Malaysia introduces new Advance Pricing Arrangement Rules 2023

Malaysia introduces new Advance Pricing Arrangement Rules 2023

Key highlights:

• Taxpayers can only seek a bilateral or multilateral advance pricing arrangement (APA) for cross-border transactions with an associated person from countries that have an avoidance of double taxation agreement (DTA) with Malaysia.
• The rollback of an APA outcome is allowed only for a period of up to three years of assessment (YAs) immediately preceding the APA’s covered period, where the proposed transfer pricing (TP) methodology is relevant to the resolution of TP issues in the prior years’ assessment and the facts and circumstances remain substantially the same as the covered period, subject to verification on audit.
• Contemporaneous TP documentation must be prepared in accordance with the new TP Rules and must be submitted together with the request for the pre-filing meeting with respect to the APA application.

The Inland Revenue Board of Malaysia (IRB) has released new APA Rules, cited as the Income Tax (Advance Pricing Arrangement) Rules 2023 [P.U.(A) 166] (new APA Rules), dated 29 May 2023.  With this, the Income Tax (Advance Pricing Arrangement) Rules 2012 [P.U. (A) 133/2012] are revoked.

The changes set out in the new APA Rules are summarized below.

Application for an APA 

• An APA application can be made by a taxpayer who carries on a cross-border transaction with an associated person. 
  • An application for a bilateral APA or multilateral APA will only be accepted where the counterparty to the transaction is from a country that has a DTA with Malaysia pursuant to Section 132 of the Income Tax Act 1967 (ITA).
  • A unilateral APA can be sought for transactions with a person from a country that does not have a DTA with Malaysia.
  • A permanent establishment may only apply for a bilateral or multilateral APA, and cannot apply for a unilateral APA. Such applications shall be made by its head office on behalf of the permanent establishment to the Director General of the IRB (DG).
  • The arm’s length transfer price for an APA shall be ascertained in accordance with:
    • Section 140A of the ITA; 
    • The Income Tax (Transfer Pricing) Rules 2023 [P.U. (A) 165] (new TP Rules); and
    • The DTAs entered into pursuant to Section 132 of the ITA. 

Additional documentation to be submitted together with the pre-filing meeting request

• Contemporaneous TP documentation as specified in the new TP Rules.
• A description of the critical assumptions under which the proposed TP methodology and analysis relating to the critical assumption will operate and the events that should be taken into account when considering the said assumptions.
• Financial statements and tax computations - at least for the latest three years prior to the application.
• A written indication of whether the income in relation to the covered transactions is exempted from tax by the other Competent Authority.

Timing of filing the APA application

• The DG shall notify the taxpayer within 14 days after the pre-filing meeting of his decision on whether the taxpayer may proceed to submit an APA application.
• The taxpayer is to submit the APA application, within six months from the date of notification by the DG on the outcome of the pre-filing meeting.
• In the case of an APA renewal, a taxpayer may submit the renewal application to the DG in a form under Subsection 138C(2) and Section 152 of the ITA within two months after receipt of the DG’s written decision.

Additional circumstances under which an application for an APA may be declined

• Failure to comply with the contemporaneous TP documentation requirements per the new TP Rules;
• Where the proposed covered transaction involves improper use or abuse of the application of the DTA to obtain unintended benefits. 

It should also be noted that where the taxpayer does not furnish additional information requested by the DG within 30 days of the date of the request, the APA application shall be deemed to have been withdrawn by the taxpayer. 

Additional guidance on rollback 

• A rollback of not more than three YAs immediately preceding the covered period of the bilateral or multilateral APA will be allowed, where the proposed TP methodology is relevant to the resolution of the TP issues in the prior years’ assessment, and the facts and circumstances remain substantially the same as the covered period, subject to verification on audit.
• A rollback for the bilateral or multilateral APA shall not apply if: 
  • A tax audit has been conducted by the DG on the prior YAs 
  • A voluntary disclosure has been submitted by the taxpayer for a TP matter for the prior YAs 
  • The matter on which the APA is sought has been decided by the Special Commissioners or a court; and
  • Unless stipulated otherwise in the APA, the taxpayer has not submitted the amended tax computation for rollback years within 30 days from the date of signing the APA.

Additional disclosure requirements for APA compliance report

• Ownership structure of the local and foreign entities involved in the covered transaction, local organisation chart, details of the controlled transactions and flow of the covered transactions
• Relevant accounting entries in relation to compensating adjustments for taxpayers and foreign entities, to ensure the economic and tax position of the arm’s length price are  aligned
• Results which comply with the TP methodology for a YA.

Additional situations for revocation of an APA 

• If any of the persons in the covered transaction in respect of the arrangement fails to disclose any occurrence of voluntary disclosure, investigation, audit or incentive approval; or
• If the bilateral APA or multilateral APA entered into with the other participating Competent Authority has been revoked.

Fee and other payments for the APA application

• The taxpayer shall pay a non-refundable fee for filing and processing the APA application as follows: 
  • If the application is made within two months after the receipt of notification from the DG for the taxpayer to proceed with the application for the APA - RM5,000
  • If the application is made after two months but within six months after the receipt of notification from the DG – RM10,000
  • Application for renewal of an APA - RM5,000
  • Any other expenses as determined by the DG

Practical considerations and next steps for taxpayers

The new APA Rules provide further clarity on the APA process and administrative matters surrounding the application for an APA. However, taxpayers should note the following:

• The new APA Rules stipulate that a taxpayer is given 30 days to furnish any additional information requested by the DG. However, it remains silent on whether an extension of time can be sought.  
• Taxpayers need to ensure that their contemporaneous TP documentation is in line with the new TP Rules. The new TP Rules have additional TP documentation requirements for taxpayers, in particular extensive information required under Schedule 1 relating to Multinational Enterprise Groups. This is particularly onerous for taxpayers that are part of a Group to which the Master File requirements do not apply.
• Rollback applications are only allowed for bilateral or multilateral APAs. The new APA Rules do not permit rollback applications for unilateral APAs, which may be challenging for taxpayers as those years may be subject to TP audits, thereby increasing litigation risks and associated costs for the taxpayer.

Key takeaways

• Taxpayers may consider applying for an APA (including rollback, where applicable) to obtain certainty on the transfer price for a specified period.
• The following taxpayers in particular would benefit from the certainty and protection from double taxation which an APA may provide:
  • Taxpayers with significant cross-border intercompany transactions
  • Taxpayers who have entered into material intragroup services transactions
  • Taxpayers with a history of TP Audits
  • Taxpayers who have recently completed or are about to complete their incentive periods
  • Taxpayers which deal with low-tax jurisdictions

Overall, an APA would help mitigate compliance and potential litigation costs for the years which are covered by the APA.

How EY can help you

• We can assist you with the timely preparation of robust contemporaneous TP documentation which are in line with the requirements of the new TP Rules, for the purpose of the APA application.
• We can assist you with APA applications and provide support throughout the APA process, to gain certainty on the TP arrangements for material intercompany transactions.

EY will be holding a webinar to discuss the new APA Rules. The webinar details will be released shortly.

For additional information regarding this alert or to discuss any other matters relating to TP, please contact any of the following: