The Malaysian Finance Act 2020 introduced, among others, several legislative changes to the Malaysian Income Tax Act 1967 (ITA) in respect of transfer pricing. Notably, a penalty provision was introduced. Effective 1 January 2021, taxpayers (where applicable) who fail to furnish transfer pricing documentation (TPD) upon the Malaysian Inland Revenue Board’s (MIRB’s) request will be subject to a fine ranging from RM 20,000 to RM 100,000 and / or imprisonment.
Consistent with this, the MIRB has also revised the Transfer Pricing Guidelines 2012 to reduce the time given to taxpayers to furnish their TPD from 30 days to 14 days.
The introduction of this penalty provision brings to light stricter enforcement measures adopted by the MIRB against the backdrop of increasing tax and transfer pricing audit activity. In view of the short time frame of 14 days to furnish TPD, taxpayers now need to be aware that time is of the essence in preparing contemporaneous TPD.
For companies that currently already have TPD, it may be prudent to review them to ensure that they are aligned with the MIRB’s requirements and that their transfer pricing policies are defensible in the event of an audit.
In more detail
Recent transfer pricing-related amendments made to the ITA
Among the amendments affecting the Malaysian transfer pricing regime from 1 January 2021 onwards are the following:
- Introduction of a penalty for the failure to furnish TPD upon the MIRB’s request (section 113B of the ITA) (“TPD Penalty“). This amendment will be elaborated in the next section.
- Introduction of a provision which allows the Director General of Inland Revenue (DGIR) to impose a surcharge not exceeding 5% on any transfer pricing adjustment made, regardless of whether the adjustment resulted in any additional tax payable (section 140A(3C) of the ITA).
- Insertion of provisions legislating the existing authority for the DGIR to disregard and make adjustments to any structure adopted in a controlled transaction so the transaction may be carried out at arm’s length, having regard to economic and commercial reality (sections 140A(3A) and 140A(3B) of the ITA).
Introduction of the TPD Penalty
While taxpayers are not required to file their TPD along with their annual income tax returns, taxpayers have to furnish their TPD for any year of assessment upon the MIRB’s request. With the introduction of the TPD Penalty, any taxpayer who fails to furnish their TPD to the MIRB within the stipulated time frame may be liable to a fine ranging from RM 20,000 to RM 100,000 and/or imprisonment not exceeding six months.
The applicable time frames to submit the TPD requested is currently as follows:
|For transfer pricing audit cases which have commenced before 1 January 2021||Within 30 days from the date of the MIRB’s written notice of request|
|For transfer pricing audit cases which have commenced on or after 1 January 2021||Within 14 days from the date of the MIRB’s written notice of request|
In short, the introduction of the TPD Penalty is particularly significant as it provides the MIRB with the power to penalise a taxpayer without having to undergo the whole audit process, given that the taxpayer may be penalised solely for not being able to furnish TPD for the relevant year of assessment in time.
How can we can help
With the introduction of the penalty for failure to furnish TPD as well as the power to impose a surcharge on any transfer pricing adjustment made, taxpayers may expect increased transfer pricing audit activity and intensified scrutiny on intercompany transactions.
In this regard, businesses without TPD may wish to consider if their intercompany transactions warrant TPD. Companies with existing transfer pricing policies and documentation should ensure that they are sufficiently robust to withstand audit and scrutiny.
We have a multi-faceted and multi-disciplinary team of transfer pricing practitioners who are economists and tax lawyers who are able to provide strategic advice and assistance in respect of the following:
- Transfer Pricing Planning – we are well positioned to support you in developing a sustainable planning approach;
- TPD Preparation and Defence – we are capable ot assisting you with the requisite TPD that is compliant and defensible; and;
- Transfer Pricing Audit Support – in times of audit, we are well placed to support you and your team.