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      As Singapore aims to establish itself as a carbon services and trading hub, the nation is actively promoting the development of credible carbon markets. 

      Carbon credit markets, both voluntary and compliance, are constantly evolving. Ensuring carbon credits are credible and maintaining transparency in their usage can be crucial. Many large businesses have taken a keen interest in this area, which require them to make substantial investments in order to meet their environmental and sustainability goals. With significant funding at stake, transfer pricing challenges are gaining prominence.

      As a continuation to KPMG in Singapore’s whitepaper released in 2022, this whitepaper deep dives into the carbon markets with a focus on transfer pricing. It discusses the possible pricing of internal transactions using core transfer pricing principles and Singapore guidelines, as well as other practical insights.

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      understanding-transfer-pricing-models-of-carbon-markets-in-singapore.pdf

      Understanding transfer pricing models of carbon markets in Singapore

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      Singapore outlook

      Singapore is well-positioned to become a carbon services and trading hub. The nation is a regional hub for commodity trading and financial services, which presents opportunities to co-locate commodity and carbon trading desks and support financing toward decarbonisation.

      Furthermore, as an international aviation and shipping hub, Singapore is an attractive carbon credits trading destination for international sectoral schemes such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

      The Singapore government is also scaling up its efforts to develop an international carbon marketplace and services ecosystem to support international decarbonisation initiatives.   This is evident by IRAS’ recent clarification of goods and services tax (GST) treatment on carbon trading in Singapore in November 2022.

      As the carbon trading landscape grows globally, many MNCs choose to have a centralised carbon trading team. This team is strategically positioned to help identify opportunities for carbon credit optimisation. Many MNCs have set up their regional or global carbon trading desks in Singapore, in view that the nation is enhancing its position as a carbon trading hub. 

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      Transfer pricing principles and carbon trading models

      Trading of carbon credits is still in its growing phase, and MNCs have implemented multiple scenarios for creating and trading carbon credits within and between their group entities.

      Despite the variety of scenarios in the market, the following principles should be applied when considering the internal pricing of carbon trading activity:

      One of the key factors to consider is the ability of the internal carbon trading team to manage core risks related to carbon credits. When mapping the risk-taking abilities between companies within MNCs, companies might need to look wider than just the carbon trading team, the operating company, and the company that generates the offsets. The shareholder element of such investments should also be considered as it could potentially limit losses from carbon trading, investment, or operating companies related to the use of carbon credits. 

      It is the industry practice model for a carbon trading desk to receive a service or brokerage fee when the carbon trading desk’s risk profile is limited. However, the carbon trading desk might not be the only eligible entity for service fees. There are special functions performed within the lifecycle of carbon credits, such as verification, registration, and retirement. These functions may either be executed by the carbon trading desk or elsewhere and should be remunerated accordingly (often with service fees). 

      The structure of the carbon credit fees is closely tied to the industry practices and value chain within each organisation, which require separate analysis. When the charges are implemented without the involvement of the tax department, these principles may be ignored or misinterpreted, and the charges may later be challenged by tax authorities. 

      The optimal tax and transfer pricing models are those which can scale and adapt to the growth of the business and maturing of carbon markets. The models which were considered practical two years ago can now carry substantial tax and transfer pricing risks, because of how the carbon markets have developed and how the legislation has changed. 

      How we can help

      Our tax teams at KPMG in Singapore have helped multiple companies to streamline their carbon trading transfer pricing models, finding a balance between technical argumentation and the practicality of implementation. Reach out to us to discover how KPMG can help optimise tax and transfer pricing models related to carbon trading for your group of companies. 

      Denis Philippov
      Denis Philippov

      Partner, Transfer Pricing

      KPMG in Singapore

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