Transfer pricing, which refers to the manner
in which multinational corporations transfer goods and services between and
within each other, continues to be an important issue for the Inland Revenue
Board (IRB) in Malaysia. This article discusses recent developments in transfer
pricing in Malaysia and advises taxpayers operating in Malaysia on how to
prepare for scrutiny by the IRB.
The
Past
Transfer
pricing as a concept is not new in Malaysia but has been a part of the
corporate tax environment since 2003, when the first set of transfer pricing
guidelines was issued. However, the scrutiny of transfer pricing in the country
remained quite limited in the initial years.
Transfer
pricing issues came to the fore in 2009 with the introduction of Section
140A,which provided the Director General with the power to substitute the price
and disallow interest on certain transactions. In public comments made by the
Malaysian Government in relation to the introduction of transfer pricing
provisions in the Income Tax Act, it was noted that business transactions
between related companies tend to be conducted at non-arm’s length prices as a
means to reduce incomes (and thereby taxes owing). But does this mean that any
reduction in income will necessarily be the result of non-arm’s length pricing?
Couldn’t the Malaysian taxpayer suffer a reduced income as the result of
commercial pricing, for example, reduced demand for the product / service?
The
introduction of Section 140A also specified “disallowance of interest,” which
brought the issue of thin capitalization into the Malaysian Income Tax Act. To
date, there are no specific rules on thin capitalization and the implementation
of any such provision has been deferred to 31 December, 2015.
In
addition, 2009 also saw the introduction of Section 138(c), which introduced
provisions associated with negotiating and concluding advance pricing
arrangements (“APAs”) by the Malaysian taxpayer with the IRB. As noted in
Budget 2009, the primary motive of introducing the APA regime in Malaysia is to
provide certainty on pricing issues for inter-company trades within a group and
to ensure that the tax framework is transparent and business-friendly so as to
keep Malaysia an attractive destination for investment in the region,
particularly among multinational companies.
The
Present
Although
these measures were introduced in 2009, there was little guidance from the IRB
on how it would approach transfer pricing issues. Clarity in this regard was
provided in 2012, when the Income Tax (Transfer Pricing) Rules 2012 and Income
Tax (Advance Pricing Arrangement) Rules 2012 were implemented in May
2012.
The
most interesting point raised by these Rules was that they were deemed to have
retrospective effect from 1 January 2009. What this essentially means is that
the IRB expects taxpayers to have adhered to the principles introduced in 2012
through the Rules. This has been a bone of contention between Malaysian
taxpayers and the IRB, as most taxpayers did not prepare the necessary transfer
pricing analyses in prior years. However, the IRB’s position has been that
given that Section 140(a) was introduced in 2009, Malaysian taxpayers were
expected to prepare for transfer pricing scrutiny and that the retrospective
application of the Rules should have not have taken them by surprise.
Both
Rules provided much needed guidance to taxpayers. With respect to the Transfer
Pricing Rules, the IRB specified the following:
- The necessity
for contemporaneous annual documentation;
- The ability of
the IRB to re-characterize transactions, particularly where it is believed
that a third party would not have engaged in transactions in a similar
manner;
- The application
of transfer pricing methods on a transactional basis, explicitly requiring
taxpayers to test transactions on separate basis, rather than on a
combined basis; and
- Considerations
for intra-group services / intangible property and intercompany financing;
- A penalty regime
for the lack of transfer pricing documentation.
The
Advance Pricing Arrangement Rules provided procedural guidance (e.g., required
forms and procedures) to taxpayers on how to negotiate and conclude APAs. In
addition, it provided conditions under which the IRB may reject / decline an
application.
With
the implementation of these Rules, the IRB also released updated transfer
pricing guidelines. These guidelines provide additional guidance, with detailed
examples, on how the IRB will review related party transactions. In addition,
the guidelines provide considerations for when Malaysian taxpayers enter into
specific transactions e.g., intercompany services, intangible property and
intercompany financing.
Transfer
pricing audit guidelines were released in April 2013. Although the guidelines
are targeted towards tax auditors and intended to provide tax auditors with the
necessary support on how to conduct transfer pricing audits, they also serve as
an important source of information to taxpayers in Malaysia on what to
anticipate during the course of a transfer pricing audit. The audit guidelines
outline how tax auditors should select companies for audit and what they should
look out for during the desk audit phase and subsequently in the field audit
phase. Such guidelines will also help taxpayers prepare themselves for tax
audits.
The
Future
Transfer
pricing audits are intensifying year-by-year, bolstered by news that the first
transfer pricing audit was concluded in favor of the taxpayer in 2013 by the
Special Commissioners of Income Tax. This audit focused on service fees paid by
the Malaysian taxpayer to an overseas company, as well as reduced commissions
received by the Malaysian taxpayer for logistics services provided. The
taxpayer was able to substantiate its position with comprehensive transfer
pricing documentation which included detailed benchmarking.
In
assisting our clients in transfer pricing audits in Malaysia, we have noticed
the following:
- Transfer pricing
documentation is requested and has to be provided to the tax auditor prior
to the commencement of the audit. We noticed that the tax auditor was
well-prepared and familiar with the relevant policies for transfer pricing
documentation and price setting and / or checking.
- Intercompany
agreements were requested and where they were not provided, the tax
authority re-requested them, suggesting that tax auditors wanted to ensure
a sufficient legal structure was in place to support the intercompany
transactions. The existence of intercompany transactions is also evidence
of arm’s length pricing.
- In addition to
transfer pricing documentation, other documentation was requested from the
taxpayers—e.g., invoices, purchase orders, delivery information—to render
support to the pricing policy.The tax-auditor also requested that they be
allowed to withhold some of these documents for further analysis.
- Specific focus
was placed on services fees paid to overseas affiliates. The tax auditors
were particularly focused on whether the taxpayer benefitted from the
support provided, and whether they necessarily needed such support to
operate their business.
- During the audit
visit, detailed discussions were conducted with key business personnel to
understand transfer pricing policies in the organization. In addition,
detailed factory visits were also conducted for companies that had
manufacturing operations in Malaysia.
- Emphasis was
given to local Malaysian comparable companies to the extent that the IRB
preferred taxpayers to rely on financial data obtained from the Companies
Commission of Malaysia (“CCM”).
With
effect from the Year of Assessment 2014, taxpayers operating in Malaysia will
be required to disclose whether they have transfer pricing documentation for
the financial year.Taxpayers that do not have transfer pricing documentation
will be penalized.
It is
expected that intercompany financing, services and intangible property will
remain contentious areas of transfer pricing audits.Furthermore, it is expected
that companies will appeal through the judicial system to settle transfer
pricing disputes with the Malaysian tax authority, and may even rely on APAs to
achieve certainty on transfer prices rather than wait for an audit.
Sowmya
Varadharajan
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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