TRANSFER pricing (TP) refers to inter-company pricing arrangements for the transfer of goods, services and intangibles between associated or related persons.
Transfer pricing laws and guidelines are in place to ensure fairness of the transactions by enforcing the arm’s length rule. Simply put, taxpayers are required to demonstrate that the related party transactions are carried out in an arms-length manner i.e. comparable to third party transactions and to demonstrate this, transfer pricing documentation is to be prepared accordingly.
What is meant by transfer pricing documentation
The Income Tax (TP) Rules 2012 and the TP Guidelines 2012 require a person who enters into a controlled transaction to prepare contemporaneous TP documentation which is to be submitted to the tax authorities within 30 days upon request by the Inland Revenue Board (IRB).
Currently, there is no specific penalty imposed for the failure to submit the contemporaneous TP documentation within 30 days upon request by the IRB.
However, effective from Jan 1,2021, taxpayers that fail to submit the contemporaneous TP documentation within 30 days upon request by the IRB can be fined between RM20,000 and RM100,000 and/or to imprisonment for a term not exceeding six months.
Practically all tax payers that have related party transactions need to take heed of this new penalty.
Based on the existing transfer pricing guidelines, taxpayers with gross income exceeding RM25mil where their related party transactions exceed RM15mil are required to prepare complete and detailed transfer pricing documentation.
It, however, does not mean that taxpayers that do not reach the above threshold are not required to prepare the TP documentation as the guidelines require the preparation of a simplified version.
It therefore affects all taxpayers that have related party transactions.
Is it true that a loss-making company will not be affected by transfer pricing adjustments carried out by the IRB
It could be said that a loss- making company might not have been affected by transfer pricing adjustments in the past although the reasons for the losses may be scrutinised by the tax authorities.
However, another amendment to the TP rules that is effective from Jan 1,2021 allows the tax authorities to impose a surcharge of 5% on companies that are loss-making or enjoying tax incentives if it is found that the related party transactions are not conducted at arms-length. This means that even if the transfer pricing adjustment does not result in additional tax payable, the surcharge of up to 5% may still be imposed on the amount of increase of any income or reduction of any deduction or loss arising from the TP adjustment. As many companies are expected to report losses in 2020 and the next one to two years, this measure might be quite instrumental for tax collections from the IRB’s perspective.
What should tax payers with related party transactions do?
It is becoming increasingly onerous on tax payers in relation to transfer pricing matters and taxpayers should assess the risks involved if they have not prepared transfer pricing documentation.
It is highly recommended that at the very least the simplified version as per the guidelines is kept on file for taxpayers whose gross income and related party transaction values do not exceed RM25mil and RM15mil respectively.
Harvindar Singh is Tax Partner at SCS Global Consulting (M) Sdn Bhd. Views expressed here are the writer’s own.