The Concept Of Transfer Pricing Explained By The Experts
Many companies have different offices in different countries. These companies may be manufacturing the goods in one country and selling the same through another office in another country. This is a very common practice not only between offices in different countries but also in the same country. The product is sold from one division to another and this has many purposes for the company. The companies involved in selling the products from one of their divisions to another one must understand the concept of transfer pricing and its impact on the running of the company. They must also know what tax implications are there and how they must manage them to remain compliant with the local laws. It is best to avail of the transfer pricing services in Singapore to make certain that they are functioning within the legal framework of the country.
What Is Transfer Pricing And How It Is Used?
Transfer pricing is the pricing that is fixed for the sale of goods between two entities controlled by the same company. These entities can be divisions of the same company, subsidiary companies, or companies that are fully or mostly controlled by the same company. When goods are sold between these entities, the price that is charged is called the transfer pricing. This pricing can be used for transactions between countries or inside the same country.
Various transactions come under the transfer pricing concept. Sale of finished goods from the parent company to a subsidiary or vice versa. Purchase of raw material from a subsidiary company. Sale and purchase of machinery or intangible goods. The reimbursement of expenses paid or received is also considered under transfer pricing. Many kinds of technical, software, IT-enabled and support services also can use transfer pricing. Different types of fees paid from one entity to others can be termed as transfer pricing.
Why Do Companies Use Transfer Pricing?
Multinational companies have subsidiaries in various countries. It is essential for management purposes and for reporting to divide the profits and expenses between the different subsidiaries that are located in various countries. When the subsidiary of the company is considered as an independent entity it is good to fix a transfer price for the goods that are transferred from the parent company to the subsidiary. This will help in assessing the performance of the subsidiary in the right manner and allocate the profits and expenses correctly to it.
How much profit the subsidiary makes will depend on the transfer pricing that is applied to the goods that are sold to it by the parent company. This could greatly affect the taxable income of the company and subsequently the post-tax profits. This will have an impact on the wealth created by the shareholders of the company.
Understanding Arm’s Length Principle Is Essential To Calculate Transfer Pricing
When there are so many companies that have subsidiaries in various countries, there is a need to have a common principle to guide the calculation of transfer price. Various methods are being used. Singapore adheres to the arm’s length principle as laid down by the Organization for Economic Cooperation and Development (OECD) which also lays down the international tax laws. IRAS has analyzed the different methods and found out that this principle is the best for calculating the transfer price.
This principle says that the transfer price should be fixed in such a way that two unrelated or independent entities would have fixed the price for a product or service. This gives all the governments a good chance to collect their share of taxes. It also helps multinational enterprises to avoid double taxation.
How Do Transfer Pricing Services In Singapore Help Companies?
There is a need for documenting the transactions that occur between the different entities of the same company. Though the documents are not required to be presented to the IRAS along with the tax returns, these can be demanded from some companies by the IRAS. At that time, it is essential to have proper documents regarding the transactions. The aim of asking for the records of the transaction is to ensure that the pricing used by the companies are as per the arm’s length principle.
The proper recording of the transactions will help companies to prove that they were using the transfer pricing as per the guidelines and there was no deviation. This documentation can be properly done by service providers. It will help companies to remain compliant with the laws. Companies will also benefit from the documentation because they can then raise objections if there were unfavorable adjustments to the price by the authorities. Without documentation, companies will not have anything to support their claims.
What Are Safe Harbor Provisions In Transfer Pricing?
Safe harbor is usually referred to as provisions in a law that offer an escape from a penalty for the taxpayers if certain conditions are met or under certain specific circumstances. IRAS offers safe harbor provisions for certain support services and is willing to accept a 5% mark-up as the arm’s length price. Companies that offer regular support services can use this safe harbor provision when charging their subsidiaries for these services.
This condition is an exception from the regular transfer pricing rule. But this is offered when the support service is offered regularly to the subsidiaries. The company must confirm that these services are not provided to any entity that is unrelated to the company. This means that they must not sell the services to other customers.
Many companies use the transfer pricing method to reduce their tax burdens. But they must ensure that they fall the rules that are laid down by the countries that the transactions take place in. There are tax consultants who are competent enough to advise the companies concerning transfer pricing rules and how the companies can keep themselves compliant with the laws.
Multinational companies must take care because transfer pricing is being scrutinized very keenly by tax authorities. Companies must ensure that they follow all the procedures to avoid a stiff penalty, additional taxes, and fines. Service providers come to the help of such companies.