TRANSFER PRICING UPDATE: Malaysia Tightens Transfer Pricing Compliance Requirements
07 January 2021
The Income Tax (Transfer Pricing) Rules 2012 (“Malaysian TP Rules”) require taxpayers in Malaysia to prepare contemporaneous Transfer Pricing Documentation (“TPD”). This legislation has been effective in Malaysia since 1 January 2009. Taxpayers are given 30 days to submit TPD upon request by the Inland Revenue Board of Malaysia (“MIRB”).
Under Section 113(2) of the Income Tax Act 1967, penalties will be imposed on TP adjustments arising from preparing an incorrect return and the TP Audit Framework 2019 (“TP Audit Framework”) provides that a penalty of 50% of the tax undercharged is applicable if no TPD is prepared. If TPD is prepared but is not submitted within 30 days of a request by the MIRB, the penalty would be 30% of the tax undercharged.
The MIRB has however noted that the level of non-compliance amongst taxpayers is still very high. With a view to increasing the rate of compliance, the Finance Bill 2020 introduces the following key transfer pricing amendments which will be effective in Malaysia from 1 January 2021:
Failure to Furnish Contemporaneous TPD
A new Section 113B(1) of the Income Tax Act 1967 will be introduced which provides that where a company fails to furnish Contemporaneous TPD upon request by the IRB, the taxpayer may be prosecuted and, upon conviction be subject to a fine of between RM20,000 and RM100,000 and/or imprisonment of up to 6 months. This applies regardless of whether the company is taxable or not and the Court may still order the taxpayer to furnish the TPD within 30 days or such other period as the Court deems fit. Where prosecution is not instituted, the taxpayer may nevertheless be subject to a penalty of between RM20,000 and RM100,000 for failure to submit the TPD.
Surcharge on the Transfer Pricing Adjustment
Previously, taxpayers would not be subject to penalties if thea TP adjustment does not result in additional tax liability. The new Section 140A(3C) provides that 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 adjustment.
This new provision essentially closes the net on taxpayers who previously were not subject to TP penalties notwithstanding a TP adjustment as a result of unabsorbed tax losses, capital allowances, tax incentives, etc.
Power to Disregard Structure in a Controlled Transaction
Pursuant to Rule 8 of the Malaysian TP Rules, the Director General (“DG”) has the power to disregard and re-characterise the structure in a controlled transaction to reflect arm’s length economic and commercial reality. The DG’s power will now be inserted into the principal legislation via Section 140A(3A) and 140A(3B) of the Income Tax Act, 1967.
Section 140A(3A) further fortifies the DG’s power to disregard a related party transaction if the DG is of the opinion that:
i) The economic substance of the transaction defers from its form; or
ii) The form and substance are the same but the transaction, viewed in totality, differs from those which would have been adopted by independent parties behaving in a commercially rational manner and the structure impedes the DG from determining the appropriate transfer price.
Under Section 140A(3B) the DG has the power to re-characterise the transaction to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regard to the economic and commercial reality.