In management accounting, transfer pricing is a topic which addresses the issues with regard to determining a price for the transfer of goods and services between two divisions in a decentralised set-up.
In taxation, transfer pricing relates to the following areas:-
- When entity A sells goods on credit to entity B and the receivable remains outstanding beyond the normal credit term – Entity A may be deemed to have provided interest-free funding to entity B.
- Entity A and entity B are related. Entity B uses entity A’s accounts department as its accounting resource. How much should entity A charge entity B? IRAS is prepared to accept a 5% mark-up on the basis that this has been a practice commonly adopted by related party service providers in Singapore as remuneration for providing routine support services. Other mark ups are acceptable. subject to arm’s length principle.
- In the third situation, entity A and entity B are utilising a service provided in a cost pooling arrangement. Issue here is the way the costs are allocated between the entities.