Configuring Transfer Pricing
Transfer pricing is not new in Malaysia. It has been a part of the tax environment since 2003 when the first set of transfer pricing guidelines was issued. Presently, transfer pricing remains one of the top concerns of tax regulators around the globe, while medium to large corporations and multinational companies (MnCs) face complex compliance challenges.
Consequently, the Inland Revenue Board of Malaysia (IRBM) has significantly improved transfer pricing compliance by implementing stricter legislation to uphold the transfer pricing regime. For companies having related party transactions, it is essential to configure the transfer pricing documentation according to the current legislation. This article provides a summary of the transfer pricing requirements and how SALIHIN can help you with compliance matters.
What is Transfer Pricing?
Transfer pricing refers to the rules and methods for pricing transactions between related parties. Such transactions can be selling or purchasing goods, provision of services, borrowing or lending money, using or transferring intangibles, etc.
When related parties transact with each other, their pricing may not reflect market conditions due to a lack of independence in their commercial and financial relations. As a result, their profits and tax liabilities may be distorted, primarily when they are located in different jurisdictions with different tax rates. This distortion creates concerns that the related parties may not pay their fair share of tax and can derive a tax advantage as a group.
Arm’s Length Principle
The “arm’s length principle” is currently the globally accepted guiding principle in choosing an acceptable transfer price. Under the arm's length principle, transactions within a group are compared to transactions between unrelated entities to determine the acceptable transfer prices. Thus, the marketplace comprising independent entities is the measure or benchmark for verifying the transfer prices for intra?entity or intra?group transactions and their acceptability for taxation purposes.
Transfer Pricing Documentation
Section 140A of the Income Tax Act 1967 and the Malaysian Transfer Pricing Guidelines 2012 requires ALL pricing of intercompany transactions to be documented in a contemporaneous Transfer Pricing Documentation (TPD). The TPD must be prepared annually to demonstrate the arm’s length nature of such transactions, be it sale of goods/services, licensing of intellectual property, etc.
Apart from that, transfer pricing rules in Malaysia also apply to intragroup financing transactions, such as loans and advances between related parties.
The Malaysian Transfer Pricing Rules do not provide any exclusions concerning the preparation of TPD for companies which only enter into transactions with related parties within Malaysia. As such, the transfer pricing rules still require companies to prepare TPDs even if they solely engage in related party transactions domestically.
Similarly, even if the company is merely the recipient of goods or services supplied by its related parties, it is still required to prepare TPD.
Risk for Non-compliance
A lot of changes and updates have been made by IRBM since the introduction of the Malaysian Transfer Pricing Guidelines. Effective January 2021, several legislative changes were made to the ITA1967 regarding transfer pricing. These changes reflect IRBM’s continued focus on transfer pricing and its commitment to strengthening Malaysian rules and guidance on transfer pricing.
There is a huge penalty for non-compliance and a shorter period for submission of TPD, which is 14 days upon request by IRBM. Hence, it is crucial that taxpayers comply with the arm’s length principle when transacting with their related parties and maintain proper transfer pricing documentation to substantiate their pricing.
HOW WE CAN HELP YOU
The tax administration of today has access to a wide range of taxpayer information. It is attributable to the increased reporting requirement and automatic exchange of information between regulatory bodies. Tax administration has never been better positioned to perform transfer pricing audits and process information than they currently are. This makes TPD complex and challenging for companies with related party transactions. In this case, it is a daunting task for the company to self-prepare the TPD, taking away much of the time that could have been spent on the company’s critical strategic matters.
our team of expertise can assist taxpayer in the following areas:
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This publication has been carefully prepared, but should be seen as general guidance only. You should not act upon the information contained in this publication without obtaining specific professional advice. Please contact SALIHIN to discuss these matters in the context of your particular circumstances. SALIHIN accepts no responsibility for any loss incurred as a result of acting on information in this publication.