Managing TP Risk: From Compliance to Defence

As Transfer Pricing (“TP”) enforcement by the Inland Revenue Authority of Singapore (“IRAS”) continues to evolve, companies face not only compliance requirements but also the need to effectively defend their positions under scrutiny. At RSM Singapore, we help clients in addressing potential TP challenges at an early stage, often resolving issues before they escalate into formal audits or require prolonged follow-ups.

The following examples illustrate how a focused, strategic approach can make a tangible difference.

Case Study 1: Management Fee Income  

A Singapore-based company received queries from IRAS regarding its management fee income. IRAS requested the company to furnish, among others, its TP policy, relevant agreements, and the basis for charging its various subsidiaries.

Service fee income is an area that is commonly overlooked as many companies tend to focus primarily on whether the mark-up percentage aligns with benchmarking results, without fully considering whether the appropriate compensation is being received from the correct entities. 

The company’s management was also operating under a common misconception, that all its subsidiaries were served uniformly across the board. However, upon closer review, certain activities were identified as shareholder functions rather than operational services. 

Without a precise functional and TP analysis, companies risk exposure to TP adjustments and surcharge as may be unable to clearly explain their operations and underlying TP mechanisms.

In anticipation of IRAS’ key focus, whether all costs were appropriately charged and whether the Singapore entity was sufficiently remunerated, the company required our assistance to prepare a comprehensive analysis ahead of further queries. This included:

• Ensuring all costs were appropriately allocated and charged to the correct entities, with reasonable mark-ups;
• Identifying subsidiaries which did not require services from the Singapore entity (as they had their own teams) and therefore should not be charged;
• Clearly documenting the distinction between shareholder oversight and service delivery. 

By addressing these areas proactively and providing clear, evidence-based explanations, IRAS’ queries were more like to be resolved early, avoiding prolonged follow-ups and multiple rounds of review. 

Key insight: Service fee income requires careful scrutiny beyond mark-up percentages. Early, proactive analysis of roles, functions, and cost allocation can prevent misunderstandings and facilitate efficient resolution of queries. 

Case Study 2: Engineering Support Services

A Singapore-based company in the engineering sector received queries from IRAS regarding a cost-plus service arrangement where losses were reported in certain years. The company had previously been advised to make a voluntary TP adjustment (together with corresponding penalties). 

With our support, the company revisited the years under review and identified special events or operational changes that explained the financial outcomes. A key finding during the period in question was that the company had planned to expand into a new market and had hired additional engineers in anticipation of this growth. However, the market did not develop as expected, resulting in under-utilised capacity.

Based on these findings, the company was able to demonstrate that its existing TP policy remained at arm’s length, as the reported losses were primarily attributable to temporary excess capacity rather than pricing issues. It was also explained to IRAS that services are remunerated only when rendered, and idle capacity does not automatically generate revenue.

Understanding the commercial realities underpinning transactions is crucial. By leveraging existing TP documentation, benchmarking, and a targeted review approach, unnecessary additional data requests were avoided while effectively defending the company’s TP position. As a result, the voluntary TP adjustment was no longer required. 

Through this proactive and strategic approach, the company successfully resolved IRAS’ queries without prolonged follow-ups, multiple review cycles, or potential penalties.

Key insight: Early-stage, pragmatic engagement enables companies to address regulatory queries efficiently, minimise administrative burden and preserve business focus.

Key Takeaways

These examples demonstrate how early-stage, proactive engagement can make a meaningful difference in managing TP queries raised by IRAS. By anticipating potential concerns, conducting detailed functional and commercial analyses, and providing clear, evidence-based explanations, companies can resolve IRAS questions efficiently, avoiding prolonged follow-ups, repeated reviews, or penalties.

At RSM Singapore, our TP team combines compliance, advisory, and early-stage audit defence expertise to help clients turn potential challenges into early wins, mitigating risk, reducing administrative effort, and ensuring efficient resolution. Even small or preliminary TP queries can be effectively managed with a defence-oriented mindset, protecting both the company’s tax position and operational resources while preventing unnecessary escalation.

Early, strategic intervention not only resolves issues efficiently but also reduces administrative burden, allowing businesses to focus on their core operations while maintaining robust TP compliance.