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TRANSFER PRICING 101

Things You Should Know Before IRB Knocks Your Door

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Time to Read: 15 min | Last Updated: June 2021

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The Background of Transfer Pricing

In the globalisation era, with the increasing cross border business transactions where tax rates vary from country to country, businesses may be able to reduce tax cost by transferring profits to low tax regimes.     .

Therefore, tax authorities would want to prevent the unreasonable shifting of profits in order to protect their tax revenues     .

This is exemplified in OECD’s introduction of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017 as guidance on the application of “arm’s length principle”. This forms the international consensus on transfer pricing especially on the valuation for tax purposes of cross-border transactions between related enterprises.

Ever since Malaysia joined the OECD's Inclusive Framework on BEPS, the transfer pricing landscape in Malaysia has been gradually shifting to be more aligned with the OECD arrangements and frameworks.

Therefore, transfer pricing policies and regime in Malaysia largely mirror the 2010 Transfer Pricing Guidelines issued by the OECD. Malaysia commits to observing that the minimum standard prescribed by the Framework is fulfilled.

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Transfer Pricing refers to the intercompany pricing arrangements for the transfer of goods or services between related or commonly controlled legal entities within an organization. 

Before we explore further, you might wonder how this is related to my company. Here’s why.

The recent most significant change in Section 113B of the Income Tax Act 1967 (ITA) is the introduction of penalty provision starting from RM20,000 up to RM100,000 per year of assessment for failure to furnish contemporaneous transfer pricing documentation upon request.

Previously, there were no specific penalties imposed on documentation non-compliance. Penalties were only imposed if a tax adjustment or transfer pricing adjustment was made whereby taxpayers would be subject to additional tax and penalties for the submission of an incorrect tax return under Section 113(2) of the Income Tax Act 1967.

It would be impossible to prepare a comprehensive transfer pricing documentation from scratch even within 30 days, so the shortened time frame of 14 days means that the IRB expects taxpayers engaging in controlled transactions to have up-to-date transfer pricing documentation for each year of assessment.

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It’s clear that isn’t any industry or business of any scale that have controlled transactions will be able to be exempted from transfer pricing audit, so you shall identify the scope of Transfer Pricing Documentation that is required by your company.

Are you within the Scope for Transfer Pricing Documentation? Please take note that if you do, it is mandatory for you to prepare a full Transfer Pricing Documentation.    

Those who fall under this category are meeting the following criterias:

  • Having turnover of RM25 million or more and the total amount of related party transactions of RM15 million or more
  • Providing financial assistance exceeds RM50 million to related company.

What if you fall outside the Scope for Transfer Pricing Documentation? It is optional to comply with either full version or limited version Transfer Pricing Documentation. Bear in mind that, the Transfer Pricing Documentation has been made mandatory for all companies.

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  • SPEED

Preparing Transfer Pricing Documentation by yourself takes time and patience. It is possible to complete your own Transfer Pricing Documentation once you gather all the comparable documents in front of you. The speed at which you complete the Transfer Pricing Documentation depends on your understanding on transfer pricing rules.

The preparation of Transfer Pricing Documentation can be summarised in 3 simple steps; gather and analyse relevant data, draft report and review with management. On average, a Transfer Pricing Advisor takes around 1 month time to finalize a limited version of Transfer Pricing Documentation whereas 2 to 3 months’ time for a full version.               .      

Upon completion, you would want to ensure that the details of your report is accurate and in accordance with the transfer pricing guidelines. A Transfer Pricing Advisor will certify accuracy and can help you down the road in a transfer pricing audit, hence always ensure that you furnish a complete set of documentations to your Transfer Pricing Advisor.

  • KNOWLEDGE

A professional Transfer Pricing Advisor who is familiar with the transfer pricing calculation can quickly and easily accomplish tasks that might take even skilled taxpayers hours of research. For busy non-tax professionals, your time can generally be better spent earning money in your area of expertise. Even if your transfer pricing is straightforward, hiring a professional will save you the time and stress of doing your taxes.

However, for those who are keen to learn and do Transfer Pricing Documentation on your own, there are numerous Transfer Pricing Workshops offered by experienced Tax Professionals that you may attend to obtain the necessary skills and knowledge.

  • COST

Should you hire a professional Transfer Pricing Advisor, rather than spending your precious time to learn this whole new topic? Depends on your opportunity cost of time.

