With effect from year of assessment 2014, the income tax return for corporate tax payers has a mandatory field for confirmation of the availability of Transfer Pricing documentation (TP) for support of their related party transactions. Therefore, all tax payers with related party transactions must prepare and update their TP documentation on annual basis, as required under the Transfer Pricing Guidelines 2012 and the Income Tax (Transfer Pricing Rules) 2012. There are no specific penalties for failure to comply with TP rules but the following penalties is commonly applied among the tax payers:
- If there is no contemporaneous TP documentation, a penalty at rate of 50% of the taxes under-charged being imposed; and
- If the TP documentation is prepared however not according to the Guidelines, a penalty at rate of 30% of the taxes under-charged being imposed.
Further the 2021 Budget Proposal and effective from 1st January 2021, we wish to bring your attention to the below updates in relates to the TP Documentation.
Penalty for failure to furnish contemporaneous TP documents
Currently, tax payers which enter into controlled transactions are required to prepare contemporaneous TP documentation under the Income Tax (Transfer Pricing) Rules 2012. The TP documentation is required to be furnished to the Inland Revenue Board Malaysia (“IRB”) upon the IRB’s request. With the new insertion of Section 113B of the Income Tax Act 1967 (ITA), upon conviction, tax payer will be fine between RM20,000 to RM100,000 or imprisonment of up to 6 months, or both; and the Count may order for the TP documentation to be furnished within 30 days or any other period deemed fit by the Court. Nonetheless, tax payer may appeal to the Special Commissioners of Income Tax to waive/reduce the penalties. If no prosecution is instituted, the Director General (DG) of IRB may impose a penalty of RM 20,000 to RM 100,000.
Restructure of Controlled Transaction
Currently, there is a specific provision empowering the DG to disregard and make adjustment to any structure adopted by a person for TP purposes. This power is currently found under the Income Tax (Transfer Pricing) Rules 2012. With the new insertion of Section 140A(3A), DG may disregard any structure adopted by a person if:
- the economic substance of that transaction differs from its form; or
- if the DG found that tax payers have commercially irrational arrangement, and viewed in totality, differs from those have been adopted in an arm’s length situation.
The DG shall make adjustments to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length basis.
New surcharge on TP adjustments and structures disregarded by DG
Currently, where TP adjustments are made by the DG, the taxpayer is only subject to a penalty if the TP adjustments result in additional tax payable. Where the TP adjustments do not result in additional tax payable, no penalty is imposed. It is proposed that a surcharge of not more than 5% of the total TP adjustments being imposed whether or not the adjustment results in additional tax payable. The surcharge shall be treated as tax payable for the purposes of tax payment and recovery of the tax payment by civil suit. The DG is given the discretion to remit the surcharge. The proposed surcharge is also applicable to adjustments made in relation to structures disregarded by the DG under the proposed new Section 140A(3A). Source from e-Federal Gazette Official Portal (https://www.bnm.gov.my/o/covid-19/Features%20of%20Micro%20Enterprises%20Facility%20MEF.pdf)
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