Why SMEs should care about transfer pricing.

Transfer pricing legislation applies to any company that enters into transactions between companies that are part of the same group (also knowns as related parties) located in different countries. Some countries also have transfer pricing regulations for domestic transactions (Singapore included) between related parties, particularly, when the country has different tax rates.

Yes. One common question from Entrepreneurs, Start-Ups and SMEs is:
- Why should I care about transfer pricing, it all one company? Or
- I owned all the companies so transfer pricing shouldn't matter

Yes, it does matter, and you should care. Tax Authorities do not see the Group as ‘One Company’. It is the opposite; Transfer Pricing is about pricing transactions based on market prices assuming that two or more companies of the same group are totally independent and separate (this is also known as the arm’s length principle).

Unfortunately, not many. Unless your business is operating in a remote area where the ‘Transfer Pricing Tentacles’ has not reached (we cannot think of any place at the moment!). Every country has/ is adopting the transfer pricing legislation.

Mispricing transactions can increase a company’s tax bill in more than one country. Any mistakes when pricing a transaction can affect the amount of taxed paid or deductions claim in two countries.

It is very common to come across businesses that are facing big headaches that could have been prevented. Some examples include mismatches of income and expenses resulting in losses in one entity and disproportionate profit in other entity, incorrect pricing of services transactions and mark-ups, implementation of incorrect royalty rates, incorrect management of cost centres entities; the list goes on.

The price of a transaction between related parties should follow the arm's length. The Inland Revenue Authority of Singapore (“IRAS”), other tax authorities worldwide and the Organisation for Economic Co-operation and Development (“OECD”) endorse the arm's length principle as the standard to guide transfer pricing. 

The arm's length principle requires that transfer prices between related parties are equivalent to prices that unrelated parties would have charged in the same or similar circumstances. In layman’s term, it means ‘market price’.

Ensure the price for related party transactions are at arm’s length (i.e. market price) since the moment the transaction is set up.  Some of the documents that are recommended to show evidence of compliance with transfer pricing includes:

• Transfer pricing documentation to facilitate any reviews by the tax authorities. TP Documentation is the number one tool to show evidence of compliance.
• Contracts covering the transaction entered between related parties.