Malaysia Transfer Pricing Update

Knowledge • Malaysia Transfer Pricing Update

Important Transfer Pricing obligations in Malaysia.

The Malaysian Finance Bill 2020 was released following the tabling of the Malaysian 2021 Budget on 6 November 2020. The Finance Bill 2020 incorporates transfer pricing-related changes to the current Income Tax Act, 1967 (“ITA”). The changes permit significantly greater authority to the Malaysia Inland Revenue Board (“MIRB”) and re-emphasises the importance of TP compliance, with effect from 1 January 2021.

On 21 April 2021 we hosted a webinar on this topic. Take a look:

The key amendments made following the release of the Finance Bill 2020 and gazetted on 31 December 2020 are summarised below:

Amendment	Prior to 1 January 2021	Effective 1 January 2021
Penalty for failure to furnish TP documentation	No specific provision in the ITA on the imposition of penalty for failure to furnish contemporaneous TP documentation	A new section 113B in the ITA is proposed to include the penalties for failure to furnish TP documentation to the MIRB on time. Section 113B (1) (on conviction) Penalty of RM20,000 to RM100,000 or prison term of up to 6 months or both; and Furnish TP documentation within 30 days or any other period decided by the Court Section 113B (4) (without prosecution) Penalty of RM20,000 to RM100,000 Section 113B (5) Taxpayer may appeal to the Special Commissioner of Income Tax (“SCIT”) within 30 days
Surcharge for TP adjustment	A penalty is imposed on TP adjustments resulting in additional tax payable. The penalty cannot be imposed on businesses with no tax payable (eg. businesses incurring losses)	Section 140A(3C) A surcharge of up to 5% will be imposed on all TP adjustments, and this will apply irrespective of whether there is tax payable on the adjustments Section 140A(3D) Collection of the surcharge as if it was tax payable
TP documentation to be made available within 14 days upon request	TP documentation to be submitted within 30 days upon request by the Director General of Inland Revenue ("DGIR").	DGIR can request for TP documentation to be submitted within 14 days upon request for TP audit cases which have commenced on or after 1 January 2021. For TP audit cases which have commenced before 1 January 2021, the TP documentation is submitted within 30 days upon request.
Tax authority to disregard structures in a controlled transaction	The provision in relation to power of the DGIR to disregard and make adjustment to any structure adopted by a person for TP purposes can be found under Income Tax (TP) Rules 2012.	Rule 8 of ITA (TP) Rules 2012 is now proposed to be inserted in the ITA which empower the DGIR to disregard and re-characterize any structure adopted by a person in a controlled transaction if: the economic substance differs from form; or the arrangement lacks commercial rationale.

Example

We illustrate below a brief example on how the penalty and surcharge will be imposed on company in Malaysia:

Prior to 1 January 2021	Effective 1 January 2021
A penalty or surcharge cannot be imposed as the company is loss making	Section 140A(3C) – Surcharge of up to 5% (i.e. RM150,000)
	Section 113B(4) – Penalty between RM20,000 to RM100,000

Small and medium sized enterprises (“SMEs”) greatly affected

Transfer pricing awareness in Malaysia has been increasing since the introduction of the Malaysian Transfer Pricing Guidelines 2012 coupled with the introduction of a transfer pricing declaration in the corporate tax return in 2014.

The lack of clear penalties as well as the Malaysian Transfer Pricing Guidelines 2012 allowed the SMEs to go under the radar as SMEs deemed the transfer pricing compliance was not necessary.

With the introduction of the fixed penalty as well as shorten timeline to furnish the TP documentation upon request, SMEs that have not prepared any TP documentation are effectively caught under this regime which will force the SMEs to be compliant.

Key takeaway

Penalties for failure to furnish TP documentation

With the introduction of the new section, the MIRB has made it very clear on the importance of preparing contemporaneous (i.e. up-to-date) TP documentation to avoid the possibility of severe penalty. To be precise, the TP documentation should be prepared for all open years of assessments (“YAs”) (i.e. the last 7 YAs) and readily available by tax filing due date and is submitted to the MIRB upon request. In addition, it is to be noted that as long as companies are involved in controlled transactions, the companies are required to prepare contemporaneous TP documentation (either the full-fledged or limited TP documentation).

Surcharge for TP adjustment

The introduction of the surcharge strongly indicates that the MIRB will rely heavily on TP compliance and put greater emphasis on TP audits going forward. The imposition of the surcharge would mean that companies need to ensure the controlled transactions are carried out on an arm’s length basis and be mindful that surcharge can be imposed irrespective of whether the companies have tax incentives, unutilised allowances or business losses.

TP documentation to be made available within 14 days upon request

If you think you have ample of time to produce your TP documentation upon the 30 days request from MIRB, well, you may have to think again! The MIRB’s recent amendment requires TP documentation to be submitted within 14 days upon request. A failure to furnish the TP documentation according to the timeline will lead to the possibility of severe penalty being imposed.

Tax authority has the power to disregard structures in a controlled transaction

Business structure adopted by taxpayers which are related to each other may be scrutinized by the MIRB from the commercial perspective. If the controlled transactions do not reflect commercial reality, the MIRB may re-characterize the transaction and make appropriate TP adjustments it thinks fit.

Be proactive, and manage your TP compliance and risks since the beginning to avoid future headaches and high penalties. TP Solutions Malaysia can help with practical and cost-effective solutions for Malaysian companies to prepare TP documentation.

Questions?

Transfer Pricing Solutions Malaysia can assist with the preparation of TP documentation locally and regionally, Master File and Local File to comply with the OECD and also local legislation.

Malaysia
+ 603 2298 7153
services@transferpricingsolutions.my
www.transferpricingsolutions.my/

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