Lembaga Hasil Dalam Negeri Malaysia (LHDN) has introduced new penalty provisions for transfer pricing. Getting it wrong can be costly for you as a taxpayer with related party transactions.
In this modern business environment, organizations of all industries and sizes are more exposed to the ever-evolving tax regulations. The heightened scrutiny in tax compliance demands extensive industry knowledge and experience.
In Cheng & Co, our network of experts have the right tools, in-depth understanding and up-to-date regulatory knowledge to help you in achieving your tax objectives.
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Frequently Asked Questions
Transfer Pricing Documentation has to be updated every year?
If there are significant changes in the business model and related party transactions.
YES, you have to.
What are the examples of material changes?
1.Changes in shareholding
2.Changes in business model
3.Changes in financial structure
4.Changes in business activities
5.Merge & Acquisition
How often should the contemporaneous transfer pricing documentation to be updated?
According to LHDNM, taxpayers should update the transfer pricing documentation accordingly (i.e. At the year end) where there are material changes
Is it true that Transfer Pricing Documentation in Malaysia is not required for Small and Medium Enterprise?
If you are an Entrepreneur or SME, please do not disregard Transfer Pricing compliance and fall under the trap of thinking that Transfer Pricing affects large MNCs only. In the past, the Inland Revenue Board of Malaysia (LHDN Malaysia) did not emphasize Transfer Pricing and Transfer Pricing Documentation for Small and Medium-sized Enterprises (SME). In contrast, transfer prices were examined in more detail when auditing large multinational corporations active in Malaysia.
This approach has changed in recent years. We have now seen an increased focus from the IRB on TP in tax audits when auditing SMEs and the IRB has acted aggressively in these audits.
Is there any exception or special treatment for SMEs with only domestic transactions?
There is no exclusion clause for domestic-related party transactions (RPT)
Do I need to prepare Transfer Pricing documentation for a domestic group of companies?
Yes, it is covered by both the Transfer Pricing Rules and the Guidelines. In Malaysia, transactions between related domestic companies are subject to the same legislative provisions and rules that govern international intercompany transactions. It is prudent for groups of companies to maintain proper Transfer Pricing Documentation regarding their domestic intercompany transactions.
Is it necessary to prepare TP documentation if I am engaged only in domestic-related party transactions (RPT)?
Yes. Transfer Pricing audits are not limited to only cross-border transactions.
IRB may conduct a tax audit on the individual taxpayer (i.e., company by company basis) to evaluate if the RPTs carried out by that taxpayer were conducted at arm’s length. If the RPTs are not at arm’s length, the IRB can make Transfer Pricing adjustments.
The taxpayer is transacting with a local related party where both parties are accessible to tax in Malaysia. Hence, the non-arm’s length transaction is unlikely to result in any loss of revenue to the IRB may NOT be an excellent defense to the taxpayer.
The Income Tax Act (“ITA”) requires a Malaysian taxpayer engaged in RPTs to prepare Transfer Pricing documentation to justify the arm’s length nature of their RPTs. Transfer Pricing is pricing transactions based on market prices, assuming that two or more companies of the same group are independent and separate (this is also known as the arm’s length principle).
Do I need to prepare Transfer Pricing Documentation if my RPTs are minimal?
There is no threshold or de minimis exception to exempt a taxpayer from the preparation of TP documentation.
As long as a taxpayer is engaged in an RPT (whether domestic or cross-border), such taxpayer is expected to prepare a TP documentation to justify the arm’s length nature of the RPTs.
Since when does a Transfer Pricing Documentation requirement exist in Malaysia?
Does a taxpayer need to disclose information regarding Transfer Pricing Documentation in his tax return?
Yes. Taxpayers are required to disclose the amount and type of related party transactions in the tax return and disclose whether TP documentation has been prepared.
With effect from the year of assessment (YA) 2014, taxpayers are required to confirm in the income tax return form C under Box whether they have prepared contemporaneous TP documentation by ticking the relevant box. Taxpayers need to ensure that the TP documentation is prepared on time to adhere to the requirements, including the “tick the box” requirement.
Transfer Pricing Documentation has to be updated every year. True or False?
True, if there are significant changes in the business model and related party transactions. Even if there aren’t any substantial changes, it is encouraged to review every year and update the financial data of the RPT in the Transfer Pricing Documentation.
Is your company keeping sufficient documentary evidence as prescribed by the IRB?
In Malaysia, taxpayers nowadays must have contemporaneous TP documentation available to substantiate the TP applied to related transactions. Taxpayers are required to submit documentation within 30 days of the IRB’s request. It is required to keep the documentation in the administration for 7 years. The time-barred period for TP audits is 7 years.