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Transfer Pricing Malaysia: New Income Tax Rules in 2023

22.08.2023

The Inland Revenue Board of Malaysia (IRBM) has issued the latest Income Tax (Transfer Pricing) Rules 2023, which are effective from the 2023 assessment year and replace the Income Tax (Transfer Pricing Rules) 2012. The experts from ECOVIS MALAYSIA TAX SDN BHD explain what companies must pay attention to.

What the New Transfer Pricing Rules Bring

The rules apply to controlled transactions given in subsection 140A (2) of the Income Tax Act and are used in determining and applying the arm’s length price for the acquisition or supply of property or services in accordance with these rules. This article highlights some of the key changes which taxpayers making such transactions must be aware of.

The New Definition of Contemporaneous Transfer Pricing Documentation (CTPD)

Under the new rules, a person who enters into a controlled transaction must prepare a CTPD prior to the due date for furnishing a return in the basis period of an assessment year in which the controlled transaction takes place.

The CTPD must contain:

• Multinational enterprise group information (master file information).
• The individual’s business information (local file information).
• Information and documentation regarding the cost contribution arrangement.

Timeline: The CTPD must be prepared prior to the tax return lodgement due date and furnished within 14 days upon request by the IRBM.

Date: The CTPD completion date must be provided.

Non-applicable information: The CPTD must also include information, data or documents concerning non-applicability.

Taxpayers are obliged to prepare full transfer pricing documentation if the company has:

• gross income of more than MYR 25 million and
• total related party transactions of more than MYR 15 million or
• receives financial assistance of more than MYR 50 million (does not apply to transactions involving financial institutions).

We will show you the steps you must take to comply with the new transfer pricing rules.

Ang Heng Ann, Tax Partner, ECOVIS MALAYSIA TAX SDN BHD, Kuala Lumpur, Malaysia

Hierarchy of Transfer Pricing Methods No Longer Applies

According to the 2012 rules, the IRBM required transfer pricing methods to be selected on a hierarchy basis to assess applicability and reliability. However, the new 2023 rules remove this hierarchy of methods.

Director General’s Power

The director general of the IRBM has the right to:

• Make an adjustment to reflect the arm’s length price or arm’s length interest rate for a transaction by substituting or imputing the price or interest rate, as appropriate.
• Adjust the price of the controlled transaction to the median if the price is outside the arm’s length range, or to any point above the median if the price is within the arm’s length range. This applies when the uncontrolled transaction is of a lesser degree and any of the comparability defects cannot be quantified, identified or adjusted.
• Impose a surcharge in accordance with subsection 140A(3C) of the Income Tax Act.

Arm’s Length Range

Definition: The Income Tax (Transfer Pricing) Rules 2023 defines the “arm’s length range” as a range of figures or a single figure falling between the value of 37.5 percent and 62.5 percent of the data set and acceptable to the director general in determining whether the arm’s length price has been applied in a controlled transaction. This range is derived by either applying the same transfer pricing methodology to multiple comparable data or applying different methods, as determined under rule 6 of the Income Tax (Transfer Pricing) Rules 2023.

According to rule 6, the methods for determining the arm’s length price are:

• The traditional transactional method.
• The transactional profit method.
• Any other method allowed by the director general which provides the highest degree of comparability between the transactions.

The introduction of these enhancements to the transfer pricing rules aims to increase taxpayers’ transfer pricing compliance and make it easier for the IRBM to enforce. Taxpayers must ensure that they take the appropriate steps to ensure compliance, as the rules are becoming more stringent.

For further information please contact:

Ang Heng Ann, Tax Partner, ECOVIS MALAYSIA TAX SDN BHD, Kuala Lumpur, Malaysia
Email: hengann.ang@ecovis.com.my

Cross-border Data Transfer Made Easy: The CAC Standard Contract

21.08.2023

The transfer of personal data has been much simpler since 1st June 2023. This has been made possible by the newly introduced Collective Action Clause (CAC) Standard Contract, together with the corresponding Standard Contractual Clauses (referred to as “China SCCs”). The experts from Ecovis Richard Hoffmann law firm explain what needs to be considered with the Standard Contract and how the new simplified procedure works.

