The Malaysian 2023 Budget was announced on 7 October 2022 by the Minister of Finance,...
SEPTEMBER 22 ― Transfer pricing (TP) is a tax concept where companies operating within a group are required to transact with one another at market prices (also known as arm’s length transactions). In short, such transactions should be similar to how independent companies transact with one another.
In the course of carrying out their business activities, many companies inevitably enter into intra-group transactions (or related party transactions) whether it is the buying or selling of goods or services.
In Malaysia, the Inland Revenue Board (IRB) regularly conducts tax audits on companies, in the form of desk or field audits. Hence, taxpayers must manage transfer pricing risks carefully as there are various business, reputational and financial implications involved.
Globally, many countries have introduced various measures with the aim of mitigating and preventing tax leakages as well as ensuring that profits are taxed in line with value creation (i.e. to prevent profit-shifting from one tax jurisdiction to another). Correspondingly, many countries have mandated the need for companies to prepare transfer pricing documentation (TPD). According to the Organisation for Economic Co-operation and Development (OECD)’s website, a total of 73 countries have TP legislations in place as at June 2022.
Malaysia is no exception whereby a company carrying on business in Malaysia with its related parties is required to prepare a TPD. The TPD is required to be prepared in order to demonstrate arm’s length nature of such transactions, be it sale of goods/services, licensing of intellectual property, etc. Apart from that, TP rules in Malaysia also apply on intragroup financing transactions, such as loans and advances provided between related parties.
The documentation needs to be maintained on an annual basis, and should be ready by the time that the company files its tax return for the year of assessment (typically seven months after the financial year end).
Let us now look at a few key points which are important for SMEs to take note of, when it comes to compliance to TP rules in Malaysia:
1. No exemptions from preparation of TPDs for SMEs
To ease the burden of taxpayers, the Malaysian TP Guidelines sets out thresholds to differentiate between when taxpayers are required to prepare full TPD, and when the taxpayer has the option to prepare limited TPD instead.
Companies which record gross income exceeding RM25 million and total amount of related party transactions exceeding RM15 million or provide financial assistance to related parties where the financial assistance exceeds RM50 million (other than financial institutions) are required to prepare full TPD.
This, however, does not exempt SMEs from the preparation of the TPD as there are currently no exemptions or concessions provided for SMEs. As such, SMEs essentially face the same TP risks as larger taxpayers. In short, as long as a company enters into related party transactions, the company is required to prepare TPD in Malaysia.
2. TP rules apply to all related party transactions
The Malaysian TP Rules do not provide any exemptions/ exclusions for companies which only enter into transactions with related parties within Malaysia (domestic related party transactions) in relation to preparation of TPD. As such, companies would still be required to prepare TPDs even if they solely engage in domestic related party transactions.
Similarly, even if the company is merely the recipient of goods/ services supplied by its foreign and/ or domestic related parties, a TPD would still be required to be prepared by the company.
3. Risk of TP adjustments
Based on Malaysian TP rules, companies are required to prepare TPD to demonstrate the arm’s length nature of such transactions. The IRB may make TP adjustments in the event that the IRB views the transactions as not meeting the arm’s length requirement. This in turn may result in additional tax payable by the company.
As an example, a product sold to a group company for RM500,000 may not be considered as meeting the arm’s length requirement when the same product is sold to a third party for RM1 million. The IRB may seek to uplift the company’s revenue in this respect.
Similarly, companies which acquire intercompany services but are unable to demonstrate benefits received from these services are exposed to higher risk of TP adjustments during an audit.
4. Introduction of surcharge and penalty for failure to furnish transfer pricing documentation
In the past, penalties were tied to additional tax payable. Hence, many taxpayers which are not in tax payable positions (eg. companies which are granted tax incentives, loss-making companies, etc.) generally focus less on the preparation of TPD, given that TP adjustments proposed by the IRB would not give rise to additional tax payable.
However, with effect from January 1, 2021, a surcharge on TP adjustments was introduced. The surcharge can be applied up to 5 per cent of TP adjustments, whether or not the company is in a taxable or non-taxable position.
In addition, to facilitate a greater level of compliance amongst taxpayers, a penalty for failure to furnish TPD upon request by the IRB was introduced. Based on the TP Guidelines, the taxpayer is required to submit the TPD within 14 days of the request. Companies which fail to submit the TPD within the timeline may be subject to fines of between RM20,000 to RM100,000. This penalty also came into effect from January 1, 2021 onwards.
The 14-day timeframe may be too short to prepare a robust set of TPD, especially if the company engages in complex related party transactions and/or faces various TP issues. This in turn may increase the risk of TP adjustments made by the IRB (and accordingly the surcharge applied), if the TPD is not robust enough to adequately support the arm’s length nature of the company’s related party transactions.
Given the ever-evolving TP landscape within Malaysia as well as globally, it is imperative that SMEs increase their awareness with respect to TP matters in order to better manage and mitigate their TP risks. Hence, it is important for businesses to take a proactive approach in addressing these key areas within the context of their respective operations. This would enable businesses to focus on their core business activities whilst having a certain level of assurance that their transfer pricing risks have been appropriately managed.
Source: Malay Mail
SEPTEMBER 22 ― Transfer pricing (TP) is a tax concept where companies operating within a...