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Steep Penalties for Not Preparing Transfer Pricing Documentation in Malaysia
The Inland Revenue Board of Malaysia (IRBM) has taken a significant move to improve transfer pricing compliance by introducing new penalty provisions, whereby taxpayers involved in related party transactions must prepare either full or partial transfer pricing documentation, depending on whether the taxpayer has reached the threshold. Failing to prepare the transfer pricing documentation will incur a penalty of RM 20,000 to RM 100,000 imposed by the IRBM.
With effect from year of assessment 2014, the IRBM formally introduced an additional question asking corporate taxpayers to indicate if they had prepared transfer pricing documentation by way of a “Yes or No.” in the Corporate Income Tax Return Form (Form C). With this additional disclosure, taxpayers would be required to prepare and maintain contemporaneous transfer pricing documentation as an annual tax compliance requirement prior to filing an annual income tax return.
Transactions between related companies include:
sales to related companies;
purchases from related companies;
other payments to related companies;
loans to/from related companies; and
receipts from related companies.
Referring to the Income Tax (Transfer Pricing) Rules 2012 and Transfer Pricing Guidelines 2012, a person who undertakes related party transactions domestically and across borders should prepare contemporaneous transfer pricing documentation.
Basically, the Guidelines apply wholly to all taxpayers meeting the following conditions:
i) Taxpayers carrying out businesses with a gross income of more than RM25 million, and a total amount of related party transactions of more than RM15 million; and
ii) For taxpayers providing financial assistance, where such financial assistance is more than RM50 million. Transactions involving financial institutions are excluded.
Taxpayers who fall within the above scope of the Guidelines need to prepare contemporaneous transfer pricing documentation. Taxpayers who do not fall under the above scope may opt to prepare partial transfer pricing documentation covering specific requirements of the Guidelines.
A person who enters into a controlled transaction shall prepare contemporaneous transfer pricing documentation which includes records and documents which provide a description of the following matters:
Organizational structure including an organization chart covering persons involved in a control transaction.
Nature of the business or industry and market conditions.
Assumptions regarding factors that influenced the setting of prices, or pricing policies and business strategies that influenced the determination of transfer prices.
Comparability, functional and risk analyses.
Selection of the transfer pricing method.
Application of the transfer pricing method.
Background documents that provide for or were referred to in developing the transfer pricing analysis.
Index to documents.
Any other information, data or document considered relevant in the determination of an arm’s length price.
To further tighten the enforcement of transfer pricing compliance by Malaysian taxpayers, the IRBM extended the transfer pricing adjustment periods from 5 years to 7 years in December 2014.
With the introduction of new penalty provisions for failing to prepare transfer pricing documentation, the IRBM updated the transfer pricing guidelines on 2 February 2021, whereby the time to submit transfer pricing documentation was reduced from 30 days to 14 days once requested by the IRBM.
The transfer pricing landscape in Malaysia continues to evolve, with the tax authority becoming more aggressive in scrutinizing the controlled transactions of domestic groups of companies. In view of the above, affected taxpayers must pay immediate attention and take immediate action, otherwise hefty and painful penalties will result.
Contemporaneous documentation is crucial to proving to the IRBM that the taxpayer’s pricing policy for controlled transactions is at arm’s length. Therefore, taxpayers should ensure that appropriate transfer pricing documentation for each particular year of assessment (YA) is ready and in place, so that transfer pricing audits can be dealt with more efficiently and effectively.
Ang Heng Ann
Ecovis Malaysia Tax
Tel : +603 7981 1799
Fax: +603 7980 4796
Ecovis welcomes its new Head of Business Development
With 18 years of experience in Business Development and in assisting multinational companies and SMEs expanding and maintaining operations overseas, Rosario Di Maggio has now been appointed Head of Business Development at ECOVIS International, and will be reporting directly to the Management Board.
Rosario started his professional career at the European Union Chamber of Commerce in China in 2004 before joining a fast-growing Asian regional consulting firm specialized in assisting American and European companies expanding into Asian Emerging Markets. Here, he co-led teams of accountants, tax specialists and legally trained professionals located in several offices across South China and Vietnam.
In 2014, Rosario joined a global service provider of trust, fund administration and corporate service with offices across the world. As Business Development Director based in Shanghai, he built a team of professionals assisting clients with their expansion plans in Greater China. Later in January 2018, Rosario relocated to Luxembourg where, as a Senior Business Development Director, he designed and implemented a pan European Business Development strategy for European based clients to expand activities both within Europe and in other continents. This position allowed him to focus on many cross-border projects for clients involved in multiple jurisdictional international expansion.
Born in Belgium and raised in Belgium and Italy, Rosario Di Maggio holds a Master degree in International Relations and Developing Countries from Bologna University and a Master of Business Administration from the Hong Kong University of Science and Technology. He is fluent in English, Italian, Spanish and French.
“I am looking forward to contribute to the further development of ECOVIS International. We are living in challenging times, with limited access to travel and deep transformation of our daily business and working life. However, difficult times bring opportunities and I am thrilled to join the Ecovis family, a client centric organization led by an amazing group of people dedicated to provide the highest standard of services to client”, says 44 years old Rosario Di Maggio.
The history of ECOVIS BB3 Audit dates back to the beginning of the year 2000. In July 2016 Jeroen Rans and Frank Bloemen became partners of ECOVIS BB3 Audit. Alongside with the two partners, ECOVIS BB3 Audit currently employs seven professionals and one administrative staff. ECOVIS BB3 Audit provides services in the audit field. Services include:
Statutory and voluntary audits
Review of financial statements
Statutory group audits
Audit of internal controls
Financial due diligence
The firm handles the financial issues faced by family businesses, SMEs, international companies and non-profits. Their main office is located in Herent but they can also assist clients in Antwerpen and Gent where ECOVIS BB3 Audit has visiting addresses.
We warmly welcome our new colleagues from Belgium to the Ecovis family!