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Transfer Pricing Risk Assessment Exercise on MNEs
The Multinational Division of the Inland Revenue Board of Malaysia ("IRB") announced in July 2011 that it would be sending out "Form MNEs (1/2011) Information on Cross Border Transactions" to selected taxpayers for completion. The information provided by taxpayers on this Form would be part of the IRB's transfer pricing risk assessment exercise on Multinational Enterprises (MNEs) in Malaysia. Taxpayers who receive such notification from the IRB are required to respond within a 30-day period. Taxand Malaysia looks at the disclosures required by Form MNE (1/2011) and the impact of such disclosures on MNEs in Malaysia.
The data required on Form MNE (1/2011) is more detailed than that disclosed in the tax return (Form C). The Form is divided into four sections comprising:
1. General information
This section is intended to collate information relating to the taxpayer's global structure including mapped details of the related-party transactions. Names of the ultimate holding company, subsidiaries and affiliates in Malaysia (including branch / permanent establishments) are to be disclosed.
2. Particulars of transactions with foreign related companies
Taxpayers are required to disclose their related-party transactions which cover tangible and intangible property, services, interest, and guarantee fees and all other related-party transactions.
3. Particulars of financial assistance to/from foreign related companies
Taxpayers are required to disclose information on interest-bearing and interest-free loans as well as interest-bearing trade credit. This is to be disclosed in terms of amounts borrowed/loaned during the year and the closing balance.
4. Other information
Taxpayers are required to characterise their business activity (e.g. toll / contract / fully-fledged manufacturer, commissionaire, limited-risk or fully-fledged distributor, service provider, or other characterisation).
The introduction of Form MNE (1/2011) comes some two years after the introduction of specific transfer pricing legislation in Malaysia in the form of Section 140A of the Income Tax Act 1967. Section 140A which is effective 1 January 2009 requires that transactions with associated persons for the acquisition or supply of property or services be performed at arm's length. Penalties imposed for incorrect transfer pricing can be up to 100% of the tax undercharged and such assessments can be made going back as far as six years.
This new development provides a clear signal to taxpayers that the IRB in Malaysia is paying increasing attention to transfer pricing and there is a need for taxpayers to ensure that they are sufficiently prepared for a transfer pricing audit.
While Form MNE (1/2011) does not form part of a company's tax return, the taxpayer's responses can influence the IRB's initial assessment of the transfer pricing risk. Taxpayers with high levels of related party transactions and who do not have transfer pricing documentation will obviously fall into the high audit risk category. It is likely that the characterisation of operations (e.g. type of distributor, service provider, manufacturer, etc.) will go towards the IRB's collation of industry information.
Whilst only selected MNE taxpayers will be required to complete Form MNE (1/2011) at this juncture, it is likely that in the foreseeable future MNE taxpayers will be required to file this Form on a yearly basis.
The introduction of Form MNE (1/2011) as part of the IRB's transfer pricing risk assessment exercise shows an increasing focus on transfer pricing in Malaysia. In light of this development, MNEs in Malaysia should review their related-party transactions to ensure that robust contemporaneous transfer pricing documentation is kept.
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