TRANSFER PRICING SERVICE

Is your company ready for transfer pricing audit?

The Finance Act 2020 which has been gazetted on 31 December 2020 and effective 1 January 2021, introduced several new provisions that seek to strengthen the transfer pricing compliance amongst taxpayers in Malaysia.

Failure to Furnish Contemporaneous Transfer Pricing Documentation

Effective 1 January 2021, a new Section 113B was introduced into the Malaysian Income Tax Act (“the Act”), setting out the penalty for failure to furnish contemporaneous transfer pricing documentation.

  • On conviction: Fine of MYR 20,000 – MYR 100,000 or imprisonment of up to 6 months. Taxpayers are required to furnish transfer pricing documentation within 30 days, or a period decided by the court;
  • No prosecution: Fine of MYR 20,000 – MYR 100,000.

This change is effective for transfer pricing audits which commence from 1 January 2021 for the open years of assessment (the statute of limitation is 7 years for transfer pricing). This new punitive provision is a premiere in relation to transfer pricing documentation compliance. In the past, there were no specific penalty provisions imposed on taxpayers for failure to furnish transfer pricing documentation.

HEFTY PENALTY FOR NON-COMPLIANCE . . .

Shortened Timeframe for Submission of Contemporaneous Transfer Pricing Documentation

The Malaysian Transfer Pricing Guidelines have been updated to reflect that the transfer pricing docu­men­tation needs to be made available to the Malaysian tax authorities within 14 days from the date of request. Prior to 1 January 2021, taxpayers had 30 days to submit their transfer pricing documentation upon request from the Malaysian tax authorities.

This applies to transfer pricing audits that commence from 1 January 2021 for the open years of assessment.

Taxpayers who fail to submit the transfer pricing documentation within this shortened timeframe will be subject to the new penalty provisions under Section 113B of the Act.

ONLY 14 DAYS TO SUBMIT TP DOCUMENT . . .

Power to Disregard Structure in a Controlled Transaction

Prior to 1 January 2021, the Director General of Income Tax (“DGIR”) merely had the power to substitute the pricing of controlled transactions without explicitly giving the DG the power to disregard a structure.

With effect from 1 January 2021, Section 140A(3A) & (3B) has been introduced into the Act, giving the DGIR the power to disregard and re-characterize structures adopted by a person if the economic substance of that transaction differs from its form, or the form and substance of that transaction are the same, but the arrange­ment made in relation to the transaction, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price.

DGIR POWER TO OVERRIDE . . .

Surcharge on Transfer Pricing Adjustments

Prior to 1 January 2021, taxpayers were only subject to penalties for transfer pricing adjustments if the adjustment resulted in additional tax payable.

Effective 1 January 2021, with the introduction of Section 140A(3C) into the Act, the DGIR may impose a sur­charge of 5 percent (5%) on any transfer pricing adjustment regardless of whether it results in additional tax. On top of it, the DGIR may impose penalty:

  • If there is no contemporaneous transfer pricing documentation: 50% penalty
  • If transfer pricing documentation is prepared, but not according to the guidelines: 30% penalty

The application of this surcharge would have an impact on taxpayers with business losses or tax incentives, as they may previously not have been subject to any penalty for a transfer pricing adjustment.

MORE PENALTY TO COME . . .

IS YOUR COMPANY REQUIRED TO PREPARE TRANSFER PRICING DOCUMENTATION?

Referring to the Income Tax (Transfer Pricing) Rules 2012 and Transfer Pricing Guidelines 2012, a person who undertakes related party transactions domestically and across borders exceeding the thresgold should prepare contemporaneous transfer pricing documentation.

FINANCIAL THRESHOLD

  • Taxpayers carrying out businesses with a gross income of more than RM25 million, and a total amount of related party transactions of more than RM15 million; and
  • For taxpayers providing financial assistance, where such financial assistance is more than RM50 million. Transactions involving financial institutions are excluded.

YES

Prepare Full Transfer Pricing Documentation

NO

Prepare Limited Transfer Pricing Documentation

WHAT IS CONSIDERED RELATED PARTY TRANSACTIONS?

Related Party Transactions cover a very broad aspects in business. Generally here are some common transactions which most of the companies would encounter:

Transactions between related companies include:

Sales to related companies

Purchases from related companies

Other payments to related companies

Loans to/from related companies

Receipts from related companies

WHAT IS TRANSFER PRICING DOCUMENTATION ?

Malaysia has well-defined and extensive transfer pricing documentation requirements. Transfer pricing documentation should include records and documents describing:

The organizational structure, including an organization chart covering persons involved in a controlled transaction.

The nature of the business or industry and market conditions.