Previously, whether it was conducting a CAC security assessment or certifying personal data, the cross-border transfer of personal data was challenging. The processes involved high costs, a significant administrative burden, and long waiting times.

Overview: Cross-border Data Transfer and its Challenges

With the introduction of the Standard Contract, China is taking another important step to ensuring the secure and private transfer of personal or confidential data to other countries. Organisations that transfer large amounts of personal data are required to apply one of three transfer mechanisms. All three transfer mechanisms are outlined in Article 38 of China’s Personal Information Protection Law (PIPL):

1. The first is the security assessment conducted by the Cyberspace Administration of China (CAC), which follows a complex two-step process of self-assessment and CAC security assessment.
   Duration: At least 57 working days
   This assessment is mandatory for:
   1. Data processors transferring the personal data of more than 1 million individuals
   2. The general transfer of the personal data of more than 100,000 individuals or the sensitive personal data of more than 10,000 individuals
   3. The transfer of other data of special significance
2. For affiliated companies, obtaining a “Personal Information Protection Certificate” from specialist institutions involves a lengthy process.
   Duration: Approximately 110 working days
3. A new option: Concluding a Standard Contract and submitting it to the relevant CAC authority
   Duration: At least 15 working days

Unlike the European Standard Contractual Clauses (EU SCC), the CAC Standard Contract does not have four different modules (“controller-to-controller,” “controller-to-processor,” “processor-to-controller,” “processor-to-processor”). Instead, it adopts a “one-size-fits-all” approach, using a universal “module” for all transfers of personal data abroad. The obligations of the parties (exporter and overseas recipient) are not dependent on their role and function.

ECOVIS Ruide in Shanghai and ECOVIS Heidelberg provide tax and legal advice for German and Chinese companies.

Richard Hoffmann, Lawyer, Ecovis Heidelberg, Germany

Key Information About the CAC Standard Contract

• It is applicable when there is no obligation for a CAC security assessment (as mentioned above)
• Language: Mandarin Chinese (mandatory)
• Process duration: At least 15 working days; extension of at least 25 working days where supplementary documentation/adjustments by the data processor and re-examination are required
• Process description:
  • What: Obligation to submit documents, including the signed standard contract and the data protection impact assessment report
  • When: within 10 working days after the Standard Contract takes effect
  • Where: to the competent CAC authority at the provincial level
  • Form: in written and electronic form
• The regulations of the CAC Standard Contract, like the EU SCC, are non-negotiable
• Additional agreements or conditions that do not contradict the purpose of the Standard Contract are permissible
• Termination of the contract is achieved through mutual agreement based on designated reasons
• Liability between the contracting parties (exporter and overseas recipient) applies to all damages caused by a contract breach
• Joint liability of the exporter and the overseas recipient towards the data subjects from whom the personal data originates; recourse claims between the joint debtors

Parallel Application of the CAC Standard Contract (China SCC) and the EU SCC

The CAC Standard Contract and the EU SCC both have substantive differences and partially contradictory provisions. Both standard contractual clauses are non-negotiable and unchangeable. Therefore, in each specific case, it is essential to determine whether the CAC Standard Contract or the EU SCC applies. The two parties to the CAC Standard Contract must ensure in advance, based on the local laws and practices at the destination, that the transfer process is not hindered.

Be on the Safe Side with Legal and Tax Advice

Businesses should be extremely vigilant when transferring personal information as described above. In particular, it is important to closely scrutinise the interaction between the CAC Standard Contract and the EU SCC in advance. Extensive research is key! Businesses should seek help and support to ensure a smooth process and avoid liability or high fines if the requirements for data transfer are not met. These fines are imposed not only on the “person in charge” but also on “other personnel subject to direct liabilities.”

The appropriate procedure for data transfer (security assessment, certificate, or CAC Standard Contract) should be selected after a thorough data analysis. The affected parties must be informed of the transfer and, if necessary, their consent obtained. The data processor must perform a due diligence assessment of the data recipient and conduct a privacy risk and impact assessment with a subsequent report before concluding the Standard Contract.

The data recipient and data processor should maintain close communication before and during data export. The implementation of technical and organisational measures (TOMs) must be coordinated.

