It is common practice for businesses to price services transaction between related parties using cost plus a mark-up. In our experience, we have noticed a common trend to use a cost plus a 5% mark-up for any service transaction as an arm’s length price without considering the type of services being provided.
A recurrent question that often arises is: Is it correct to use a cost plus 5% mark-up for any service transaction?
In a nutshell, no it’s not correct to use cost plus 5% mark-up for any service transaction.
The Inland Revenue of Singapore (IRAS) clarified in a recent statement Companies Servicing Only Related Parties when is it appropriate to use the cost plus 5% mark-up concession. The IRAS also explained in the transfer pricing guidelines fourth edition released in January 2017 what are the requirements that a taxpayer needs to meet to rely on the cost plus 5% mark-up concession.
What are the key requirements for a taxpayer to be eligible to use the cost plus 5% mark-up concession?
To alleviate compliance burden on companies, IRAS accept a cost plus 5% mark-up as an arm’s length price for certain routine support services if the following conditions are satisfied:
Routine support services are services that support the main business activity of a company different from the main activities by which the business derive its income, and therefore only a small mark-up is intended to be added. Examples of these services include support with accounting, auditing and legal matters, clerical and administration activities, computer support.
What is the benefit for taxpayers when using the cost plus 5% mark-up concession?
The main benefit for a taxpayer if using the cost plus 5% mark-up concession is that it does not have to prepare a comprehensive transfer pricing analysis including a benchmarking analysis to support the 5% mark-up.
However, simplified documentation is still required to substantiate the following:
Do I always have to use a cost plus 5% mark-up for routine services as an arm’s length price?
No. A taxpayer can adopt a mark-up that is different from the 5% mark up as an arm’s length price for a transaction involving routine service. For a different mark-up to be acceptable, the taxpayer will have to demonstrate that the mark-up is at arm's length. For this purpose, the taxpayer will be required to:
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Achieving tax excellence is not just about practical insights to manage the complexities, it is also very much about having a strong grasp of fundamentals to ensure a strong foundation.
As Transfer Pricing (TP) continues to be at the frontline of tax issues that companies with related party transactions face, it is vital to have a solid grasp of TP fundamentals.