Managing transfer pricing risks

IN RECENT years, transfer pricing has become increasingly relevant to the fund management industry as it is not uncommon for fund managers to sub-contract part of the value chain to associated enterprises located in other jurisdictions. As tax authorities seek to establish increasingly stringent transfer pricing compliance requirements to promote greater transparency and a more equitable share of the global tax pie, corporate citizens with an international footprint - including fund managers - find themselves facing a new set of challenges.

By definition, transfer pricing refers to the pricing of goods, services and intangibles transferred between entities belonging to the same business group (related parties) with a mandate that the pricing be at arm's length. The arm's length principle posits that transactions with a related party should reflect the true economic value of the contributions made by each party to that transaction. As an international business and financial hub for multinational corporations, Singapore prescribes to the international standard of this principle to guide transfer pricing.

Singapore is regarded as one of the most appealing jurisdictions for fund managers to operate, owing to its conducive business environment as well as regulatory and tax regimes. In addition to the bevy of tax incentives available to fund managers, the Singapore government recently launched the Variable Capital Company (VCC) that offers increased operational flexibility compared to the existing investment fund structures. This being said, fund managers intending to set up office in Singapore should first establish a proper transfer pricing framework ensuring that all related-party arrangements conform to the arm's length principle.