On 19th March 2021, the Inland Revenue Authority of Singapore (‘IRAS’) published the e-Tax Guide – Transfer Pricing Guidelines Special Topic on Centralised Activities in Multinational Enterprise Groups (‘e-Tax Guide’) in Singapore. The e Tax Guide aims at providing guidance on how to analyse the related party transactions and the transfer pricing methods that may be appropriate to determine the arm’s length transfer price for centralized activities. It also discusses the various factors affecting transfer pricing for these activities and documentation required to substantiate the arm’s length nature of intra-group services transactions. Some of the key highlights
are:
▪ Focus on delineating the actual related party transaction, after giving due consideration to the transaction in the context of the MNE group’s business and the nature of the transaction itself.
▪ Where the “Headquarter” (‘HQ’) assumes risk for transfer pricing purposes, it should have control over the risk and financial capacity to assume the risk.
▪ Emphasis on understanding how value is generated within the group, the interdependencies of the functions performed by the HQ with the rest of the entities and the contributions that the HQ makes to that value creation.
▪ For determination of the contributions made by HQ, importance should be given to the economic significance of the functions performed in terms of their frequency, nature, and value to the respective parties to the transaction, rather than the number of functions performed by HQ.
▪ Activities performed by the HQ may be classified under four broad categories to include typical functions performed, assets employed, and risk assumed under each of these categories. Finally, it also provides guidance on transfer pricing methods that may be applied to these activities:
✓ Principal in distribution, manufacturing, or research and development arrangements –
▪ The HQ acts as a principal, it carries out risk-taking and decision making in these arrangements. E.g., a regional contract manufacturer of the group.
▪ The HQ would typically assume all/some of the key business risks arising from its activities and have the capability to make key business decisions to take on, lay off or reduce a risk-bearing opportunity.
▪ The HQ would usually be the party with a more complex functional profile. Consequently, the related party would generally be the tested party.
▪ The e-Tax Guide provides that in case of the manufacturer and the research and development service provider, usually the costs incurred by the service provider are the value drivers of the business. Accordingly, the Transactional Net Margin Method (‘TNMM’) may be used by taking cost base as the Profit Level Indicator (‘PLI’).
▪ Where distributors are responsible for driving the sales, they are usually tested using the resale price method or the TNMM by taking sales as the appropriate base i.e., operating margin. In case, the distributors do not drive sales, the distributors may be rewarded using the cost-plus method or the TNMM using cost as the appropriate base or the berry ratio.
T r a n s f e r P r i c i n g U p d a t e
✓ Activities relating to core business processes –
▪ These processes typically would form a part of the supply chain of goods and/or services within the group to improve the overall performance of the group. E.g., procurement services, sales and trading services, etc.
▪ The HQ would usually manage the critical business risks for the MNE group.
▪ Where the service provider shares in the risks and consequently the rewards of their function, a profit split method may be used to determine the contribution made by each entity involved in the transaction.
▪ In other instances, the cost-plus method or TNMM would be appropriate when the value of the
services provided by the centralised service provider is driven by its inputs into the process i.e.,
its costs.
▪ Where the HQ assumes economically significant risks and is characterised as an entrepreneur, it should receive the residual profit split method may be used.
▪ Where the HQ does not assume economically significant risks and does not make key business decisions and it is characterised as a service provider, it would generally receive a fixed return.
✓ Activities relating to administrative, technical, financial, commercial, management, coordination,
and control functions –
▪ The services provided are generally administrative and executory in nature, which are not part of the supply chain of goods and/or services within the group, to support the smooth running of the group entities. E.g., issuance of invoices, the processing of accounts payable and accounts receivable, etc.
▪ The associated risks are generally limited to the operational risks of providing these services.
▪ For the determination of the transfer pricing method, the principles discussed in activities
relating to core business processes would also apply in these types of activities.
✓ Shareholder activities –
▪ The activities relating to other group entities that are performed from the perspective of a
shareholder and do not benefit the group entities. E.g., consolidation of financial statements.
▪ These services do not benefit the group entities. Hence, the HQ cannot charge a service fee in respect of these activities.
▪ The e-Tax Guide also states that every effort should be made to price the actual related party transaction for HQ using the five methods set out in the IRAS Transfer Pricing Guidelines, any other more appropriate methods or a combination of various methods.
▪ In addition to considering the availability of reliable independent comparable, it is important to consider common industry practices.
Read the full article by clicking the link below.
Contributing Advisors
