The arm's length principle is the international standard that governs how transactions between related parties are priced for tax purposes. It requires that the terms and pricing of dealings between associated entities – for example, a Singapore company and its overseas parent or subsidiary – be consistent with what independent parties would have agreed under comparable circumstances.
The principle exists to prevent profit from being shifted artificially between related entities (and often between jurisdictions with different tax rates) through non-commercial pricing. In Singapore it is given legal force by Section 34D of the Income Tax Act and is elaborated in IRAS's Transfer Pricing Guidelines, which follow the OECD approach.
In practice, applying the principle means selecting an appropriate transfer pricing method (such as the comparable uncontrolled price, cost plus, resale price, transactional net margin or profit split method), and benchmarking your related-party pricing against comparable independent transactions or companies. Where pricing is not at arm's length, IRAS can make transfer pricing adjustments and impose a surcharge.
Apexia can help you apply the arm's length principle to your related-party dealings and support it with proper analysis and documentation.