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Should local companies prepare transfer pricing documentation?

GOOD news for all business enterprises including companies carrying out domestic related party transactions!

Such enterprises will be relieved from the obligation of preparing transfer pricing (TP) documentation provided that any adjustment by the Inland Revenue Board (IRB) in future audits will not result in altering the total tax payable or suffered by the related parties to the transaction.

The announcements by IRB have come through the professional bodies and IRB’s publication of a flowchart and self-test kit available on its website.

Which companies should prepare TP documentation?

Domestic business enterprises transacting with related parties outside Malaysia or where one of the parties to the transaction enjoys tax incentives, tax losses or is taxed at a different rate which could give rise to additional taxes in the event of a tax adjustment should prepare contemporaneous TP documentation.

An example would be where one of the related parties with MSC Malaysia status incentive (100% tax holiday) transacts with another related party that pays tax at 24% – a situation like this requires TP documentation to be prepared because any adjustment could result in additional taxes.

However, if both related parties are paying taxes and any adjustments made by IRB will not result in any additional taxes, then there is no need to prepare TP documentation. For example, TP documentation is not required where a construction company paying tax at 24% transacts with a related property developer company which also pays tax at 24%.

Business enterprises must be careful before they take the decision not to prepare TP documentation especially domestic groups where their tax liabilities are at a borderline or where their tax payable is minimal which can easily be altered into a larger taxpaying situation.

An example would be where one of the parties is in a minimum tax paying situation of say RM100,000 and the other party is paying taxes of RM500,000. If an adjustment of RM200,000 is made to the first party, the first party will go into a loss situation and there will be increased taxes on the other party. In such situations, the judgment call whether to prepare TP documentation is a fine dividing line.

If the wrong judgment call is made by the taxpayer, the penalty for failure to furnish the TP documentation of RM20,000 to RM100,000 for each year will kick in and the 5% surcharge on the adjustment made will also be applied.

Mismatch between the practice and the law

Although announcements have been made by IRB to waive the penalty for failure to furnish TP documentation for domestic companies in the above situations, the law remains unchanged and therefore these announcements do not carry the force of law.

In the event there is a tax adjustment in the future by IRB which results in additional tax payable, will IRB impose the 5% surcharge if the taxpayer has diligently followed the self-test and decided not to prepare the TP documentation? In such a situation, will the taxpayer be penalised further for not having prepared TP documentation?

Taxpayers in a quandary

Taxpayers are in a precarious situation because the imposition of surcharge and penalty could be done by IRB on hindsight versus the taxpayers who must take the decision at the time the transaction is undertaken or before tax returns are filed.

The reality on the “ground level” is IRB frequently disagrees with taxpayers and adjustments are not uncommon which leaves taxpayers with uncertainty as to whether to prepare TP documentation or not.

Our advice

Wherever business enterprises are in a borderline situation where their current tax position can easily alter into a taxpaying situation due to a tax adjustment, they should prepare TP documentation despite the self-test kit indicating that you do not need to do so.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd
managing director SM Thanneermalai.