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Singapore Transfer Pricing Rules

Globalization has led to expansion of companies in terms of geographical presence. This has meant that companies today have more international transactions than ever before and even within the same company having offices worldwide. This is the case when manufacturing of products for accompany takes place in a particular country while their marketing in another country is looked after by a company that is a wholly owned subsidiary of the parent company in yet another country. In such cases, there is a Transfer Pricing Mechanism in place that decides the prices of products that are distributed in different countries for sale. However, this pricing mechanism also consists of the T&C of such sales between companies that are all part of a family. It is very important to comprehend this TPM fully as it decides the incomes of companies in different countries and profits earned in different tax regimes. The basic principle guiding this pricing mechanism is Arm’s Length Principle. This is a principle that states that pricing should be market based even if it is between business entities that are related to each other. This mechanism keeps sentiments at bay and keeps prices that would have been in place if the parties were not related.

There is a tendency to keep pricing different from what it would be when the companies are unrelated. This happens because of the feelings of association and comradery. However, this tendency affects the taxable income of the two business entities and thereby their tax liabilities. With companies transcending borders and many companies becoming related because of the same parent company, tax authorities today are more alert when looking at the transactions between such business entities. When authorities do not find transactions between related business entities to be following the principle of Arm’s Length, they tend to adjust the figures of tax liabilities and profits. This adjustment always tends to enhance the tax liabilities of the business entities involved. Make sure to fully understand the implications of Transfer Pricing Mechanism to avoid being penalized by the tax authorities. It is important to understand the pricing mechanism in one’s own jurisdiction as well as the pricing mechanism in the jurisdiction of the other party in question.

This article aims to make clear the principle of Arm’s Length Principle so as to easily comprehend Transfer Pricing Mechanism. You will understand the documentation that you need to maintain to create the favorable impression on the tax authorities.

Background of TPM

The very fact that there are companies that are related to each other because of a common parent company means they will try to shift profits from a jurisdiction where higher tax rates are prevalent to a tax regime with lower corporate taxes. To make sure that this tendency is curbed, tax authorities of different countries worked together to come up with a regulatory mechanism. The UN initiated these attempts and it was OECD that proposed the guidelines for TPM in 1995. These guidelines are today followed by tax authorities in various countries to ensure that companies pay actual taxes in respective jurisdictions and are not able to manipulate differences in tax rates in different countries.

The guidelines issued by OECD form the backbone of the principle of Arm’s Length to decide on pricing of products in cross border transactions between business entities that are related. The year 2010 saw many new additions to these guidelines so as to make it an ideal pricing mechanism for transactions between companies that are related. Though the interpretation of these OECD guidelines may be different in different countries, their essence remains the same and it helps in better collections of taxes from international companies and puts a spanner in the scheme of these companies to save taxes through clever pricing between related business entities.

If you are interested, you can read Article 9 of the OECD Model Tax Convention to know in detail the provisions of the TPM that forms the basis of tax treaties between member countries of OECD. The application of TPM is done by comparing the prices of products in transactions between cross border related companies with the principle of Arm’s Length to arrive at the correct prices and tax liabilities of the companies in their respective tax jurisdictions are decided accordingly.

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