The controlled transaction.

Strategies, assumptions and information regarding factors that influenced the setting of any pricing policies.

Comparability, functional and risk analysis.

Selection of the transfer pricing method.

Application of the transfer pricing method.

Documents used in developing the transfer pricing analysis.

Index to documents.

Any other information, data or document considered relevant by the person to determine an arm’s-length price.

It is not required to submit transfer pricing documentation when filing a tax return. However, the documentation must be made available to the IRB within 14 days upon request. It is required to keep the documentation in the administration for a period of 7 years.

MASTER FILE & LOCAL FILE?

Malaysia has introduced the OECD three-tiered approach on transfer pricing documentation. Taxpayers that are to prepare the Country-by-Country Report (see below) have to also prepare a Master File and submit it together with regular transfer pricing documentation upon request by the IRB. The requirements to the Master File are very similar to those prescribed by the OECD in Action 13. There is no requirement to prepare a Local File in addition to the general transfer pricing documentation requirements.

Country-by-Country Reporting

Malaysia introduced Country-by-Country Reporting (CbCR) with effect as of 1 January 2017. CbCR applies to MNEs that meet the following requirements:

Any of the constituent entities of the MNE group have cross-border operations with its other constituent entities.

The consolidated revenue of the MNE group is at least RM3 billion in the financial year (FY) preceding the reporting FY.

The ultimate holding company of the MNE group is incorporated under the Malaysian Companies Act 1965 or under any written law, and it is resident in Malaysia.

Its constituent entities are incorporated or registered under the Companies Act 1965 or under any written law or under the laws of a territory outside Malaysia, and resident in Malaysia, including Labuan

Any constituent entity of an MNE group that is resident in Malaysia must notify the IRB in writing if it is the ultimate holding entity or the surrogate holding entity, on or before the last day of the reporting financial year. Where a constituent entity is not the reporting entity, it must notify the IRB of the identity and tax residence of the reporting entity, also on or before the last day of the reporting financial year.

FAQs on Transfer Pricing

Arm’s length price is the price which would have been determined if such transactions were made between independent entities under the same or similar circumstances.

In essence, the application of the arm`s length principle:

  1. treats associated persons as not dealing at arm`s length and as if they operate as separate entities rather than as inseparable parts of a single unified business; and
  2. is generally based on a comparison of:
    • prices, margins, division of profits or other indicators of controlled transactions; with
    • prices, margins, division of profits or other indicators of uncontrolled transactions.
  1. Comparable uncontrolled price method
  2. Resale price method
  3. Cost plus method
  4. Profit split method
  5. Transactional net margin method

It is advised that methods (4) and (5), commonly referred to as “transactional profit methods”, be used only when (1) to (3) traditional transactional methods cannot be reliably applied or exceptionally cannot be applied at all.

A transfer pricing documentation is deemed “contemporaneous” if it is prepared:-

  1. at the point when the taxpayer is developing or implementing any arrangement or transfer pricing policy with its affiliates; and
  2. if there are material changes when reviewing these arrangements prior to, or at the time of, preparing the relevant tax return for the basis year for a year of assessment.

Material changes are significant changes that would give impact to the functional analysis or transfer pricing analysis of the tested party. Material changes include changes to the operational and economic conditions that will significantly affect the controlled transaction under consideration.

Benchmarking analysis should be carried out afresh every three (3) years and an update of such benchmarking analysis should be conducted every year, provided the operational conditions remain unchanged.

Section 140A of the Income Tax Act, 1967 empowers the DGIR to disregard and recharacterise any structure adopted by a person in a controlled transaction if:

  • the economic substance of the transaction differs from its form; or
  • the form and substance are the same, but the arrangement when in totality, differs from those that would have been adopted by independent persons behaving in a commercially rational manner, and the actual structure impedes the DGIR from determining an appropriate transfer price.

Accordingly, the DGIR is empowered to make adjustments to the structure of that transaction that would be reflective of the arm’s-length principle, having regard to the economic and commercial reality.

We can assist you in reviewing related party transactions to assess the risks associated with the level of documentation within the company and the pricing basis between the related parties, as ad-hoc services if required by you.

Do you want to be sure about your transfer pricing compliance in Malaysia?

Call us today! Our transfer pricing consulting team will assist you to evaluate your company’s transfer pricing risk.

Our services include:

Preparation of transfer pricing Documents in compliance with section 140A of ITA and Transfer Pricing Rules 2012

Preparation of Master File and Local File

Preperation and submission of Country-by-Country Reports (CbCR)

Intercompany Transfer Pricing Policy development

Intra-group services and agreeements

Risk assessment and agreements

Cost allocation techniques