Transfer Pricing

Why Transfer Pricing?

Globalisation and the growth of international trade has led tax authorities to develop more robust tax regimes focused on protecting their respective countries’ tax derived revenue base. While it was always an important tax issue, more recently, transfer pricing has been revolutionised with the finalisation of the Base Erosion and Profit Shifting (“BEPS”) Action Plans. Four of the fifteen action plans directly address transfer pricing practices. These Action Plans provide the required guidance to ensure that profits are taxed where the real economic activities generating the profits are performed and where value is created. It is essential that a proper application of the transfer pricing rules ensures this outcome. In addition, transfer pricing documentation has been standardized.

The range of transactions that come under this purview includes the pricing of tangible goods, intangible property, services and financial transactions. While transfer pricing typically covers “related party” transactions, it is possible that what is considered to be “related party” may differ from jurisdiction to jurisdiction. It is therefore important to understand each local country’s transfer pricing provisions to ensure that a robust analysis of related party transactions is carried out.

These developments have collectively led to increased scrutiny on transfer pricing matters, both by tax payers as well as tax authorities. Specifically, a recent survey noted that transfer pricing has entered an era of heightened tax risk and controversy, driven by an exponential increase in the demand for tax related transparency. As a result of the Action Plan 13, companies are forced to share significantly more details regarding their operating data and tax strategies, both publicly and in materials made available to tax authorities.

Arm’s Length Principle – the fundamental concept of transfer pricing

The basis of transfer pricing rests on the arm’s length standard, which is an international standard that OECD member countries have agreed for determining transfer prices for tax purposes. Historically, the arm’s length standard merely required that the commercial and financial relations governing related party transactions were identical/ similar to the commercial and financial relations governing third party transactions. However, under Action Plan 8 – 10, this definition has been expanded to include concepts of commercial rationality, to address the issue around morality of taxation. Specifically, under the expanded definition of arm’s length standard, it is possible for tax authorities to reconstruct related party transactions to the extent that the form of the transaction is different from the substance of the transaction. In addition, where the arrangements made in relation to the transaction, viewed in their totality, differ from those that would have been adopted by independent enterprises behaving in a commercially rational manner, and the actual structure practically impedes the tax administration from determining an appropriate transfer price, tax authorities may also argue that such transactions do not conform with the arm’s length principle.

Thus, tax authorities do not merely stop at a comparison of prices/ profits in reviewing intercompany transactions, but they also require that taxpayers are able to demonstrate that third parties would have entered into similar transactions. This will raise the scrutiny around how transactions are structured.


IRAS Transfer Pricing Guidelines, 5th Edition.

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OECD Transfer Pricing Guidelines, 2017

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For more information on Transfer pricing

Please refer to the IRAS