Ultimately, there is no universally correct answer to the question of hiring a Transfer Pricing Advisor or doing your taxes on your own. Your comfort and familiarity with IRB transfer pricing guidelines will be part of your decision, but the complexity of your transfer pricing should be the key deciding factor.

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Transfer Pricing Promo Package

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In Malaysia, the Transfer Pricing Documentation is not required for Small and Medium Enterprise (“SME”) other than Multinational Corporation (“MNC”). True or False?
  • If you are an Entrepreneur or SMEs please do not disregard transfer pricing compliance and fall under the trap of thinking that transfer pricing affects large MNC     s only.
  • In the past, the Inland Revenue Board of Malaysia (“IRBM”) did not place emphasis on transfer pricing and transfer pricing documentation (“TP documentation”) for small and medium-sized enterprises (“SME”).
  • In contrast, transfer prices were examined in more detail when auditing large multinational  corporations that are     active in Malaysia.
  • This approach has changed in recent years.
  • We have now seen an increased focus from the IRB on transfer pricing in tax audits when auditing SMEs, and the IRB has acted aggressively in these audits.
Is there any exception or special treatment for SMEs with only domestic transactions?
  • There is no exclusion clause for domestic related party transactions (“RPT”).
Do you need to prepare TP documentation for a domestic group of companies?
  • Yes, it is covered by both the Transfer Pricing Rules and the Guidelines
  • In Malaysia, transactions between related domestic companies are subject to the same legislative provisions and rules that govern international intercompany transactions.
  • It is prudent for groups of companies to maintain proper transfer pricing documentation in respect of their domestic intercompany transactions.
Is it necessary to prepare TP documentation if I am engaged only in domestic related party transactions (RPT)?
  • Yes
  • TP audits are not limited to only cross-border transactions.
  • IRB may conduct   tax audit on the individual taxpayer (i.e. company by company basis) to evaluate if the RPTs carried out by that taxpayer were conducted at arm’s length.
  • If the RPTs are not at arm’s length, the IRB can make TP adjustment.
  • The fact that the taxpayer is transacting with a local related party where both parties are accessible   to tax in Malaysia and hence the non-arm’s length transaction is unlikely to result in any loss of revenue to the IRB may NOT be a good defence to the taxpayer.
  • The Income Tax Act (“ITA”) requires a Malaysian taxpayer engaged in RPTs to prepare a TP documentation to justify the arm’s length nature of their RPTs.
  • Transfer Pricing is pricing transactions based on market prices assuming that 2 or more companies of the same group are totally independent and separate (this is also known as arm’s length principle).
Do you need to prepare a TP documentation if your RPTs are minimal?
  • There is no threshold or de minimis exception to exempt a taxpayer from the preparation of a TP documentation.
  • As long as a taxpayer is engaged in a RPT (whether domestic or cross-border), such taxpayer is expected to prepare a TP documentation to justify the arm’s length nature of the RPTs.
Since when does a TP documentation requirement exist in Malaysia?
  • Since 2009
Does a taxpayer need to disclose information regarding TP documentation in his tax return?
  • Yes
  • Taxpayers are required to disclose the amount and type of related party transactions in the tax return and disclose whether transfer pricing documentation has been prepared.
  • With effect from the year of assessment (YA) 2014, taxpayers are required to confirm in the income tax return form C under Box whether they have prepared contemporaneous transfer pricing documentation by ticking the relevant box.
  • Taxpayers need to ensure that the transfer pricing documentation is prepared in a timely manner to adhere to the requirements including the “tick the box” requirement.
Transfer Pricing Documentation has to be updated every year. True or False?
  • True, if there are significant changes in the business model and related party transactions.
  • Even if there aren’t any substantial changes, it is encouraged to review every year and update the financial data of the RPT in the TP documentation
Is your company keeping sufficient documentary evidence as prescribed by the IRB?
  • In Malaysia, taxpayers nowadays are required to have contemporaneous transfer pricing documentation available to substantiate the transfer pricing applied to related transactions.
  • Taxpayers are required to submit documentation within 30 days of the IRB’s request.
  • It is required to keep the documentation in the administration for a period of 7 years.
  • Time barred period for TP audits is 7 years.

Watch these video to understand more on Transfer Pricing.

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