By Admin, 2 years ago | Campers
Increasingly with advances in technology and transportation, companies have offices and factories in multiple countries. A large number of companies are manufacturing the products in less developed countries to keep the cost of the products low. They are then selling the products in other countries though their subsidiary or related company belonging to the same group. The financial results of each of the group companies is published separately. When goods are sold by one group company to another group company, transfer pricing is used. Business executives who are not familiar with the term will ask what do you mean by transfer pricing. Hence more details of transfer pricing are provided below for reference.
Typically manufacturing companies are pricing the products which they sell after considering the cost of manufacturing, overheads and their profit margin. Usually if they are selling the product to another group company, they will usually charge a lower price, compared to what they would charge their direct customers. One of the reasons for the lower price, is that the company will usually have to spend less time and effort to sell the product to the group company, reducing the marketing expenses and effort. The transfer pricing is usually clearly defined for manufacturing companies which sell to other group companies
There are comparatively few manufacturing companies in Singapore, most of the companies are selling the products which are manufactured by their group companies in different countries. These products are imported and sold in Singapore. If the transfer pricing of the imported product is very low, the import duty will be lower and the Singapore government will lose some revenues in the form of import duties. Hence the Singapore government specifies that each company should clearly define the transfer price rules for products between group companies. The transfer pricing is also applicable for services, assets , funds and rights.
The companies are expected to follow the arm's length principle while deciding the transfer pricing between group companies. This means that the pricing should be similar to what the price would be if the companies were not related or were not part of the same group. Many companies may charge higher or lower prices depending on tax rates or other factors to maximize their profit for transfers between group companies and save money. Hence Singapore makes it mandatory for the group companies to specify how they have finalized the transfer price, the factors considered like the cost of raw materials, manufacturing, transport, profit margin.
The multinational company should finalize the transfer pricing documentation (TPD) at the end of the financial year. It is a comprehensive document which explains the business model for the company, supply chain, factors affecting the profit of the different companies, economic conditions, risk involved, financing. In addition to the tax authorities, key stakeholders can also use the document. The rules regarding transfer pricing were introduced in Singapore in 2018, and is only applicable if the gross revenues of the company exceed $10 million or the company has prepared similar documentation in the last year.