A doctor may consider using either one of the following methods to determine if there has been an arm’s length attribution of income/profit between the company and himself/herself:
Option 1: Market Salary Benchmarking – remunerating the doctor based on his/her contributions
Market Salary Benchmarking attempts to determine the due amount of remuneration that doctors should be paid using available comparables. Factors taken into consideration include:
(i) Area of expertise and specialisation
(ii) Years of experience
(iii) Roles and duties performed
(iv) Availability of similar specialist services in the market and remuneration for such services
The doctor who incorporates his/her own company typically performs a combination of roles in the company. Other than working as a medical practitioner, he/she may also provide stewardship as a director, perform marketing and networking duties, lend his/her reputation to the business etc. The doctor/owner is to be remunerated for each of these roles. It may be difficult to attribute a value to each of these areas, especially for specialists with unique profiles in terms of their specialization, level of expertise, experience and reputation. Hence alternative methods may be considered.
Option 2: Cost Plus Method – attributing profits to the company based on its value-add
As a result of the difficulties ascertaining the market salary benchmark for doctor/owners, an alternative used is the cost-plus method, to be applied on the company. It is derived from transfer pricing methodology, a tax concept conventionally used to determine arm’s length pricing between related parties.
The cost-plus method is applied where the company provides support services only to related parties, such as doctors practicing in corporatized medical practice which they own and have control of.
In such medical practices, the company provides support functions such as management services, technical support services, administrative support, and customer support to facilitate the provision of medical services by the doctor in exchange for a fee. For specialists in particular, the value of the business lies largely in their personal skills and reputation. A percentage mark-up is applied to the company’s cost base to determine the company’s share of profit based on its value-add to the business i.e. the company’s remuneration for the support services provided to the business. The remaining profits are attributed to the doctor (cum owner) for his/her contributions.
The following framework serves as a general guide to the amount of mark-up that can be applied to the cost base to determine the company’s share of the profits. While the recommended guidelines have been derived from industry benchmarks, IRAS will accept other justifiable mark-up margins or basis of apportionment:
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Categories
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Specialist services
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Dental services/General practitioner ("GP") services
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|---|---|---|
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% Mark-up
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10%
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15%
|
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Explanation
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Production of income relies wholly on the owner doctor(s).
Primarily derived from the provision of one's personal services. Company provides some routine support services. |
Production of income may not be wholly reliant on the owner doctor.
Company provides relatively more value add in the production of income e.g. inventory management for the clinics, management of a few clinic premises and some assets. |
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