Transfer Pricing Guidelines For Headquarters In Singapore

Insights • Transfer Pricing Guidelines For Headquarters In Singapore

New Transfer Pricing Guidelines for Headquarters in Singapore.

Situated at the heart of Asia, Singapore is often a preferred location for setting up headquarters (HQ) due to the presence of key attributes that are essential for HQ activities. Singapore ranks amongst the top in the world in terms of a competitive economy and ease of doing business.

In addition, Singapore’s strategic location, vibrant innovation ecosystem, strong talent base and established infrastructure present a unique combination of factors that allow a Singapore-based HQ to host a range of business activities.

IRAS is aware that Singapore HQs add significant value to Multinational Groups as an strategic place for entering into business in Asia. For this reason, many MNE groups are increasingly leveraging Singapore as a home to centralise key decision-making, management and coordination, build customer insights and develop product and services strategies for local markets. In turn, Singapore-base HQs have deepened capabilities and broadened their networks to support business, innovation and talent needs.

A key aspect from Singapore transfer pricing perspective is that the entities that perform the role of headquarter in Singapore should be compensated with a fair share of profit and Singaporean HQs should pay their fair share of tax. In many occasions, the profit allocation of the Singaporean HQs is compromised as the general perception is that Tax Authorities of surrounding countries in South East Asia tend to be aggressive when challenging the price of intercompany transactions specially when the counterparty is located in Singapore.

Following this, the Inland Revenue Authority of Singapore (“IRAS”) released an e-Tax guide on centralised activities in multinational enterprise (“MNE”) groups focussing on the economic value contributions of centralised activities in Singapore and their importance to MNE Groups. Ultimately, IRAS is also prepared to ensure that Singapore HQs abide to the arm's length principle and are compensated with the fair share of profits.

Highlights

1. Entrepreneur Vs Centralised Service Provider

Through the e-tax guide, the IRAS has clearly distinguished the two main roles that a Singaporean HQ could play within an MNE which are either as an entrepreneur or centralised service provider. An entrepreneur makes key business decisions, performs significant functions to organise and operate the business and controls and assumes significant risk and has the financial capacity to assume risk. A centralised service provider, also known as a regional HQ or cost centre performs low value centralised activities for the benefit of the MNE group.

The operation and activities of a HQ provides various core benefits to an MNE group such as:

Directing overall business performance and aggregating specialised knowledge
Accelerating decision-making in response to market conditions
Achieving economies of scale and cost efficiencies
Driving consistency in branding, marketing and creative strategies and capturing real-time market opportunities
Proximity to markets

2. Why Singapore?

Within the Asia region, a number of MNE groups are choosing to site global and regional HQ functions in Singapore due to the following reasons:

Supply chain management capabilities
Global financial centre
Professional services
Strong talent base
Legal, regulatory and tax framework
Digital infrastructure and cyber resilience

3. Transfer pricing for activities that are centralised in Singapore

The functional profile of a HQ for a related party transaction is dependent on the nature of the activities it conducts which in turn define its contribution to value. Hence, it is important to ensure that the contribution made by a HQ to the value creation is taken into consideration when determining the arm’s length transfer price for a related party transaction. Such contribution may vary depending on the intensity of activities undertaken.

Functions

The four main activities undertaken by a HQ are provided in the table below:

	Principal in distribution, manufacturing or research and development arrangements	Activities relating to core business processes	Activities relating to administrative, technical, financial, commercial, management, coordination and control functions	Shareholder activities
Nature of activity	Risk taking and decision making	Core business processes with respect to supply chain of goods and/or services	Routine centralised services	Activities relating to other group entities that are performed from the perspective of a shareholder
Level of expertise and skills	High	Medium	Low	N/A
Objective	Meet group level commercial objectives and performance	Improve the overall performance of group	Support the smooth running of the group entities	Compliance with regulation
Provides benefit to group entities	Yes	Yes	Yes	No
Return/ compensation	Service charge	Service charge	Service charge	No charge

Assets

The assets utilised by the HQ are as follows:

Assets	Principal	Centralised service provider
Intangible properties	Yes	No
Operating premise	Yes	Yes
Fixtures and equipment	Yes	Yes
Raw materials, packaging materials and finished goods	Yes (for manufacturing MNE)	No

4. Risks

Where the HQ assumes a risk for transfer pricing purposes, it needs to control the risk and has the financial capacity to assume the risk. The following are some examples of risks typically assumed by HQs acting as principal and performing activities relating to core business processes:

Market/economic risks
Commercial risks
Supply chain risks
Product liability risks

Inventory risks
Capacity risks
Operational risks
Foreign exchange risks

HQ acting as principal

The HQ would typically assume all/some of the key business risks arising from its activities.

HQ conducting activities related to core business processes

The HQ would typically manage the critical business risks for the MNE group.

HQ conducting administrative, technical, financial, commercial, management, coordination and control functions

The HQ assumes risks that are generally limited to the operational risks of providing the services.

5. Transfer pricing method

As the activities performed by the HQ are benefitting the Group entities, the HQ should be compensated on an arm’s length basis. The amount of compensation should be determined based on appropriate analysis and will be subject to tax in Singapore as part of the HQ’s income to ensure the related party transactions for HQ are accurately delineated using the five transfer pricing methods.

Where a HQ assumes economically significant risks and is characterised as an entrepreneur, it should receive the residual profit according to the transfer pricing method (typically, in the form of a variable return).

Where a HQ does not assume economically significant risks, does not make key business decisions and is characterised as a service provider, it would generally receive a fixed return. The quantum of the fixed return is dependent on the level of value add of the service.

To sum up, the total remuneration for the HQ should always be commensurate with its functions, assets and risks profile.

6. Transfer pricing documentation

Transfer pricing documentation is expected to be prepared by Singapore Taxpayers if they have entered into related party transactions to show evidence on how the price is in line with the arm’s length principle. From Year of Assessment 2019, transfer pricing documentation is Mandatory for Singapore Taxpayers.

HQs located in Singapore are therefore expected to prepare transfer pricing documentation to demonstrate that their compensation and allocation of profit is aligned with the value contribution of the HQs to the Multinational Group.

Still unsure on how you can comply with the transfer pricing requirements in Singapore and avoid the risk of mispricing related party transactions when it comes to your HQ operations?

At Transfer Pricing Solutions Asia, we can help you manage your Transfer Pricing risks and save on your compliance costs, offering affordable fees on transfer pricing planning and compliance.

We can assist with:

the planning and preparation of transfer pricing documentation
comprehensive transfer pricing policy
performing global and local benchmarking comparable searches
providing training designed for CFOs and tax teams
performing transfer pricing controversy and audits

Questions?

We'd love to chat further. Please get in touch to discuss how Transfer Pricing Solutions Asia can assist.

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