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.

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:

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.

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.

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.

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.

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

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.