Related party services or intra-group services are to be charged in accordance with the arm's length principles laid down by the transfer pricing guidelines. As mentioned above, the comparable uncontrolled price or cost-plus methods are preferred in determining the arm's length price. However, for routine support services, a 5% cost mark-up is usually accepted as an alternative to conducting a transfer pricing analysis. Routine support services include:
- Accounting & auditing;
- Accounts receivable and accounts payable;
- Computer support;
- Database administration;
- Employee benefits administration;
- General administrative;
- Legal services;
- Corporate communications;
- Staffing and recruiting;
- Tax return preparation; and
- Training and employee development.
The cost of third-party services paid for by one related party for the benefit of another related party can generally be passed through with no mark-up. Such pass-through is accepted only if the cost paid to the third party was in accordance with the arm's length principle and the party making the original payment does not add any value to the services.
Under a cost-sharing agreement (discussed below), routine services can be provided at a 0% mark-up.
Where taxpayers are unable to apply the 5% cost mark-up for their routine support services in the absence of a significant arm’s length mark-up, they may apply the 5% profit mark-up as specified under the OECD simplified approach for low value-adding intra-group services, subject to the following conditions:
- The routine support services meet the definition of low-value adding intra-group services provided under the OECD simplified approach; and
- The routine support services are not specifically excluded as low value-adding intra-group services under the OECD simplified approach.
The ITA provides that the capital expenditure incurred for intellectual property rights for the purpose of writing down allowances must be based on open-market price.
The transfer pricing guidelines provide that the profits are attributable to the foreign-related permanent establishment if activities are performed by a taxpayer for its foreign-related party in Singapore; however, the profit attribution is not required if the following conditions are satisfied:
- The taxpayer receives an arm’s length remuneration from its foreign-related party that is commensurate with the functions performed, assets used, and risks assumed by the taxpayer;
- The remuneration paid by the foreign-related party to the taxpayer is supported by adequate transfer pricing documentation to demonstrate compliance with the arm’s length principle; and
- The foreign-related party does not perform any functions, use any assets or assume any risks in Singapore other than those arising from the activities carried out by the taxpayer.
Thus, there will be no additional Singapore tax liability for the foreign related party
Related party loans should charge interest in accordance with the arm's length principle. However, in the case of one Singapore resident lending to another resident, the act of making such domestic non-arm's length loans is not explicitly prohibited except for lenders that are in the business of borrowing and lending funds. For other residents, the claim of interest expense on loans that are not in accordance with the arm's length principle is restricted.
For cross-border loans, the requirement for loans to be made in accordance with the arm's length principle is enforced for all new and existing cross-border loans since 2011.
The taxpayers can apply an indicative margin for related-party loans not exceeding SGD 15 million during the period 1 January 2022 up to 31 December 2022, which is set at 180 bps (1.80%) (reduced from 275 bps, 2.75%). The indicative margin is not mandatory but gives taxpayers an alternative to performing detailed transfer pricing analysis in order to comply with the arm’s length principle for their related-party loans. The indicative margin is based on the Risk-Free Rates (RFRs) (earlier based on Singapore Inter-Bank Offered Rate (‘SIBOR’), until 31 December 2021) for floating-rate loans or the SGD/USD swap rate for fixed-rate loans, and is updated at the beginning of each calendar year.
Singapore has no specific legislation in regard to the treatment of cost pooling agreements but generally follows the OECD guidelines. Cost pooling payments are generally exempt from withholding tax and are deductible if incurred wholly and exclusively in the production of assessable income, not including capital expenditure. The exemption from withholding tax is withdrawn with effect from 1 November 2022 (see Sec. 8.2.2.). Contributions or payments for the right to use certain intangibles are generally deductible, except for goodwill.
In the case of the provision of services in a cost pooling arrangement, Singapore allows for the services to be provided at no mark-up subject to the following conditions:
- The services cannot be provided to an unrelated party;
- The cost of provision of services cannot exceed 15% of the provider's total expenses in a given year;
- The services are limited to the routine services covered above; and
- Sufficient documentation showing that the cost pooling arrangement was intended prior to the provision of services.
In general, management fees are deductible as long as they are incurred in the production of assessable income. They must also comply with the arm's length principle, although a 5% mark-up is generally acceptable as with other related party services. Management fees are not subject to withholding tax. Documentation is not required where the 5% mark-up is applied.
Commissionaire agreements are allowed in Singapore, however, they usually have significant permanent establishment issues.
The tax authorities published an e-tax guide on ‘Transfer Pricing for Commodity Marketing and Trading Activities’ on 24 May 2019. The guidance is intended for business entities incorporated or registered in Singapore and involved in the business of marketing and/or trading in commodities. It is based on the OECD guidelines. The guidance provides the commercial objectives and considerations required in setting up commodity marketing/trading activities, and related transfer pricing requirements, such as the comparability analysis, the functional analysis, the transfer pricing methods, and the arm's length result. The guidance further provides that taxpayers are expected to maintain contemporaneous transfer pricing documentation, including determination of value generated by the MNE group as a whole, thorough functional analysis, price-setting policy, etc., and resolving transfer pricing disputes through the mutual agreement procedure, or by applying for an advance pricing arrangement.
The tax authorities have published an e-Tax Guide on ‘Transfer Pricing Guidelines for Centralized Activities in Multinational Enterprise Groups’. It provides guidance on activities carried out in Singapore between related parties, the factors that may affect the transfer price for such activities, and the transfer pricing methods that may be appropriate for determining the arm’s length price.
The guide is of particular relevance to a business entity (including branches) incorporated or registered in Singapore and carrying out centralized activities within their MNE group. The guide provides an insight on the benefits that an MNE group can achieve by centralizing the activities, essentials for having headquarters in Singapore, transfer pricing for activities that are centralized in Singapore, including comparability and functional analysis, transfer pricing documentation requirements, and methods for avoiding and resolving transfer pricing disputes.