Taxing authority and tax law

Tax authority: Inland Revenue Board (IRB)

Tax law:

General Anti-Avoidance Provision

• Section 140 of the Malaysian Income Tax Act, 1967: Power to disregard certain transactions if not deemed arm’s length
• Section 138C of the Malaysian Income Tax Act, 1967: Advance Pricing Arrangement
• Section 140A of the Malaysian Income Tax Act, 1967: Power to substitute the price and disallowance of interest on certain transactions and

Transactions by Non-Residents

• Section 141 of the Malaysian Income Tax Act, 1967: Powers regarding certain transactions by non-residents

The IRB released the Malaysian Transfer Pricing Guidelines on 2 July 2003 which specify documentation requirements.

OECD guidelines treatment

The Malaysian Transfer Pricing Guidelines are largely based on the governing standard for transfer pricing, which is the arm’s length principle as established in the OECD guidelines. The IRB respects the general principles of the OECD guidelines.

Priorities/pricing methods

The IRB accepts CUP, Resale Price, Cost Plus, Profit Split and TNMM. However, the Malaysian Transfer Pricing Guidelines state that the traditional methods are preferred over the profit methods and advise that the profit methods should only be used when the traditional methods cannot be reliably applied or cannot be applied at all.

Transfer pricing penalties

There are no specific penalties for transfer pricing. However, the existing legislation and penalty structure under the Malaysian Income Tax Act, 1967, are applied. Penalties for transfer pricing adjustments can range from 100% to 300% of the undercharged tax. There are no transfer-pricing-specific documentation penalties.

Penalty relief

A reduction in penalties can be negotiated based on quality of contemporaneous transfer pricing documentation.

Documentation requirements

Contemporaneous documents pertaining to transfer pricing need not be submitted with the tax return form, but should be made available to the IRB upon request. All relevant documentation must be in, or translated into, Bahasa Malaysia (the national language) or English.

There is no disclosure required on a tax return to indicate that transfer pricing documentation has been prepared.

The IRB has set out a list of information and documentation to be prepared for transfer pricing purposes. This list is neither intended to be exhaustive nor meant to apply to all types of businesses. Instead, taxpayers are advised to maintain information and documentation that are applicable to their circumstances. The list includes:

• Company details
  • Ownership structure showing linkages between all entities within the Multinational Enterprise (MNE)
  • Company organization chart
  • Operational aspects of the business including details of functions performed
• Transaction details
  • A summary of transactions with other entities in the same MNE, indicating the name and address of each entity in the MNE with whom international transactions have been entered into, and the type of transactions (e.g., purchase of raw material or fixed assets, sale of finished goods, borrowing of money)
  • A summary of transactions similar to the above that are conducted with independent parties or information derived from independent enterprises engaged in similar transactions or businesses
  • Economic conditions during the time of the transactions
  • Terms of the transactions, including where applicable contractual agreements with overseas associated parties with regard to technical assistance fees, management fees, marketing fees, recruitment fees or other services provided, royalties payable, purchase or rental of equipment or other assets, handling charges, loans, allocation of overhead expenses or any specific expenses (e.g., promotional or advertising) borne by the foreign entity or other forms of payment to overseas associates
  • Pricing policy over the past seven-year period
  • Breakdown of product manufacturing costs
  • Product price list
• Determination of arm’s length price
  • The pricing method adopted, showing how the arm’s length price is derived, and indicating why that method is chosen over other methods
  • Functional analysis taking into consideration all risks assumed and assets employed
  • If a comparability analysis results in a range of arm’s length outcomes, then the furnishing of documents relating to all of the outcomes and the reasons for choosing that particular arm’s length price from the range of outcomes must be given.

Documentation deadlines

There is no documentation deadline. However, documentation should be prepared contemporaneously. As tax returns are due for filing to the IRB within seven months of the close of a company’s financial year-end, it is advisable that transfer pricing documentation be prepared before the submission date of the return.

Statute of limitations on transfer pricing assessments

There is a six-year statute of limitations for tax adjustments, and documentation must be kept for seven years. There is no statute of limitations in instances of fraud, willful default or negligence.

Return disclosures/related-party disclosures

Disclosure of arm’s length values is required in the tax return for the following transactions:

• Sales to related companies
• Purchases from related companies
• Other payments to related companies
• Lending to and borrowing from related companies
• Receipts from related companies

Audit risk/transfer pricing scrutiny

The risk of transfer pricing scrutiny during an audit is high. Tax audits are carried out under a self-assessment regime. Every company is expected to be subject to a desk or field audit at least once every five years. With the release of the Malaysian Transfer Pricing Guidelines, greater scrutiny on transfer pricing has been observed in these field audits. Ernst & Young’s experience is that every multinational corporation that was audited over the last 12 months was scrutinized on its transfer pricing policy. Since the beginning of 2005, the number of transfer pricing audits and investigation activity by the IRB increased significantly. There is a specific transfer pricing unit in the IRB to handle all transfer pricing audits.

This scrutiny is expected to increase significantly with the introduction of §140A of the Malaysian Income Tax Act, 1967: Power to substitute the price and disallowance of interest on certain transactions. This section effectively shifts the onus unto the taxpayer to prove arm’s length pricing in acquisition or supply of property and services. Furthermore, this section also imposes thin capitalization rules, disallowing deductions for interest, finance charge and other consideration in respect of financial assistance between related persons.

APA opportunity

The introduction of §138C in the Malaysian Income Tax Act, 1967 effectively formalizes the availability of unilateral and bilateral APAs in Malaysia. However, at this stage, formal guidelines on APAs are still in draft form, and the IRB has previously indicated that it will consider any terms and conditions which are the norm observed in the transfer pricing regimes in other jurisdictions. A specific transfer pricing unit in the IRB has been established to oversee the APA applications and negotiations.

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