Additionally, companies should assess whether the data processing and transfer comply with the provisions of the Standard Contract as well as other individual conditions. Active information exchange with the CAC authority is also necessary.

For further information please contact:

Richard Hoffmann, Lawyer, Ecovis Heidelberg, Germany
Email: richard.hoffmann@ecovis.com

Cross-Border Game Providers in Vietnam: Impact of Recent Actions by the MIC

18.08.2023

The Ministry of Information and Communications (MIC) and its Authority of Broadcasting and Electronic Information division (ABEI) recently implemented various measures that have significantly impacted cross-border game providers in Vietnam. Most notably, the specific actions taken by the MIC and ABEI requesting that Apple and Google remove/delete unlicensed games in Vietnam.

The Consequences for Foreign and Domestic Game Providers

The actions of the MIC and ABEI have led to increased challenges and costs for cross-border game providers operating in the country. They have also limited the available channels and platforms for Vietnamese gamers, as well as restricting payment options. These actions now require cross-border game providers to establish a legal entity in Vietnam and seek the relevant approvals on content/censorship from the authorities to comply with Vietnamese regulations on offering online gaming services, as the experts from ECOVIS Vietnam OC Law in Ho Chi Minh City know.

The Impact

The overall impact has been to reduce the number of cross-border game providers operating in Vietnam and to make it more difficult for Vietnamese gamers to access these games. This has had a negative impact on the Vietnamese gaming industry, as it has reduced competition and made it more difficult for Vietnamese game developers to compete with foreign developers.

In addition to the direct impacts on cross-border game providers, there are also a number of indirect impacts. For example, there has been a decline in the number of Vietnamese gamers, as some have simply given up playing cross-border games due to the difficulties involved. This has had a negative impact on the Vietnamese gaming economy, as it has reduced the amount of money being spent on games.

The Rationale

The MIC and ABEI have justified their actions by arguing that they are necessary to protect Vietnamese children from harmful content and to promote the development of the Vietnamese gaming industry. However, many critics have argued that the actions are excessive and that they will ultimately harm the Vietnamese gaming industry.

Do you want to offer online games in Vietnam despite government restrictions? Speak to us.

Vu Manh Quynh, Managing Partner, ECOVIS Vietnam OC Law, Ho Chi Minh City, Vietnam

The Long-term Impacts

It remains to be seen how the long-term impacts of these actions will play out. However, it is clear that they have already had a significant effect on the cross-border gaming industry in Vietnam.

What Does this Mean for Cross-border Game Providers?

Cross-border game providers operating in Vietnam, or considering entering the Vietnamese market, need to be aware of the recent MIC and ABEI actions, which have made it more difficult and expensive to operate in Vietnam and limited the payment options available to Vietnamese gamers. Cross-border game providers that are not prepared to comply with Vietnamese regulations may find it difficult to continue operating in Vietnam.

What Does this Mean for Vietnamese Gamers?

Vietnamese gamers have also been affected. It has become more difficult for Vietnamese gamers to access cross-border games, and they have more limited payment options. Vietnamese gamers who are not willing to comply with Vietnamese regulations may find it difficult to continue playing cross-border games.

What Can Foreign Game Providers Do?

Cross-border game providers and Vietnamese gamers who are affected by the recent MIC and ABEI actions should consider taking the following steps:

• Stay up to date on the latest regulations and requirements
• Work with a local law firm to ensure compliance with Vietnamese regulations
• Consider using a payment processor specifically designed for the Vietnamese market
• Educate Vietnamese gamers about the recent changes and how they can continue to play cross-border games

The future of cross-border gaming in Vietnam is uncertain. However, cross-border game providers and Vietnamese game developers who are prepared to comply with Vietnamese regulations may be able to continue to operate in the Vietnamese market (see box for statistics).

For further information please contact:

Vu Manh Quynh, Managing Partner, ECOVIS Vietnam OC Law, Ho Chi Minh City, Vietnam
Email: quynh.vu@ecovislaw.vn

Nguyen Nhuan, Partner, ECOVIS Vietnam OC Law, Ho Chi Minh City, Vietnam
Email: nhuan.nguyen@ecovislaw.vn