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Transfer Pricing Documentation

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In the 2021 Budget proposals, there were some changes made to the Income Tax Act 1967 (“ITA”) and one of the more notable ones was the introduction of new provisions over transfer pricing (“TP”) penalties. The Malaysian TP Guidelines were also updated to stipulate that TP documentation must be submitted within 14 days instead of the 30 days that were given previously.

TP is set to be one of the avenues that the Malaysian tax authorities will be zooming into in 2021. As such, much needed attention must be given to TP to ensure that our clients and taxpayers at large are managing their tax risk well.

TP basically affects companies with related party transaction(s) (“RPT”)” in which prices transacted must be ‘arm’s length’ in nature, i.e. the transacted price(s) must be similar to how independent companies transact with one another.

The Inland Revenue Board Malaysia (“IRB”) has issued TP Guidelines which can be used as a reference point by taxpayers when preparing the TP documentation.

In the abovementioned TP Guidelines, the IRB has recently made two (2) important amendments as follows –

Please note that in Malaysia, there is no requirement in the law for TP documentation to be submitted on any predetermined or annual/regular basis. It is submitted or made available upon request by the IRB, normally when the companies are selected for TP audits. Probably, due to this, there tends to be a relaxed approach taken by many taxpayers that the TP documentation can be prepared as and when the need arises. It is important to note that it is not possible to prepare TP documentation in 14 days or even 30 days for that matter!

The timeline needed to prepare the TP documentation depends on the complexity and volume of RPT transactions. It is also important to take note that unlike other countries, TP in Malaysia also includes “domestic” transaction(s) as well as “cross-border” transactions. As such, companies must place importance to prepare TP documentation pro-actively to avoid getting things wrong and then scrambling for solutions after the inquest begins!

Please take note that there were no specific TP penalties in place prior to the 2021 Budget proposals. The following “NEW” penalty section 113B in the ITA was introduced obviously with strict TP compliance for taxpayers in mind and we provide this below –

In addition to the above penalty under section 113B, new subsections 140A(3A), (3B) and (3C) were also introduced in the ITA. A new concept of imposing a “5% surcharge” is introduced as follows –

The surcharge may make companies which are in a loss-making position or in a non-tax payable position due to tax holidays/incentives to take seriously the need to prepare TP documentation that meets the expected standards under the laws and guidelines.

With the shorter 14-day timeframe, it is important for taxpayers to ensure that contemporaneous TP documentation is in place and up to date. ‘Contemporaneous’ refers to ensuring that all data in the TP documentation is valid and updated in the relevant financial period under review. The preparing of contemporaneous TP documentation requires specific expertise and technical knowledge. Baker Tilly Malaysia urges their clients and taxpayers at large to consult advisers on what needs to be the minimum to be put in place to avoid undue problems with the tax authorities. The TP documentation will be subject to scrutiny by the IRB during the course of an audit, and there tends to be greater reliance placed on work of external consultants when assessing the sufficiency and compliance of the documentation with the Rules and Guidelines.

With such severe TP penalties being imposed with effect from 1 January 2021, it is time for companies with RPT to pay careful attention to ensuring, without delay, the preparation of robust TP documentation, if they have not already paid heed.

*ABSS is pleased to be partnering with Baker Tilly, a globally recognised accounting and advisory firm that offers accounting, assurance, tax and advisory services.

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