Transfer Pricing Disputes: Protecting Your Business with Proper Documentation

You have been hearing from LHDNM, us, and many others telling you that proper TP documentation is crucial, and must be produced in a timely fashion (during the related party transaction). The thing is TP documentation is not easy to produce, and the process is time-consuming. The goal of this advice is provide proof to LHDNM, Special Commissioners of Income Tax (SCIT), and the courts that LHDNM’s TP rulings have been abided by. Well, a recent case heard in High Court of Malaya proves just that.

The Crucial Role of Proper TP Documentation: A Local Distributor’s Encounter

An local distributor of Proctor & Gamble International Operations Pte Ltd was charged by LHDNM for not abiding with the arm’s length principle in its transaction with its principal. In 2012, LHDNM conducted a TP audit on the said transaction, which took place somewhere in the mid-2000s. The distributor filed submitted its TP documentation in 2009, when requested to do so by LHDNM.

From the audit, LHDNM determined that the distributor, among other findings, did not abide by the arm’s length principle, despite the adequate TP documentation submitted that proves just what the distributor contended, which leads to LHDNM making adjustment in the pricing, which resulted in additional tax payable with penalty.

LHDNM’s Ruling and the Aftermath: The Appeal to the SCIT and High Court

In turn, the distributor appealed to SCIT, and SCIT agreed with the distributor. LHDNM did not concur with SCIT, and, so, appealed to High Court of Malaya. The High Court, after hearing the case, agreed with SCIT’s decision, and dismissed LHDNM’s appeal.

The key point in this story is that the proper TP documentation was essential for the distributor to make their case that they had fully complied with applicable TP rulings at the time of the transactions. Both SCIT’s and High Court of Malaya’s rulings were based on their examination of the TP documentation produced by the distributor during the transaction.

Lessons Learnt: Importance of Timely TP Documentation

Again, we strongly advise any company engaging in related party transactions to produce TP documentations for every transaction as in when the transaction is taking place, for LHDNM would give your company only up to 14 days to submit the document upon request. Failure to do so will to a fine of any amount from RM20,000 up to RM100,000, imprisonment for 6 months, or both.

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