Generally, IRAS requires companies to charge an appropriate arm's length fee for related party transactions.
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Types of Service Arrangements
A service company in this section refers to a company that renders services to its related parties. The types of services that the service company may provide include:
- Management services
- Technical support services
- Procurement
- Administrative support services
- Customer support services
Generally, a service company may provide services to its related parties:
- For free
- At cost
- At arm's length prices (i.e. the price that would have been charged if the service company had been an independent third party)
- At non-arm's length prices
Services Provided for Free, at Cost or at Non-Arm’s Length Prices
IRAS endorses the arm's length principle as it ensures that prices on transactions with related parties reflect the true economic value of the transactions. Learn more about the arm's length principle (PDF, 1.6MB).
Where your service company provides services for free, at cost or at non-arm's length prices to related parties (e.g. at a rate lower than the industry norm), IRAS requires that the arm’s length prices for the services be determined and used for computing the profit from the rendering of the services.
Services Provided at Arm’s Length Prices
Where your service company provides services to related parties on an arm's length basis, IRAS will accept the fees charged and not make transfer pricing adjustments on the transaction.
5% Cost Mark-Up for Certain Routine Support Services
It is common for parent companies or group service companies to provide certain routine support services to related parties. Strictly, your company should perform a proper transfer pricing analysis to determine the arm's length price for providing such services.
To ease companies’ compliance burden, IRAS is prepared to accept a 5% mark-up on costs as a reasonable arm’s length charge for certain routine support services, if the following conditions are satisfied:
- The routine support services fall within Annex C of the e-Tax Guide on Transfer Pricing Guidelines (PDF, 1.6MB);
- Your service company does not offer the same services to an unrelated party; and
- All costs, including direct, indirect and operating costs, relating to the routine support services performed are taken into account in computing the 5% mark-up.
Your service company may also adopt a mark-up that is different from 5% if you are able to demonstrate that this is the arm's length charge for the routine support services. In this regard, you should:
- Support your basis with a detailed transfer pricing analysis
- Apply the mark-up consistently year-after-year throughout the group until there are material changes to the circumstances or services provided
- Review the mark-up regularly to ensure that it continues to reflect arm's length conditions
Basis of Assessment
‘Normal Trading Company’ Basis of Assessment
The assessment of your service company does not differ from that of other companies. Its chargeable income is ascertained after detailed examination of its accounts and tax computation in accordance with the provisions of the Income Tax Act 1947. This basis of assessment is commonly known as the ‘normal trading company’ basis of assessment (‘NTC basis’).
To arrive at the income chargeable to tax, your company must make the following tax adjustments:
- Deduct income that is not taxable
- Add back disallowed expenses
- Deduct capital allowances, losses and donations
- Claim deduction under the Corporate Volunteer Scheme (CVS)
Learn more about tax adjustments.
Example: Using the NTC Basis
| Profit and loss account for the year ended 31 Dec 2020 | ($) | ($) |
|---|---|---|
| Service revenue | 50,000 | |
| Wage credit scheme | 200 | |
| Operating expenses | ||
| Audit, accounting and secretarial fee | 30,000 | |
| Bank charges | 100 | |
| Depreciation | 32,000 | |
| Foreign exchange gain | (4,000) | |
| Salaries, CPF and bonus | 870,000 | |
| Rental expenses | 50,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | |
| Transport expenses | 18,900 | |
| Total operating expenses | 1,000,000 | |
| Expenses reimbursed | (1,000,000) | 0 |
| Net profit before tax | 50,200 |
| Year of Assessment (YA) 2021 Tax Computation under the NTC basis | ($) | ($) |
|---|---|---|
| Net profit as per accounts | 50,200 | |
| Add: Depreciation | 32,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | 35,000 |
| Adjusted profit | 85,200 | |
| Less: Capital allowances | ||
| Section 19A | (35,000) | |
| Balancing Charge | 2,000 | (33,000) |
| Chargeable income before exempt amount | 52,200 | |
| Less: Exempt amount | (28,600) | |
| Chargeable income after exempt amount | 23,600 | |
| Tax @ 17% | 4,012.00 |
'Cost Plus Mark-Up’ Basis of Assessment
To adopt the ‘cost plus mark-up’ basis of assessment (‘CM basis’), your service company must:
- Provide routine support services as listed in Annex C of the e-Tax Guide on Transfer Pricing Guidelines (PDF, 1.6MB) to its related parties only; and
- Adopt a 5% mark-up on costs as the arm’s length charge for the routine support services provided.
IRAS is prepared to allow the adoption of the CM basis, in lieu of the ‘normal trading company’ basis of assessment (‘NTC basis’), for your service company on the assumption that its business is simple and its expenses are typically operating expenses of a revenue nature. Hence, no major tax adjustments are expected to be made to its tax computation.
Where the CM basis is adopted, the chargeable income is computed based on a 5% mark-up on the total cost incurred by your service company. The total cost is the amount (before offsetting revenue grants received, if any) as shown in the profit and loss account and as determined according to the Singapore Financial Reporting Standards, without further adjustments.
