News › Taxand’s Take Article
Have You Prepared Your Transfer Pricing Documentation?
The Malaysian Minister of Finance has issued two new gazette orders relating to transfer pricing. These rules are retrospective and are meant to provide guidance on the application of Section 140A and Section 138C of the Malaysian Income Tax Act 1967 'ITA'. They are deemed to have come into operation on 1 January 2009.
Multinationals with businesses in Malaysia must comply with the requirement to maintain current and up to date transfer pricing documentation. This documentation should demonstrate that transactions with related parties are at arm's length. Although there is no requirement to file this with the tax authorities, the transfer pricing documentation must be updated to reflect any material changes to the business prior to the submission of the Malaysian tax return for each year of assessment. The availability of current financial data, and the related compliance costs, are some of the challenges facing multinationals in maintaining this level of documentation. Taxand Malaysia explores the retrospective introduction of transfer pricing rules and its impact on taxpayers in Malaysia.
Under the new Income Tax (Transfer Pricing) Rules 2012, a person shall determine and apply the arm's length price for the acquisition or supply of property or services.
Pertinent points to note are as follows:
Taxpayers are required to prepare contemporaneous transfer pricing documentation which is prepared when a taxpayer implements a related party transaction; and updated to reflect material changes prior to submitting the tax return for that year of assessment.
- Unlike the 2010 OECD Transfer Pricing Guidelines, taxpayers are still required to apply a hierarchy of methods, ie, traditional transaction methods should be applied and where not reliable the transactional profit methods may be used. Malaysia is not a member of the OECD and thus not obliged to strictly follow the OECD Guidelines.
- A taxpayer who provides or receives financial assistance directly or indirectly from a related party shall apply the arm's length interest rate. Financial assistance is defined to include loans, interest bearing trade credit, advance or debt and the provision of any security or guarantee.
- The rules also cover intra-group services, cost contribution arrangements and intangible property.
- There is a provision allowing for compensating adjustments where the transaction involves two Malaysian taxpayers. However, compensating adjustments will only be executed at the request of the other person in the related party transaction.
The Income Tax (Advance Pricing Arrangements (APAs)) Rules 2012 involve applications for APAs:
- These rules only apply to cross-border transactions and cover unilateral, bilateral and multilateral APAs.
- Taxpayers who wish to enter into an APA with the Inland Revenue Board must request a pre-filing meeting 12 months prior to the first day of proposed covered period.
- APAs shall cover a minimum period of 3 years and maximum of 5 years.
- A rollback of the APA is possible.
- The rules prescribe the APA application process from the pre-filing meeting to the issuance of the APA, as well as the compliance procedures.
The long anticipated transfer pricing rules have been given force of law. Companies which have taken action to comply with Section 140A have no cause for concern as the rules are in line with the law.
The requirement for contemporaneous documentation is not unexpected. Whilst it is accepted that such documentation is the only appropriate method of giving the tax authorities a clear understanding of the transfer pricing model (and the commercial realities of the taxpayer's business), it is our view that there should have been a threshold (for the annual amount of the related party transactions). Below this threshold, contemporaneous documentation should not be required and would assist in companies in managing compliance costs.
Taxpayers should take heed of these developments and ensure that adequate documentation is prepared to support related party pricing. APAs are an effective tool for multinationals to manage their transfer pricing risks because an APA can provide certainty on future related party pricing.
Your Taxand contact for further queries is:
Mui Lee Leow
T. +603 2032 2799
More news from Taxand Malaysia
We are interested to hear your opinion on this key piece of tax news. Join our LinkedIn Group and share your ideas. With tax professionals in nearly 50 countries you can understand the impact of tax issues affecting multinationals today.