Transfer pricing refers to the prices at which goods and services are exchanged between companies under common control, typically between entities ultimately controlled by a single parent company. For instance, the price charged by a subsidiary to its parent or sister company for the goods sold or services rendered is known as the transfer price.

Many multinational corporations use transfer pricing to allocate profits among various subsidiaries within their group. They leverage the differences in tax rates and tax systems across different countries or regions to shift profits from high-tax jurisdictions to lower-tax countries or even tax havens, thereby reducing the overall tax burden for the company.

For example, if a company’s manufacturer is in China and its distributor is in Singapore, the Chinese manufacturer can sell to the Singapore distributor at a lower price if the corporate tax rate in Singapore is lower than that in China, thereby shifting profits to Singapore and reducing the tax liability in China, thus reducing the company’s overall tax expense.

Starting from 2019 tax year, the Inland Revenue Authority of Singapore (IRAS) has implemented transfer pricing requirements for related-party transactions. Eligible taxpayers are required to prepare Transfer Pricing Documentation to demonstrate that related-party transactions are conducted at arm’s length.