Companies Servicing Only Related Parties - Singapore

Companies Servicing Only Related Parties - Singapore | Bestar

Related Party Services in Singapore

This page explains how tax is assessed on companies that render services to its related parties.

When discussing companies servicing only related parties in Singapore, the key focus revolves around transfer pricing regulations, particularly those enforced by the Inland Revenue Authority of Singapore (IRAS). Here's a breakdown of essential points:

Key Considerations:

• Arm's Length Principle:

  • IRAS adheres to the arm's length principle, which mandates that transactions between related parties should mirror those that would occur between independent entities under similar circumstances. This principle is fundamental to preventing tax avoidance.

• Transfer Pricing Documentation:

  • Companies engaging in related-party transactions are typically required to maintain thorough transfer pricing documentation. This documentation serves to justify the pricing of these transactions and demonstrate compliance with the arm's length principle.

• Service Transactions:

  • These transactions encompass a wide range of services, including management, technical, and administrative support, provided between related entities.

• IRAS Guidelines:

  • The IRAS provides guidelines on transfer pricing, including specific considerations for companies servicing only related parties. These guidelines aim to ensure that profits are taxed where the economic activities generating those profits occur.

• 5% Cost Mark-Up:

  • IRAS provides a concession of a 5% cost mark-up for certain routine support services provided exclusively to related parties, under specific conditions. This is intended to simplify compliance for companies engaging in these types of transactions. However, misuse of this concession is actively monitored by IRAS.

• Routine Support Services:

  • These are services that support the main business activity of a company, and are different from the activities that generate the companies income.

Important Notes:

• Companies servicing only related parties must be prepared to demonstrate that their pricing policies are consistent with the arm's length principle.

• Failure to comply with transfer pricing regulations can result in penalties and tax adjustments.

How Tax is Assessed on Companies that Render Services to its Related Parties

When assessing the tax implications for companies rendering services to related parties in Singapore, the Inland Revenue Authority of Singapore (IRAS) places significant emphasis on the "arm's length principle." Here's a breakdown of how tax is assessed:

Key Principles and Practices:

• Arm's Length Principle:

  • This is the cornerstone of IRAS's approach. It dictates that transactions between related parties should mirror those that would occur between independent parties in comparable circumstances. This ensures that profits are not artificially shifted to lower-tax jurisdictions.   

• Transfer Pricing Documentation:

  • Companies must maintain robust transfer pricing documentation to demonstrate that their related-party transactions adhere to the arm's length principle. This documentation should justify the pricing of services and provide evidence of its market-based nature.   

• IRAS Guidelines:

  • The IRAS provides detailed guidelines on transfer pricing, which companies must follow. These guidelines offer insights into acceptable methodologies for determining arm's length pricing.   

• 5% Cost Mark-Up Concession:

  • For certain routine support services provided exclusively to related parties, IRAS offers an administrative concession of a 5% cost mark-up. This simplifies compliance for companies engaged in these specific types of services.   

  • However, this concession is subject to specific conditions, and companies must ensure they meet the criteria.   

• Normal Trading Company (NTC) Basis:

  • If a company does not meet the requirements for the 5% cost mark-up concession, it will typically be assessed on a "normal trading company" basis. This involves a more detailed examination of the company's income and expenses, with adjustments made to ensure compliance with the arm's length principle.

• Reporting of Related Party Transactions:

  • Companies with related party transactions exceeding a certain threshold are required to report these transactions to IRAS. This helps IRAS monitor compliance with transfer pricing regulations.   

In essence:

• IRAS aims to ensure that companies pay their fair share of taxes on profits generated in Singapore, regardless of whether those profits arise from transactions with related or unrelated parties.

• The focus is on ensuring that pricing is consistent with market norms, and that tax obligations are met.

How Bestar can Help

Bestar plays a crucial role in helping companies navigate the complexities of Singapore's tax landscape, especially when dealing with related-party transactions. Here's how we can provide valuable assistance:

Key Areas of Assistance:

• Transfer Pricing Advisory:

  • Bestar can help companies establish and maintain transfer pricing policies that comply with the arm's length principle.

  • We can conduct transfer pricing studies to determine appropriate pricing for related-party transactions.

  • We can prepare transfer pricing documentation to support the company's pricing policies.

• Tax Compliance:

  • Bestar can ensure that companies meet all their tax filing obligations, including the accurate reporting of related-party transactions.

  • We can help companies stay up-to-date on the latest tax laws and regulations.

  • We can assist with responding to inquiries from the Inland Revenue Authority of Singapore (IRAS).

• Tax Planning:

  • Bestar can help companies develop tax-efficient strategies to minimize their tax liabilities.

  • We can advise on the tax implications of business transactions and restructuring.

  • We can help companies take advantage of available tax incentives and concessions.

• IRAS Audit and Dispute Resolution:

  • In the event of an IRAS audit, Bestar can represent the company and help to resolve any disputes.

  • We can help companies prepare for audits and respond to IRAS queries.

  • We can assist with tax objections and appeals.

• Specific Related Party Transaction Expertise:

  • We posses the expertise to properly evaluate if a company is eligible for the 5% cost mark-up concession.

  • We can help with the proper documentation of routine support services.

• General Tax guidance:

  • We can help with corporate tax filing, and advise on any general tax related questions that a company may have.

In essence, Bestar helps companies:

• Minimize tax risks.

• Ensure compliance with tax regulations.

• Optimize their tax position.

By leveraging the expertise of Bestar, companies can effectively manage their tax obligations and focus on their core business activities.

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