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Singapore is home to many multinational enterprises (MNEs). Given Singapore’s knowledge-based economy, there is a high density of businesses that are services in nature, or conduct business services. Consequently, these businesses have a high tendency to have intercompany service transactions.
Unlike physical goods, these service transactions are intangible, as they cannot be seen or touched, which can lead to unique transfer pricing concerns and potential mistakes over the transactions. In this regard, the Organisation for Economic Cooperation and Development (OECD) and Singapore transfer pricing regulations have specific provisions to talk about intercompany service transactions.
This article delves into what Singapore taxpayers need to know about service transactions under these regulations and highlights typical mistakes businesses may make.
Service transactions refer to various services provided between related entities, such as management, technical, marketing or administrative support. These transactions are common among MNEs, where services are provided by one entity to another within the same group for centralising key decision-making, management and coordination of business operations.
The Inland Revenue Authority of Singapore (IRAS) requires that these transactions adhere to the arm’s length principle. The arm's length principle requires that the terms and conditions between related parties should be comparable to those that independent parties would have agreed under similar circumstances.
Singapore taxpayers are required to maintain contemporaneous transfer pricing documentation, i.e. preparing and keeping accurate records and documentation that justify the pricing of transactions between related parties at the time those transactions occur.
This documentation should detail the nature of the services provided, the rationale for the pricing, and provide evidence supporting the arm’s length nature of the transaction. Inadequate or missing documentation is a common issue that can lead to challenges from IRAS.
When services are provided across multiple jurisdictions, it is essential to allocate and apportion costs accurately. This can be particularly challenging for shared services, such as regional headquarters services. The allocation should be based on a method that reflects the actual benefit received by each entity involved.
The IRAS allows various transfer pricing methods, such as the Comparable Uncontrolled Price (CUP) method, the Cost-Plus method, and the Transactional Net Margin Method (TNMM). Taxpayers must select the most appropriate method based on the specific circumstances of the transaction.
Determining an appropriate service fee for service transactions is crucial. The service fee should reflect the nature of the service, the risks involved, and the value added by the service provider.
In our experience, our clients understand the basic transfer pricing rules but may not fully grasp how to set up a pricing policy or implement it for their intercompany transactions, or they might be too focused on preparing intercompany agreements and forget about the substance – which, in fact, should need more attention. In the following section, we will discuss common mistakes in transfer pricing for service transactions in further detail.
One of the most common mistakes is focusing solely on the documentation while neglecting the actual economic substance of the transaction. For example, if a subsidiary already has its own HR department, but the parent company charges for similar HR services, tax authorities may question the necessity and substance of those services. Taxpayers should ensure that the service transactions have real economic substance and provide genuine value to the receiving entity, avoiding duplication of services that are already available within the entity.
A common error when using the Cost-Plus Method for service transactions is miscalculation or misidentification of the cost base. The cost base should accurately represent the costs involved in providing the services.
Excluding important costs or including inappropriate ones can distort the final transfer price. For instance, only considering direct costs and leaving out indirect costs (like administrative overheads) could lead to underpricing the service.
On the other hand, inflating the cost base could result in excessive mark-ups, which could raise concerns during audits. For example, costs for shareholder activities – which are ones that a group member performs solely because of its ownership interest – should not be considered part of the cost base for intra-group services.
Some common examples of the costs associated with shareholder activities are costs for meetings of shareholders of the parent company, issuing of shares in the parent company and reporting requirements (including financial reporting and audit) of the parent company.
Quite often, group service providers also incur pass-through costs. These are expenses that companies may arrange and pay for services from other service providers, on behalf of their related parties, e.g. subscription fees, travel costs, etc.
If these costs meet certain conditions of strict pass-through costs stipulated in the 7th edition of the Singapore Transfer Pricing Guidelines, the group service providers may pass on the costs of the acquired services to its related parties without a mark-up rather than including them in the cost base.
A standardised 5% markup, often used for routine support services (as listed in Annex C of the 7th edition of the Singapore Transfer Pricing Guidelines) might be incorrectly applied to non-routine support services.
Non-routine services — such as strategic consulting or specialised technical support — typically require higher compensation to reflect their unique value and complexity. Misapplying the 5% markup in such cases can lead to underpricing and potential transfer pricing adjustments by tax authorities.
Another pitfall is the inconsistent application of transfer pricing policies on service transactions across different jurisdictions. Taxpayers must ensure that their transfer pricing policies are consistently applied and aligned with the overall business strategy.
Agreements for intra-group services (especially management services), if lacking specificity, make it difficult to justify the nature, scope, and pricing of the services provided. Vague agreements can raise red flags with tax authorities.
A generic service agreement that does not detail the services, fees, or allocation methods may lead to challenges in justifying the arm's length nature of the fees. Therefore, taxpayers should prepare and maintain detailed service agreements that specify the type of services, the method of calculating fees, how costs are allocated, and the terms of service delivery.
When a company solely provides services to its related parties and consistently incurs losses, this may raise concerns about the appropriateness of its transfer pricing policy. In such cases, tax authorities might scrutinise whether the pricing of intercompany transactions reflects the arm’s length principle, where the service provider should typically receive a reasonable margin for its services.
If the service provider cannot prove the arm's length nature of the transactions, transfer pricing adjustments could be imposed to align the company’s profits with what would be expected from comparable independent companies. In such cases, the adjustments could even be accompanied by a surcharge of 5% on the adjustments, increasing the overall tax liability.
While taxpayers are not required to prepare transfer pricing documentation if transactions remain below a specified de minimis threshold, this does not exempt them from adhering to transfer pricing rules.
The current de minimis threshold for service transactions will be raised to SGD 2 million effective from the year of assessment 2026, up from the current threshold of SGD 1 million. Whether or not taxpayers are required to prepare transfer pricing documentation, tax authorities may still review taxpayers’ pricing practices. Any non-compliance to the arm’s length principle could result in adjustments, surcharges and reputational impacts.
Service transactions between related parties are a critical aspect of transfer pricing that Singapore taxpayers should carefully consider. By adhering to the arm’s length principle, maintaining proper documentation, and selecting the appropriate transfer pricing methods, taxpayers could mitigate the risk of non-compliance and potential disputes with IRAS, especially when transfer pricing would be of a higher focus by Singapore tax authorities going forward.
Conducting regular reviews of transfer pricing policies will also help you navigate the complexities of service transactions and stay aligned with regulatory requirements.
