The transfer pricing methods applicable in Singapore are as follows:
1. Comparable Uncontrolled Price (CUP) Method: This method compares the price charged for goods, services, or intangibles in a controlled transaction with the price charged in a comparable uncontrolled transaction.
2. Resale Price (RP) Method: The RP method is used when a related party purchases goods from another related party and resells them to an independent party. The resale price is reduced by a comparable gross margin to determine the arm’s length price.
3. Cost Plus (CP) Method: The CP method focuses on the cost incurred by a supplier of goods or services to a related party. A suitable markup is added to the cost to determine the arm’s length price.
4. Transactional Profit Split (PS) Method: The PS method is used when related parties contribute unique and valuable functions, assets, or intangibles to a transaction. The profit is split between the parties based on their relative contributions.
5. Transactional Net Margin Method (TNMM): The TNMM compares the net profit relative to a suitable base (such as cost, sales, or assets) in a related party transaction with that of comparable parties.
The priority of methods is not fixed in Singapore, and the choice of method depends on which method produces the most reliable results. The method that takes into account the quality of available data and allows for accurate adjustments should be chosen. Taxpayers have the flexibility to select any of the five methods or a modified version to comply with the arm’s length principle.
Administrative rules and guidelines provided by the Inland Revenue Authority of Singapore (IRAS) outline specific considerations for each method. For example, the IRAS considers the CUP method as the most direct way of determining the arm’s length price and prefers it when comparable transactions are available. The RP method is suitable when the reseller adds relatively little value, and the CP method focuses on the gross markup charged by the supplier. The PS method is useful for highly interrelated transactions with unique contributions, and the TNMM compares the net profit relative to a suitable base.
The guidelines also emphasize the importance of conducting a comparability analysis, which includes examining the characteristics of goods, services, or intangible property, analyzing functions, risks, and assets, and considering the commercial and economic circumstances of the transactions. The use of multiple-year data is encouraged to identify long-term arrangements and business/product life cycles.
In terms of documentation, taxpayers must maintain and provide sufficient documentation to demonstrate that their transfer prices are established in accordance with the arm’s length principle. The IRAS accepts the use of ranges, such as an interquartile range, to determine an arm’s length range, as long as reliable comparables are used. The preference is for local comparables, but foreign comparables may be acceptable when domestic comparables are not available.
It’s important to consult the official IRAS guidelines and seek professional advice for specific transfer pricing matters in Singapore, as regulations and practices may evolve over time.