In adopting the CM basis, your service company is also not able to make tax claims (e.g. double or further tax deductions, capital allowances, losses, donations, deduction under the Business and IPC Partnership scheme and foreign tax credit), as the chargeable income of your company determined under the CM basis is already net of all available deductions, allowances and tax credits.
Example: Using the CM Basis
| Profit and loss account for the year ended 31 Dec 2020 | ($) | ($) |
|---|---|---|
| Service revenue | 50,000 | |
| Wage credit scheme | 200 | |
| Operating expenses | ||
| Audit, accounting and secretarial fee | 30,000 | |
| Bank charges | 100 | |
| Depreciation | 32,000 | |
| Foreign exchange gain | (4,000) | |
| Salaries, CPF and bonus | 870,000 | |
| Rental expenses | 50,000 | |
| Gain on disposal of fixed assets | (2,000) | |
| Provision for leave | 5,000 | |
| Transport expenses | 18,900 | |
| Total operating expenses | 1,000,000 | |
| Expenses reimbursed | (1,000,000) | 0 |
| Net profit before tax | 50,200 |
| Year of Assessment (YA) 2021 Tax Computation under the CM basis | ($) |
|---|---|
| Service income | 50,000 |
| Wage credit scheme | 200 |
| Chargeable income before exempt amount | 50,200 |
| Less: Exempt amount | (27,600) |
| Chargeable income after exempt amount | 22,600 |
| Tax @ 17% | 3,842.00 |
Transition out of the ‘Cost Plus Mark-Up’ Basis of Assessment
If your service company does not qualify for the CM basis but has been adopting the CM basis, you have to transit to the NTC basis latest by YA 2020.
If your service company qualifies for the CM basis but seeks to make tax adjustments and tax claims, you should also transit to the NTC basis.
Companies transiting to the NTC basis should apply these transition rules in the transition YA:
| Tax item | Tax treatment in the transition YA and after |
|---|---|
| Section 14N deduction for renovation or refurbishment expenditure incurred prior to the transition YA. |
|
| Capital allowances on qualifying plant and machinery acquired prior to the transition YA. |
|
| General provisions (e.g. provision for staff leave) made prior to the transition YA. | The general tax treatment applies to provisions utilised and provisions written back to the accounts in the transition YA or after. This means that provisions utilised are allowed deduction and provisions written back are not taxed. |
Specific provisions made prior to the transition YA such as:
| No tax adjustment is made on provisions utilised and provisions written back to the accounts in the transition YA or after. This means that the provisions utilised are not allowed deduction and provision written back are taxed, as the provisions are considered to have been claimed in the year the provisions were made. |
| PIC claim brought forward and unutilised donation. | There should be no PIC claim brought forward or unutilised donation because under the CM basis, chargeable income computed based on 5% mark-up on total cost is taken to be net of all available deductions, allowances and tax credit. |
FAQs
If my service company provides non-routine support services to its related companies and it imputes a profit on the costs, can my service company still rely on the ‘cost plus mark-up’ basis of assessment (‘CM basis’), or does it have to switch to the ‘normal trading company’ basis of assessment (‘NTC basis’)?
As the services provided are non-routine support services, your service company falls outside the scope of the CM basis. It has to transit to the NTC basis, latest by the Year of Assessment (YA) 2020.
Can my investment holding company that also provides routine support services (as per Annex C of the e-Tax Guide on Transfer Pricing Guidelines) to its related parties only remain on the CM basis?
Your investment holding company has to transit to the NTC basis, latest by YA 2020. The CM basis is only applicable to a service company that provides routine support services (Annex C of the e-Tax Guide on Transfer Pricing Guidelines (PDF, 1.6MB)) to its related parties only.
Is the CM basis available to my service company that uses a percentage cost mark-up other than 5% (but still within arm’s length range) as the basis of charge for routine support services listed in Annex C of the e-Tax Guide on Transfer Pricing Guidelines?
No. Your service company falls outside the scope of the CM basis as the basis is only applicable to a service company that adopts a 5% mark-up on costs as the arm’s length charge for the routine support services. In this instance, it has to adopt the NTC basis.
In a situation where 1 of the service recipients ceases to be a related party, will my service company under the CM basis be allowed to remain on the CM basis in the YA where the said service recipient ceases to be a related party?
Your service company can remain on the CM basis in the YA the service recipient ceases to be a related party. Thereafter, the CM basis will not apply as your service company is no longer providing routine support services to only its related parties.
How should my service company under the CM basis determine taxes on its revenue grants?
The revenue grants must be added to the 5% mark-up on total cost of providing the services to form part of the chargeable income of your service company.
Can my service company under the CM basis claim loss items transferred under the Group Relief system?
Yes, your service company under the CM basis can claim loss items transferred under the Group Relief system. Learn more about the conditions, rules and administrative procedures under the Group Relief system (PDF, 886KB).