Week 8 Flashcards
What should a firm do in order to be able to
claim a tax deduction on the intragroup services?
The management fee charged by the charger to chargee is generally deductible if the services can be identified, the recipient of the service receives a benefit and the fee is reasonable and appropriate based on the actual cost charged out by the charger. Furthermore, there must be a direct benefit to chargee to receive a deduction.
The chargee needs to :
1. Show that activities are chargeable services
2. Justify the services received from the charger provide a benefit to the chargee
3. Service charge is properly setup through identification of cost incurred to provide these services.
To determine whether a related party services has been provided, the chargee can apply the “benefits test” to the facts and circumstances pertaining to their activities. The factors to address the benefit test are as follows :
- Material or expected benefits for the recipient
- Commercial or practical necessity as opposed to incidental
- Benefit has an economic or commercial value
- Benefit is direct and substantial
How should the service charge be determined for intragroup services?
When establishing a related party service, the chargee should determine the appropriate charge for the service provided based on arm’s length principle.
a) Comparability analysis
b) Appropriate TP method
c) Determine arm’s length result
(i) Cost base: either direct or indirect method to determine the cost incurred in providing the services
(ii) Markup. Whether services are routine support services or non - routine services as the markup depends on the type of services provided.
Routine services do not have a significant arm’s length markup. As an administrative practice in Singapore, IRAS allow a 5% cost markup for certain routine services as a reasonable arm’s length charge if these conditions are met:
(i) Routine support services falls within Annex C of the TPG
(ii) Service provider does not offer the same routine support services to unrelated party and
(iii) All cost, direct and indirect operating cost relating to routine support services performed are taken into account in computing 5% markup.
All the above services fall within Annex C, except for marketing and advertising services.
Therefore, the following service charge can be determined at 5% markup on total cost.
- IT support
- HR support
- Finance
- Accounting
- Administration support
- Legal support
The chargee should use a different markup to determine the arm’s length price for marketing and advertising services as they do not fall with the definition of routine support services.
What are the conditions for the group service provider to charge cost under pass-through cost?
Group service provider can consider pass-through cost whereby the cost of the acquired services is passed to its related parties without a markup if the following conditions are met:
- Acquired services are for the benefit of the related parties
- Acquired services have been charged at arm’s length
- Group service provider is merely the paying agent and does not enhance the value of the acquired services
- There is a written agreement with its related parties for them to assume the liabilities relating to the acquired services
(a) Explain to X Pte Ltd the options available to determine the interest rates for its loans to
Malaysia and Indonesia subsidiary
(b) X Pte Ltd also wants to know if it is required to prepare TP documentation for YA2020 for
loan to the subsidiaries.
(a)
X Pte Ltd has to set the interest rate by determining the base rate plus margin. To determine the margin, it can use either internal data, indicative interest margin or external data.
For internal data, X Pte Ltd has the following options to determine the interest rate:
(i) Interest rate that X Pte Ltd charge to a 3rd party for the loan or
(ii) Interest rate charged by 3rd party bank for similar type of loans to the subsidiaries located in Malaysia and Indonesia; or
(iii) Interest rate charge by the 3rd party bank for the loan received.
For the indicative interest margin, X Pte Ltd can apply the indicative margin as the total loan provided to Malaysia and Indonesia respectively is below SG$15million each.
For external data, X Pte Ltd will have to perform a benchmarking analysis. Given that indicative
margin and internal data are available, X Pte Ltd is not required to obtain external data.
(b)
If X Pte Ltd adopt the indicative margin to determine the arm’s length interest rate for the
intercompany loan provided to Malaysia and Indonesia subsidiary, then X Pte Ltd is not required to prepare TP documentation for YA2020.
If X Pte Ltd did not adopt the indicative margin, it will have to prepare TPD as the total value of the loans exceed SG$15million assuming X Pte Ltd gross trade revenue exceed SG$10million annually.
What type of entities are there? Eg. Trader/Distributor
- Service Entity
- Agent
- Marketer
- Distributor
- Full Fledged Trader
What is the CUP TP method for commodities? What is the challenges of such method?
Quoted prices from transparent market or prices in available comparable independent party transactions transactions can be used as a reference for establishing arm’s length prices for the related party commodity transaction. The relevant characteristics of the controlled transactions and independent transactions need to be comparable in terms of physical features, quality, volume traded, terms of delivery etc.
Challenges
1. Difficult to pin point the specific price that is at
arm’s length
2. Commodity transactions are usually confidential and information is not publicly available
3. Complex inter company transactions and value chain may not result in the appropriate use of such TP method.
What is RP TP method for commodities? What is the challenges of such method?
RP method is used for distributor function entity when there is market evidence of independent parties performing comparable operations which are also similarly remunerated on percentage discount from sales price.
Challenges
Difficulty in using this method if there are material differences that affects the gross margin earned between related and independent party transactions.
What is Cost Plus TP method for commodities? What is the challenges of such method?
Used for contract manufacturing function entity where activities do not require significant specialized expertise, risk assumption or risk control functions to the transactions.
Challenge
Reliability will be reduced if transaction involves significant value, including decision making capacity, assume risk or risk control functions.
What is Profit Split TP method for commodities?
Used for trader function entity where its appropriate for:
Appropriate where :
1. Commodity transactions are highly inter-related and integrated
2. Makes unique and valuable contributions to the related party transactions
3. Existence of unique intangible assets makes it difficult to find reliable comparable
4. Share one or more of the economically significant risk together.
What is TMNN TP method for commodities? What is the challenges of such method?
TNMM with OM as PLI:
Appropriate where sales is a relevant indicator,
Arm’s length OM may be based on comparable independent party transactions
Not suitable in a complex functional analysis and difficult to identify reliable comparable or requires extensive adjustments to comparable
TNMM with Berry Ratio as PLI
Berry ratio measures gross profits to operating expenses.
For distributors where no further value is being added to the products
Unsuitable for use when entity’s cost if influence by internal functions like substantial amount required to modify commodity to market.
TNMM with return on assets as PLI
More appropriate for contract manufacturing where transactions involve substantial assets being deployed
What is the difference between Entrepreneur(HQ) and Centralised Service Provider?
HQ operate on behalf of other entities and perform significant function. HQ is responsible for these entities’ performance and make key decisions for these entities while assuming significant risk.
Centralised service provider is opposite and only perform low value centralised activities.
