Digital risk How to better manage digital risk
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Introduction to Malaysian transfer pricing
Transfer pricing rules
- The local Malaysia transfer pricing (TP) laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia TP Rules 2012.
- The TP rules are applicable to both domestic and overseas transactions between controlled entities for the supply and acquisition of goods or services.
- Malaysia also has a TP Guidelines 2012 that explains the TP principles and documentation requirements. The Guidelines were revised with effect from 15 July 2017, incorporating the principles of BEPS Actions and OECD TPG Version 107.
- A TP documentation is required to submit to the Malaysia tax authority (IRBM) within 30 days upon request.
- Malaysia has implemented CbCR (Country by Country Reporting) since 2017 for larger groups with consolidated revenue of more than RM3 billion. The OECD’s Master File concept is applied accordingly for groups subject to CbCR requirements.
- The revised Malaysia TP Guidelines refers to the OECD TPG version 2017 in line with the BEPS initiatives, but not completely. OECD guidelines are considered as a source of reference only.
Transfer pricing methods
- Malaysia applies the hierarchy method, whereby the 'transactional profit methods' are to be used only when traditional transactional methods cannot be reliably applied. Nevertheless, the IRBM practically prefers TNMM.
- With the revised Malaysia TP Guidelines 2012, TP analysis and the selection of TP methodology should be on a transaction-by-transaction basis.
- Other methodologies can be used, but with strong justifications.
- Malaysia applies the self-assessment regime. In the tax return form, a tax payer is required to disclose the details of his related party transaction and ‘tick box’ to indicate its conformation to the TP and CbCR requirements.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Malaysia generally accepts OECD TP documents.
- A TP document is to be prepared on a contemporaneous basis. It can be in Bahasa Malaysia (the official language of Malaysia) or English.
- In the selection of the tested party, the IRBM gives priority to the availability of sufficient and verifiable information on both tested party and comparables. Therefore, the tested party preferably should be a Malaysian entity. Should the foreign entity be used as the tested party, its financial data must be verifiable.
- Comparable data shall be from the same fiscal year. Multiple year data is only to assess whether the outcome of a particular year is influenced by abnormal factors, and not to be used as multiple-year average.
- A TP documentation should be updated every three years provided that there is no significant change in the taxpayer’s business operation, functions and risks. However, financial data and suitability of the comparable should be reviewed and updated every year in order to apply the arm's length principle reliably.
Master and local file
- For an MNE Group, Malaysia accepts the Master File prepared by the ultimate holding company or Reporting Entity.
- The Master File is only applicable to the taxpayer based on the CbCR requirement. It is only required to be submitted to the IRBM upon its request. Generally, the Master File is requested together with the Local File.
Some risk factors for challenge
- Loss making entities, in particular, a service company and manufacturer
- Consecutive losses for many years
- High percentage or amount of overseas transactions with related parties
- Transactions in relation to intangible properties, eg royalties, commission.
- The penalty is based on the amount of tax-adjusted:
- 50% if no TP documentation is prepared
- 30% if TP documentation is prepared, but not in full compliance with the TP Guidelines
- No penalty if TP documentation is prepared with full compliance with the TP Guidelines
- Correspondent adjustment is not automatic. Application has to be made to the IRBM.
Economic analysis and how to demonstrate an arm’s length result
- The IRBM prefers local comparable with financial data from the same fiscal year. Overseas comparable is acceptable only if the financial data is available for the IRBM’s verification.
- IRBM prefer the arm’s length range from the median to the upper quartile
- Minimum or no adjustment to the profit level indicators is preferred.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Unilateral, bilateral and multilateral APAs are available. Pre-filing meetings can be organized with the IRBM to discuss the case before a formal APA application is made.
- A non-refundable fee of RM5,000 per application.
- The IRBM prefers unilateral APAs.
- There is no exemption to the TP documentation requirement. However, it is mentioned in the Malaysia TP Guidelines that if can be proven that any adjustments made to both entities will not alter the total tax payable or suffered, they are only encouraged to prepare TP documentation. Based on our experience, this leeway has not been practiced by the IRBM.
Digital services tax
- Effective 1 January 2020, digital services provided by foreign service providers (FSP) are also subject to a 6% service tax
- FSP who provides digital services to consumers in Malaysia and the value of digital service for a period of twelve months or less exceeds the threshold of RM500,000 is required to be registered.
- The list of digital services (not exhaustive) is as follows:
- Software, application & video games
- Music, e-book, and film
- Advertisement and online platform
- Search engines and social networks
- Database and hosting
- Internet-based Telecommunication
- Online training
IRBM and taxpayer behaviour
- The IRBM has their own TP risk assessment to plan for its audit works. Audit cases mainly focus on taxpayers with significant related party transactions and/or consecutive years of losses, or low/declining profits
- Taxpayers have started to recognise the need to prepare TP documentation as part of tax compliance. However, for other TP services, eg preparation of pricing policy, it is still at the acceptance stage.
- The IRBM has reiterated the importance of preparing TP documentation to justify the impact of Covid-19 on the taxpayer’s business and changes to its related party transactions.