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TP & APA Guideline Changes Impact on Multinationals

Malaysia

The Inland Revenue Board of Malaysia (IRBM) has recently issued two new guidelines relating to transfer pricing.

The 2012 Transfer Pricing (TP) Guidelines replace the 2003 guidelines and are intended to provide guidance to taxpayers on the application of the law under Section 140A of the Income Tax Act (ITA) and the Income Tax (Transfer Pricing) Rules 2012. The 2012 Advance Pricing Arrangement (APA) Guidelines provide guidance to taxpayers on the procedures to apply for an APA and the manner in which such an application will be processed and administered. Taxand Malaysia looks at the impact of these guidelines on taxpayers.

The Transfer Pricing (TP) and APA Guidelines can be broken down into sections. We address each section in turn below:

Transfer Pricing Guidelines

  • Threshold for the preparation of contemporaneous transfer pricing documentation

To ease the compliance burden, the TP Guidelines clarify that the requirement for maintaining contemporaneous transfer pricing documentation under the Income Tax (Transfer Pricing) Rules 2012 will apply only to the following:

(i) for a person carrying on a business, where the gross income exceeds RM25 million, and the total amount of related party transactions exceeds RM15 million
(ii) in relation to financial assistance, where such financial assistance exceeds RM50 million. It should be noted that the Guidelines do not apply to transactions involving financial institutions

Where taxpayers do not meet these thresholds, the arm's length requirement under Section 140A will continue to apply, but the documentation requirements may not be so onerous.

Submission of TP Documentation
Transfer pricing documentation does not need to be submitted with the annual tax return but should be made available to the IRBM within 30 days upon request.

 

Penalties Penalties are imposed for transfer pricing adjustments at the following rates:

 

 

No Contemporaneous TP Documentation

35% of tax understated

TP Documentation prepared but not in accordance with requirements in the Guidelines

25% of tax understated

 

 

Taxpayers that do not fall under the TP Documentation may be subject to a 25% penalty on tax understated in the event that the related party transactions are not at arm's length.

 

The penalty rate will be increased by 20%, compared to the previous penalty rate imposed for the previous offence, but the sum will be limited to 100% of the amount of tax undercharged, where:

(i) the taxpayer obstructs or interferes with a transfer pricing audit
or
(ii) the taxpayer fails to comply with the arm's length principle after previous transfer pricing audits

Advance Pricing Arrangement (APA) Guidelines

Threshold for application for an APA

Taxpayers that meet the following criteria are entitled to apply for an APA:

(a) A company assessable and chargeable to tax under the Income Tax Act 1967
(b) Turnover value exceeding RM100 million
(c) The value of the proposed transaction (for which an APA is sought) meets a minimum percentage as follows:

Type of Transaction

Minimum value

Sale transaction

50% of turnover

Purchase transaction

50% of total purchases

Financial assistance

More than RM50 million

Other transactions

More than RM25 million

 

(d) The transactions must relate to income that is chargeable and not income which is exempt

 

Penalties

As long as an APA remains in effect and the taxpayer complies with the terms and conditions of the APA, no penalty under the Income Tax Act, 1967 will be imposed with respect to the covered transactions in the covered period.


 

Taxand's Take


Malaysia finally has an updated TP and APA legislation, and corresponding rules and guidelines. The 2012 TP Guidelines and introduction of the APA Guidelines provide the requisite guidance to taxpayers on the application Section 140A of the ITA and the Income Tax (Transfer Pricing) Rules 2012 as well as the Income Tax (Advance Pricing Arrangement) Rules 2012.

The introduction of a threshold for the requirement for contemporaneous documentation will be welcomed by taxpayers and will, to some extent, reduce compliance costs, particularly for smaller taxpayers. However, these taxpayers must still ensure that their related party transactions are at arm's length and must be able to support this via appropriate documentation.

Clearly, those taxpayers falling within the scope of the TP Guidelines should ensure that they comply with the preparation of contemporaneous TP documentation as set out in the guidelines as this would have an impact on the imposition of penalties. It is likely that the current uptrend in tax audits with a transfer pricing focus will continue, and taxpayers need to ensure that TP requirements are entrenched into their tax compliance management function.

Your Taxand contact for further queries is:
Bernice Tan
T. +603 2032 2799
E. bt@taxand.com.my

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Taxand's Take Author