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Demystifying the Arm’s Length Principle in Singapore Transfer Pricing


The arm’s length principle is a fundamental concept in transfer pricing, ensuring that related-party transactions are conducted on terms that would be agreed upon between independent entities. In Singapore, the Inland Revenue Authority of Singapore (IRAS) explicitly endorses the arm’s length principle as the standard to guide transfer pricing policies. This article will delve into the application of the arm’s length principle in Singapore’s transfer pricing regime.

I. Definition and Importance of the Arm’s Length Principle:

The arm’s length principle, adopted from the OECD Model, treats related and independent entity transactions equally for tax purposes. Its primary objective is to prevent the creation of tax advantages or disadvantages that could distort the competitive positions of different entities. By applying the arm’s length principle, Singapore ensures a fair and equitable tax system.

II. Application of the Arm’s Length Principle in Singapore:

1. Statutory Basis and Enactment:

Even before the introduction of Section 34D of the Income Tax Act (ITA), the IRAS considered the arm’s length principle consistent with the provisions of the ITA. Section 34D, introduced in 2010, explicitly incorporated the arm’s length principle into Singapore’s transfer pricing regulations. The IRAS recognized that applying the arm’s length principle is crucial for conducting a sound transfer pricing analysis.

2. Definition of Related Party:

The IRAS, through the Transfer Pricing Guidelines (TP Guidelines), defines a related party as any person who directly or indirectly controls another person, or is controlled by another person, or where both parties are under the control of a common person. The concept of control is primarily based on ownership control. However, the IRAS also considers transactions between parties that have acted in concert as related-party transactions.

3. Expansion of Section 34D and Re-Characterization of Transactions:

The Income Tax Amendment Bill No. 36/2017, enacted on 11 September 2017, expanded Section 34D to provide further clarity on the meaning of arm’s length conditions. The amendments introduced the re-characterization of related-party transactions if it is determined that arm’s length parties would not have entered into similar arrangements. Any increase in income under Section 34D may be treated as accruing in, derived from, or received in Singapore.

III. Compliance with the Arm’s Length Principle:

Complying with the arm’s length principle requires the exercise of judgment and a pragmatic approach to establishing arm’s length pricing. The TP Guidelines issued by the IRAS provide comprehensive guidance on the application of the arm’s length principle, comparability analysis, transactional profit split method, and transfer pricing adjustments. Taxpayers are expected to maintain transfer pricing documentation that demonstrates compliance with the arm’s length principle.


The arm’s length principle is the cornerstone of transfer pricing regulations in Singapore. The IRAS recognizes its importance in ensuring fair taxation and competitive neutrality. With the explicit endorsement of the arm’s length principle in Section 34D of the ITA and the comprehensive guidance provided in the TP Guidelines, taxpayers in Singapore have clear rules and regulations to follow in determining transfer prices for related-party transactions. By adhering to the arm’s length principle, businesses can avoid potential tax risks and contribute to a transparent and equitable tax system in Singapore.

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