charges at 100,000 SGD | |||||
| S co | S$ million | X co | m SGD | Total | S$ million |
| Profit | 10.1 | Profit | 9.9 | Profit | 20 |
| Tax @17% | 1.717 | Tax @30% | 2.97 | Tax | 4.687 |
| Scenario 2: S co charges at 200,000 SGD | |||||
| S co | S$ million | X co | S$ million | Total | S$ million |
| Profit | 10.2 | Profit | 9.8 | Profit | 20 |
| Tax @17% | 1.734 | Tax @30% | 2.94 | Tax | 4.674 |
When S co charges $100,000 more, the total expense will drop by $0.013 million ($13,000).
Transfer Pricing Documentation (TPD)
From the Year of Assessment 2019, companies who meet the following conditions must prepare TPD, unless they are exempted.
- Gross revenue is more than S$10 million for the basis period concerned; or
- TPD was required to be prepared for the basis period immediately before the basis period concerned.
The IRAS has provided an example in the e-tax guide to illustrate the two conditions above:
| YA | Gross revenue (S$ million) | Required to prepare | Reason |
| 2019 | 9 | No |
· Condition 1 is not met as revenue is less than S$ 10 million · Condition 2 is not applicable for YA 2019 as TPD was not required in YA 2018 |
| 2020 | 12 | Yes |
· Condition 1 is met as revenue is more than S$ 10 million · Condition 2 is not met as TPD is not required for YA 2019 |
| 2021 | 9 | Yes |
· Condition 1 is not met as revenue is less than S$ 10 million · Condition 2 is met as TPD is required for YA 2020 |
Exemptions
Notwithstanding the above, companies would not need to prepare TPD if they meet any of the condition above.
- Domestic RPT subject to same tax rate;
- Related party domestic loan where the lender is not a financial institution;
- Related party loan not exceeding $15 million where indicative margin is used;
- Routine support service on which 5% mark-up is applied;
- RPT covered by Advance Pricing Arrangement; or
- RPT not exceeding certain value.
Except RPT for goods and loans not exceeding S$15 million, all other transactions not exceeding S$1 million will be exempted from preparing TPD.
Tax administration
IRAS requires companies to prepare TPD on a contemporaneous basis. This means TPD should be prepared at the time of the transactions. The TPD should be completed by the filing due date of the final tax return (i.e 30 November).
IRAS do not need companies to submit TPD when they are filing their final tax return on 30 November. However, companies are required to provide the TPD within 30 days from request by IRAS.
For companies who are exempted from preparing TPD, IRAS encourages the companies to prepare TPD to better manage transfer pricing risk.
Conclusion
Companies who are not exempted from preparing TPD this year should prepare it as soon as possible as the deadline to complete the documentation is 30 November 2019.