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Introduction to Transfer Pricing in Malaysia
Transfer Price refers to intercompany pricing agreements for the transfer of goods, services, and intangibles between affiliated individuals, according to Malaysia Transfer Pricing Guidelines (‘the Guidelines’) established in 2012. In an ideal world, the transfer price would be the same as the current market value that would be reflected in a transaction between independent parties.
Business transactions between associated persons, on the other hand, may not always reflect market forces. The Guidelines are largely based on the arm’s length principle, as defined by the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.
Transfer Pricing Documentation: Local File
Taxpayers who engage in regulated transactions are often required to keep track of their transfer pricing documentation in real-time. This includes taxpayers who are involved in domestic regulated transactions in which at least one party receives tax benefits, suffers continuous losses, or is taxed at a different rate, and the outcome of the transaction results in adjustments that change the total tax payable.
Documentation should be ready by the time of filing the tax return (seven months after the end of the financial year).
- The annual Return Forms do not need the submission of Transfer Pricing Documentation. The documentation must, however, be made available within 30 days after the Inland Revenue Board of Malaysia’s (‘IRBM’) request. With the introduction of Section 113B (effective 1 January 2021) of the Income Tax Act 1967, the Transfer Pricing Documentation should be made available within 14 days upon request by the IRBM. This requirement will apply to transfer pricing audit cases that have commenced on or after 1 January 2021.
- The Guidelines allows taxpayers to opt to prepare limited documentation if they fall below the following thresholds*:
- Gross revenue in excess of RM25 million, and total related party transactions in excess of RM15 million.
- The threshold for financial support is RM50 million.
Country-by-Country Reporting (‘CbCR’)
Malaysia’s Income Tax (Country-by-Country Reporting) Rules 2016 (‘CbC Rules’) were published on 23 December 2016. These regulations took effect on 1 January 2017. The Labuan Business Activity Tax (Country-by-Country Reporting) Regulations (‘Labuan CbC Rules’) were then gazetted on 26 December 2017.
The CbC Rules require Malaysian multinational corporation groups with total consolidated group revenues of RM3 billion and above in the financial year preceding the reporting financial year (i.e. financial year commencing on or after 1 January 2017) to prepare and submit CbCR to IRBM no later than 12 months after the close of each financial year.
With respect to each jurisdiction in which the multinational Group operates, the CbCR requires aggregate tax jurisdiction-wide information relating to
- the global allocation of revenue,
- profit or loss before income tax,
- income tax paid,
- income tax accrued,
- stated capital and accumulated earnings,
- the number of employees and tangible assets other than cash or cash equivalents.
The CbCR also requires a listing of all the constituent entities (including permanent establishments) for which financial information is reported, including the tax jurisdiction of incorporation (if different from the tax jurisdiction of residence), and the nature of the constituent entity’s primary business activities.
A corporation, enterprise, or entity with a permanent establishment in a country must report the financial statistics of the permanent establishment in the country in which it works, not in the country in which it resides. As a result, the legal entity/head office should exclude the permanent establishment’s financial data from their jurisdiction.
Malaysian subsidiaries of international multinational corporations are often exempt from preparing and filing CbCR because the ultimate holding company is obligated to do so in the jurisdiction in which it is tax resident. However, if a Malaysian entity of a foreign multinational group is the holding company or has been appointed as the surrogate holding company, it must notify the IRBM by the end of its financial year. Malaysian entities must notify the IRBM of the identity and tax residence of the entity responsible for preparing the CbCR if it is not the holding company nor the surrogate holding company.
The CbCR will be used to analyse transfer pricing risk at a high level. It can also be used to assess other BEPS-related risks, as well as for economic and statistical analysis when necessary. However, the information in the CbCR will not be utilised to propose transfer pricing revisions based on a worldwide formulary apportionment or as a substitute for a full transfer pricing study.
Related Guide: How to reduce company tax in Malaysia
Taxpayers who are required to prepare the Country-by-Country Report under the Income Tax (Country-by-Country Reporting) Rules 2016 must prepare the Master File and submit it with the Transfer Pricing Documentation as requested.
In circumstances where the parent of the MNE Group generates a Master File for the Group, the subsidiary firm should provide a copy of the Master File together with the Transfer Pricing Documentation. To the extent that this functional analysis duplicates information in the supplied Master File, a cross-reference to the Master File suffices.
The following information should be included in the master file:
- Organizational structure
- Description of Group’s business(es)
- Group’s intangibles
- Group’s intercompany financial activities
- Group’s financial and tax positions
Penalties for Non-Compliance
With effect from 1 January 2021, Section 113B of the Income Tax Act 1967: Penalty for failure to submit Transfer Pricing Documentation to the IRBM on time is as follows:
- Where there is a prosecution and on conviction: a fine of between RM20,000 and RM100,000 or imprisonment for a term up to 6 months, or both.
- Burden of proof on the taxpayer in case of prosecution.
- On conviction, the court may further order to furnish Transfer Pricing Documentation within 30 days or such other period as it deems fit.
- Where there is no prosecution: a penalty of between RM20,000 and RM100,000.
The taxpayers should prepare contemporaneous Transfer Pricing documentation and furnish it upon request within the given timeframe.
Transfer Pricing Adjustment
Under Section 140A of the Income Tax Act 1967, the Director General of Inland Revenue (‘DGIR’) is empowered to make adjustments on controlled transactions of goods, services or financial assistance based on the arm’s length principle or to disregard and make adjustments to a structure (with effect from 1 January 2021).
New provisions with effect from 1 January 2021:
- Sections 140A(3A) and 140A(3B): The IRBM has the authority to disregard a structure in a regulated transaction and make Transfer Pricing changes to a structure that it deems appropriate.
- The Director General Inland Revenue can make Transfer Pricing adjustments if the economic substance of the related party transaction differs from its form or the related party transaction differs from commercially acceptable transactions undertaken by independent entities.
- Sections 140A(3C) and 140A(3D): Surcharge on Transfer Pricing adjustments
- Surcharge of not more than 5% on the amount of increase of income or reduction of tax deduction, arising from Transfer Pricing adjustment.
- Surcharges will be collected in the same manner as taxes for the purposes of tax collection and recovery under Sections 103 to 106 of the Income Tax Act of 1967.
The Extent of Relevant and Adequate Contemporaneous Documentation
When determining the nature and extent of documentation appropriate to their particular circumstances under subsection 140A(2) of the Act, taxpayers should consider the size and complexity of their business and transactions. In view that the nature and amount of documentation depend on facts and circumstances of a particular transaction, every taxpayer should evaluate the significance of its transactions in reference to their own business and the additional administrative costs of preparing such documentation.
In general, it is advantageous for a taxpayer to maintain proper documentation on controlled transactions that are applicable to his circumstances and be prepared to provide additional information or documentation not listed in the Guidelines but may be relevant for the determination of arm’s length price.
Taxpayers can submit transfer pricing documentation in either Bahasa Malaysia or English.
If the supporting documents are not in Bahasa Malaysia or English, a translation should be provided when the transfer pricing documentation is submitted.
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