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Guidance on Transfer Pricing Documentation

The routine Transfer Pricing Documentation (‘TPD’) compliance required to be done at the end of the financial year is now taking center stage across jurisdictions. A complete TPD would include a description of supply chain, business models & strategies, value drivers of profit, industry analysis, description of intangibles assets and the related functions, financing arrangements, restructurings within the group and rationale for the same, assumptions behind the rejig of supply chains, commercial factors considered while taking decisions regarding shifting of functions and risks, benchmarking analysis and economic adjustments. This information is of paramount importance to support the arm’s length pricing in respect of related party transactions.

The Holy Trio as per Action Plan 13 of Base Erosion and Profit Shifting project
In the year 2013, the Organization for Economic Co-operation and Development (‘OECD’) and the G20 countries had developed a 15-point Action Plan to address Base Erosion and Profit Shifting (‘BEPS Project’). On 5th October 2015, the final package of the Actions to combat Base Erosion and Profit Shifting was released by the OECD.

One of the Action (Action – 13) pertains to Transfer Pricing Documentation wherein a three-tiered documentation structure was introduced as follows:

Master File
Master File provides an overview of the group business, including the nature of global business operations, overall transfer pricing policies, and global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk.

Local File
Local File provides detailed transactional documentation specific to each country, identifying related party transactions and the arm’s length analysis. The information required in the local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction.

Country-by-Country Report
Country-by-Country Report provides aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the group operates.

Singapore is part of the Inclusive Framework
Singapore is part of the Inclusive Framework (‘IF’) for the global implementation of the BEPS Project. The inclusive framework was proposed by OECD and endorsed by G20 in February 2016. By being part of the IF, Singapore works with other participating jurisdictions to ensure the consistent implementation of measures under the BEPS Project. Singapore supports the key principle underlying the BEPS Project, i.e. the profits should be taxed where the real economic activities generating the profits are performed and where value is created.

Singapore is committed to implementing the four minimum standards under the BEPS Project, one of them being Transfer Pricing Documentation.

Read more about the importance of Transfer Pricing Documentation in Singapore at InCorp Global.