IF the latest study showing how tax authorities worldwide are clamping down on transfer pricing is at all indicative, gloom and penalties are in store for unprepared firms when the Inland Revenue Board (IRB) comes knocking on the door.
Thats because the IRB is looking to boost its revenue significantly this year and has recently been equipped with a new tool that could help it do just that.
In July, it introduced sweeping new guidelines to curb the practice of manipulating prices in transactions with related parties to evade tax (generally known as transfer pricing), believed to be particularly prevalent among multinationals.
Taxation experts at Ernst & Young, describing transfer pricing as the most important international tax issue, said companies particularly those operating in multiple jurisdictions should watch out.
Malaysia is just the latest in a growing number of countries to introduce such regulations: over 30 countries already have them in place or plan to implement them soon, up from only two countries just eight years ago.
In its recently released biennial survey of over 800 global businesses, Ernst & Young found over two-thirds of respondents saying transfer pricing would be the biggest international tax issue they will face in the next two years, while 76% feared a tax examiner could be paying them a visit within the same period.
The fear is real, as revenue authorities are beefing up their detection and assessment capabilities. And the IRB in Malaysia had been on an aggressive recruitment drive for experts to help them unearth the culprits, said the firm's principal, Yvonne Chan.
She said the IRB's investment in its enforcement task force, which would include economists, analysts and industry experts, was a good indication of the potential added tax revenue it hoped to collect.
They have done their sums, she added.
Although some multinationals were enjoying tax holidays such as during a pioneer status period, the number of companies paying taxes was also substantial.
Chan said companies needed to ensure they had the proper documents to convince authorities that their pricing decisions were at arm's length and that they were consistently applied during and post tax-free period. A failure to demonstrate this could leave them open to hefty additional taxes and penalties, she noted.
Globally, the study's findings were ominous. About one in three of all audits resulted in additional tax payable and, of those, a third were additionally threatened with a penalty. (In Malaysia, the law allows the imposition of a penalty of between 100% and 300% of the tax adjustment.)
Forty per cent of transfer pricing adjustments resulted in double taxation.
Tangible goods accounted for the highest proportion of audits, although services and intangibles were attracting increasing attention, it added.
Chan said there was greater awareness among firms in Malaysia of the IRB's new guidelines, but there was still little action in improving documentation as many deem it to be a matter of less urgency.
This, however, could change after the first transfer pricing audits take place. According to the survey, the majority of the multinationals which have been audited improved their transfer pricing documentation practices soon after.
Ernst & Young senior manager Danielle Donovan said companies could be missing out on legitimate tax planning opportunities as too many of them were looking at the new rulings as a compliance requirement when they should be considering them under a business strategy perspective.
In the survey, for instance, only 40% of parent company respondents and 36% of subsidiaries believed that their transfer pricing policies were for more than just compliance.
Nor does there seem to be any sign that multinationals are using transfer pricing for planning purposes in place of financial structures that tax authorities may see as purely tax motivated, it said.
Donovan said the clearer rules could be a godsend for progressive firms in Malaysia.
There would appear to be many missed opportunities. By tax planning, they could even come out better off than now, she said.