According to IRAS’ e-Tax guide, HQ is defined as a “centralised office location(s) where an MNE group’s management and key staff operate and oversee business activities”. Functions of an HQ may include centralised key decision-making, management and coordination, building customer insights, developing product and service strategies for local markets, as well as achieving economies of scale and cost efficiencies.

While the term “HQ” is commonly used for tax, corporate planning, corporate communications and TP purposes, IRAS has expressed that the said label should not dictate the TP analysis. Instead, emphasis should be placed on assessing the actual functions, assets, and risk profiles of the HQ to determine the appropriate transfer price for centralised activities.

In practice, the function profile of an HQ may range anywhere from a service provider to an entrepreneur, depending on the nature of the activities it conducts, taking into account assets used and risks assumed.

On one end of the spectrum is a service provider providing routine centralised services that are generally administrative and executory in nature. On the other end is an entrepreneur that performs significant functions to organise and operate the business, makes key business decisions, and controls and assumes significant entrepreneurial risk and has the financial capacity to assume risk.

An HQ’s contribution to value is defined by the nature of the activities it conducts, the assets used and the risks assumed, for which the HQ should be appropriately compensated for the benefits it confers to the MNE group.

The functions performed, assets utilised and risks assumed by the HQ define its contributions to the value chain of the MNE group; this in turn determine the arm’s length remuneration that it should earn.

To price the actual related party transaction, one of the five TP methods as set out in the TP Guidelines, any other more appropriate method, or even a combination of methods may be used. Common industry practices and the availability of reliable independent comparables should be considered when selecting the most appropriate method to price HQ activities.

Generally, an HQ assuming economically significant risks and is characterised as an entrepreneur should receive the residual profit in accordance with the selected TP method, and be entitled to the upside benefits and incur the downside costs. On the other hand, an HQ that is characterised as a service provider would generally receive a fixed return based on the level of value add of its service.

Maintaining a set of robust and contemporaneous TP documentation is key to minimise TP exposure. HQs are subject to the same thresholds for preparation of mandatory TP documentation in Singapore as outlined in the TP Guidelines, that is, if the gross revenue from their trade or business for the basis period exceeds S$10 million, or if they were required to prepare TP documentation for a previous basis period.

Exemption from TP documentation may apply if the HQ’s gross revenue is below S$10 million for the current basis period and the immediate two preceding basis periods (even if related party thresholds are exceeded), or if it is one of the transactions specifically exempted under the TP Documentation Rules.

It is a best practice for HQs to review and refresh their TP documentation annually to ensure that information contained in the TP documentation remain accurate, and that the transfer price supported by the TP documentation is still at arm’s length.

In Singapore, to reduce compliance burden, taxpayers are allowed to use TP documentation prepared previously to support the transfer price in the basis period concerned if that past TP documentation is a qualifying past TP documentation.

In the basis period where such qualifying past TP documentation is used, taxpayers need to prepare a simplified review and declaration that qualifying past TP documentation has been prepared together with a copy of the qualifying past TP documentation.

In the event of audit or review by tax authorities, common documents and information requested during audit or reviews typically include contracts, contemporaneous TP documentation, invoices, organisational charts, job descriptions, basis for the price in the transactions, and support on calculation of the price.

As the open years for which a TP audit are generally between five and seven years, HQs should ensure that they retain these documents and information to stay audit-ready.