What is Malaysia approach for Transfer Pricing Surcharges?

Knowledge • What is Malaysia approach for Transfer Pricing Surcharges?

What is Malaysia approach for Transfer Pricing Surcharges?

The Inland Revenue Board of Malaysia (“IRBM”) has recently issued a Frequently Asked Questions (“FAQ”) to address the questions taxpayers and tax professionals have regarding the Transfer Pricing (“TP”) Surcharge under Subsection 140A (3C) of the Income Tax Act (“ITA”).

The key issues clarified by the IRBM in the FAQ are:

Transfer pricing surcharge on loss-making and tax-exempt companies
Implementation of surcharge
Mutual exclusivity of surcharge and tax penalty
Surcharge on tax-incentivized companies
Rights of appeals
Factors in determining surcharge rate
Adjustments of surcharge under MAP

1. Surcharge on loss-making and tax-exempt taxpayers

The rationale for imposing a surcharge on loss-making and tax-exempt companies where transfer pricing adjustments arise is:

To ensure fair tax treatment for all taxpayers failing to comply with the arm’s length principle under section 140A of the ITA.
To encourage compliance with the Malaysia transfer pricing legal framework.

2. Implementation of surcharge

Subsection 140A (3C) comes into effect on 1 January 2021. The implementation of the surcharge for audit cases with different commencement dates is illustrated as follows:

TP Audit Commencement Period	Applicability of Surcharge
TP audit commenced after 1 January 2021 (Year of assessment before the financial year 2021)	Applicable only for TP audit cases commenced on or after 1 January 2021 (irrespective of the year under assessment).
TP audits commenced before 1 January 2021 (but concluded on or after 1 January 2021)	Not applicable if TP audit case was initiated before 1 January 2021 (although the audit was completed after 1 January 2021). However, a penalty under Subsection 113(2) of the ITA for tax undercharged from the TP audit will still apply.

3. Surcharge under Subsection 140A(3C) vs. Penalty under Subsection 113 (2) of the ITA

The IRBM has clarified that the surcharge application is mutually exclusive of the penalty under subsection 113 (2) of the ITA. Hence, taxpayers can be assured that only a surcharge will be imposed on any TP adjustments made under Section 140A of the ITA.

4. Applicability of Subsection 140A(3C) of the ITA to taxpayers with incentives

Although taxpayers enjoy incentives, the Subsection 140A(3C) rule is still applicable as the IRB has emphasized the importance of complying with the arm’s length principle in controlled transactions. Non-compliance with the arm’s length principle which gives rise to any TP adjustments during a TP audit will attract a surcharge on the TP adjustments, regardless of the tax incentive status of the taxpayers.

5. Rights of appeal

The IRB has clarified that an appeal to the Director General (“DG”) can be made if taxpayers are not agreeable to the surcharge imposed.

Under Subsection 124(3) of the ITA, the DG has the right to abate or remit any surcharge imposed on taxpayers under reasonable and justifiable conditions/ grounds on the appeal.

6. Factors in determining surcharge rate

Currently, there is no specific scale for reference published on the determination of the surcharge rate by the IRBM. Nevertheless, the IRBM has indicated that voluntary disclosure cases will be subject to a lower surcharge rate.

7. Adjustment of surcharge rate under MAP

The surcharge amount on a particular Mutual Agreement Procedure (“MAP”) will also be adjusted based on the adjustments made under the MAP.

8. Key Takeaways

Taxpayers need to continue ensuring their compliance with the arm’s length principles concerning their intercompany transactions as the IRBM has indicated that there are no exceptions from Subsection 140A (3C) for any taxpayers who are subject to transfer pricing compliance.

Irrespective of the companies’ tax position (whether increasing taxable income, reduction in tax deduction, loss-making, or tax-exempt), a surcharge of not more than 5% may still be imposed on taxpayers if TP adjustments arise during a TP audit.

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