BEPS AND MALAYSIA TRANSFER PRICING RULES
The widely known Base Erosion and Profit Swifting (BEPS) OECD initiative has drastically affected the Transfer Pricing (TP) landscape, globally, as it constitutes a crucial denominator for corporate taxation. Malaysia, being an OECD member, shows an admirable adherence to the said rules. Therefore, Malaysian TP legislation merits a brief presentation. After all, currently, most multinational tax audits in Malaysia include a look at your TP policy.
The economy of the country is mostly known as commodity-based (palm oil, crude oil and rubber constitute the major industry). However, some newly published TP Guidelines broaden the definition of intangibles to cover government licenses and contractual rights under certain circumstances, which grant companies special privileges or exclusivities. Moreover, the tax autorities deeply scrutinize outbound payments from the local entity like management fees, interest, technical consulting and royalties. The preparation of a full TP study assures TP compliance and mitigates potential risks. Audit activity has increased in Malaysia, even more so after the creation of the newly established Multinational Tax Department.
determination of associated parties
The Malaysian Inland Revenue Board’s (IRB) TP Guidelines were introduced in July 2003 and were replaced by those of 2012. Adherent to the constant evolution of TP legislation, Malaysia updated once again its TP Guidelines (UTPG) in July of 2017. This amendment introduced documentation requirements that conform to the BEPS recommendations. The guidelines serve in explaining the administrative requirements of the application of Section 140A of the Income Tax Act, 1967 and the Income Tax (Transfer Pricing) Rules of 2012.
According to the effective Malaysian TP law, when a person enters into a transaction with an associated person, that person shall determine and apply the arm’s length price for such acquisition or supply. To this purpose, we refer to an associated person where
(a) two or more companies are related within the meaning of section 6 of the Companies Act 1965;
(b) a company is so related to another company which is itself so related to a third company
(c) the same persons hold more than fifty per cent of the shares in each of two or more companies; or
(d) each of two or more companies is so related to at least one of two or more companies to which paragraph (c) applies”.
In these cases and under the framework in force, all the companies in question belong to the same group.
On the other hand, we consider related corporations to each other, where a corporation is the holding company of another corporation or a subsidiary of another corporation or a subsidiary of the holding company of another corporation.
Once a legal entity is subject to the TP law, the next step is to comply with the relevant rules.
The Malaysian TP legal framework adopts the following documentation structure:
i) Α Country-by-Country (CbC) Report, where MNEs report annually (for each tax jurisdiction in which they do business) some crucial information such as information on their global allocation of profit, taxes paid, borrowings, employees and certain indicators of economic activity among the countries in which they operate. The Rules applies to MNE’s headquartered in Malaysia, having a total group revenue of more than 3 RM (Malaysian Ringgits). The Ultimate Holding entity of the multinational group, headquartered in Malaysia, is responsible to prepare the CbCR. This report is filed and submitted to IRB within one year from the end of the financial year.
ii) Transfer Pricing Documentation which includes the completion of:
- A Master File, providing an overall description of the MNE’s global business, as stipulated by BEPS Action 13 (upon request). This file includes an organizational structure, a business description and industry conditions, financial information, pricing policies and TP methods applied.
- A Local File containing several disclosures of facts. Each Malaysian subsidiary (or permanent establishment) shall prepare and maintain a local file, if controlled transactions exceed certain thresholds. In more detail, this file focuses on the calculation process of the service fee. It also provides a detailed benefit test from the service recipient perspective.
We shall mention that taxpayers are responsible for preparing transfer pricing documentation – still less rigid – for domestic controlled transactions. This obligation arises if one party is subject to a different tax rate. All taxpayers who are required to prepare and update their TP documentation, must do so within the tax return filing deadline.
The Director General may require a company to pay a penalty equal to the tax amount which has been undercharged. This penalty applies when a person gives any incorrect information regarding his own or other entity chargeability to tax.
Moreover, if there is no contemporaneous TP documentation, a penalty rate of 35% applies on the additional tax payable. A lower penalty at a rate of 25% is applicable where TP documentation is in line with the previous TP framework.
Unilateral, bilateral as well as multilateral APAs, are available in Malaysia. Against this backdrop, we can help you prepare and apply for APAs, and advise you before, during and after negotiation and agreement with the tax authorities. For example, we can help you select appropriate transfer pricing methodologies and critical assumptions, prepare supporting documentation for the APA application, negotiate with the tax authorities, and prepare annual reports during the APA’s implementation period.
Under the Official Portal of the Malaysian Inland Revenue Board, so as to ensure the acceptability of the contemporaneous TP documentation, companies shall make reasonable efforts to:
(a) undertake a TP analysis to ascertain that transfer prices are arm’s length principle and reflect commercially realistic outcomes;
(b) implement, review and redesign (if necessary) the TP policies to accommodate any changes in the business environment;
In broad terms, complying with TP regulation in Malaysia could emerge with the preparation of a preliminary study. This study allows company’s executives to assess the intragroup margins in the provision of products or services. To this extent, a TP expert may provide a benchmarking analysis to facilitate managerial decisions around the margins use. Such a study bases on relevant financial figures from online databases (Thompson Reuters, Amadeus e.t.c.) and other resources.
An update to the benchmarking study is necessary once every three years instead of every year, as long as the taxpayer’s operational profile remains the same). The Guidelines require that the taxpayers use a quoted price obtained from domestic or international commodity exchange markets, in order to apply the CUP method. Evidence of price-setting policy, price adjustments and/or other relevant information shall be a part of the TP documentation. Thus, the government will reasonably assess the arm’s-length pricing of intercompany commodity transactions.
As an effort to tackle base erosion and profit shifting, Malaysian tax authorities have been focusing on TP administration. On top of that, current evolutions such as CRS and international cooperation in the tax field, are conducive to a closer scrutiny on TP tax audits as tax authorities are becoming much more efficient and proactive at sharing information and conducting inspections. Moreover, given the close relation between money laundering activities and TP mechanisms, AML (anti-money laundering) initiation has further intensified the said audits. The establishment of effective audit and inspection systems assists to detect suspicious money laundering transactions and prevent money laundering crimes (MLCs).
All these boil down to the conclusion that – as is the case with offshore jurisdictions – doing business with relation to such a country, comes with a considerable number of advantages. On the other hand, an extra effort is necessary so as to assure compliance with the rules, mitigate potential risks, that way optimizing the results of an activity. Thus, TP compliance constitutes a realm which necessitates full attention by the part of a CEO, CFOs or a business owner, not to also mention that a TP file makes sense for corporate governance. Industry experts deem that tax audits regarding TP law will be in the increase in 2019 and 2020. Against this backdrop, early advice and TP planning are the most effective approach for timely problem recognition and resolution.