In the proposed Finance Bill 2020, the govt is introducing penalties for failure to furnish contemporaneous transfer pricing documentation

by HABHAJAN SINGH / pic by ARIF KARTONO

MULTINATIONAL corporations (MNCs) and larger companies are seeing a flurry of tax audit queries concerning transfer pricing, a grey area of business tax law that has come under sharper focus lately.

The increase in tempo is evidenced by what is believed to be more than usual queries sent out by the Inland Revenue Board (IRB) and the proposed amendments announced in the federal government’s budget for 2021 that places greater emphasis on transfer pricing.

“We have certainly seen a greater flurry of tax audits coming out compared to the past and a heightened sense of urgency is on the cards with the proposed penalties and jail term,” Harvey & Associates and SCS Global Consulting Sdn Bhd tax partner Harvindar Singh told The Malaysian Reserve.

Transfer pricing refers to the prices of goods and services that are exchanged between commonly controlled legal entities within an enterprise, according to a transfer pricing guideline at IRB’s website.

It gave the following example. If a subsidiary company sells goods company, the price charged is referred to as transfer price and the setting is called transfer pricing.

Entities under common control refer to those that are ultimately controlled by a single parent corporation.

It noted that MNCs use transfer pricing as a method of allocating profits (earnings before interest and taxes) among its various subsidiaries within the organisation.

Harvindar said transactions between related parties are scrutinised to see if they have been conducted in a fair and arm’s-length manner; that is based on commercial and business reasons and not to obtain a tax advantage.

With expected lower tax collection due to the Covid-19 pandemic, the tax authorities may have trained their guns to ensure better compliance with transfer pricing guidelines.

In the proposed Finance Bill 2020, the government is introducing penalties for failure to furnish contemporaneous transfer pricing documentation with the introduction of Section 113b, a new addition to the Income Tax Act 1967 (ITA).

Failure to furnish the required documents will entail a fine of between RM20,000 and RM100,000, or a maximum of six-month jail term, or both.

The new proposed amendment also states the burden of proving that contemporaneous transfer pricing documentation has been furnished shall be upon the accused person.

“No company is full proof on this (transfer pricing) front. We try to get the documents in order. But there could be some area of technicality where the tax authority may come in for some settlement,” said another tax consultant.

Key pieces of legislation for transfer pricing in Malaysia are the ITA and the Transfer Pricing Rules 2012.

With effect from 2009, Section 140A was introduced to the ITA to specifically address transfer pricing issues, requiring taxpayers to determine and apply the arm’s length price on controlled transactions.

Some MNCs may resort to transfer pricing practice to reduce overall tax liability, while remaining within the law.

However, problems and abuses arise when they use transfer pricing to shift income to lower, or even zero, tax jurisdictions.

In some cases, companies even lower their expenditure on interrelated transactions by avoiding tariffs on goods and services exchanged internationally, according to information at the Corporate Finance Institute’s website.

Aside from transfer pricing, tax authorities are also expected to heighten scrutiny of areas like eligibility for tax incentives claimed, withholding tax, interest deductions and substantiation of tax losses.