Following the change in the Malaysian government, many new policies and reforms have been initiated and more are expected to be announced in the near future.
To highlight a few of the changes, effective June 1 2018, the standard rate of tax for the goods and service tax (GST) was reduced from 6% to 0%. The GST will eventually be abolished from September 2018 onwards and the new government will be introducing the sales and services tax (SST) regime. The abolishment of GST will reduce the government's tax collections and thus it is expected that the government will focus its efforts on combating tax leakages through increased tax audits. It will continue to clamp down on structures that have elements of aggressive tax planning and transactions which lack commercial substance. Penalties for non-compliance are expected to be imposed at rates of up to 100% of the additional tax payable. Clearly, a strong message that non-compliance will be very painful!
This article discusses the various transfer pricing (TP) compliance measures that the Malaysian Inland Revenue Board (MIRB) uses to assist in its audit activities.
Various transfer pricing compliance measures in Malaysia
Country-by-country reporting (CbCR)
The Malaysian government is committed to joining in the efforts along with other jurisdictions in eliminating tax mismatches, increasing the level of transparency with tax authorities and creating a consistent global tax platform. This is evidenced by the MIRB's efforts to implement BEPS Action 13 in Malaysia.
The final rules for CbCR were first released in December 2016 and were subsequently amended in December 2017. The amended CbCR rules, which entered into effect on January 1 2017, apply to Malaysian-parented multinational corporation (MNC) groups with total consolidated group revenue of at least MYR 3 billion ($738 million) in the financial year (FY) preceding the reporting FY. The information submission mandated by the rules is in the form of the country-by-country (CbC) report to be submitted to the Director General of the MIRB on or before 12 months from the last day of the reporting financial year. The content of the Malaysian CbC report is as per the OECD's recommendation. Taxpayers who are obliged under the CbCR rules to prepare a CbC report are also required to prepare a master file and submit it together with the TP documentation when requested by the MIRB, bearing in mind that taxpayers are typically given only 30 days to submit the TP documentation.
Enhanced transfer pricing guidelines
Following the release of the CbCR rules, the MIRB had also taken steps to tighten TP compliance in Malaysia by updating its 2012 transfer pricing guidelines (TPG). The updated TPG contain many enhanced requirements and have a substantial impact on how businesses are expected to manage and document their controlled transactions. A summary of the changes/enhancements to the TPG is set out in Table 1.
We understand that the MIRB is still in the midst of updating other chapters in its TPG. This is essentially to realign Malaysian TP requirements with those proposed under BEPS Actions 8 to 10 and Action 13.
|Chapter II: The arm’s-length principle||• The application of the arm’s-length principle will now focus on achieving TP outcomes that are in line with value creation; and|
• A risk analysis framework has been introduced to emphasise the interaction between risks and rewards. It sets out the process of analysing risks in a controlled transaction.
|Chapter VII: Intangibles||• This chapter has been revamped with detailed guidance on identification of intangibles and the categories of intangibles; and|
• The chapter focuses on economic ownership of intangibles and analysing the entitlement of the arm’s-length return based on the development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) concept.
|Chapter X: Commodity transactions||• This is a new chapter introduced into the TPG. It provides taxpayers with guidance on the application of the comparable uncontrolled price (CUP) method on commodity transactions.|
|Chapter XI: Documentation||• Guidance is provided to enhance the quality of the TP documentation prepared by the taxpayer. It sets out the details of what needs to be covered in TP documentation; and |
• Master file requirements have now been inserted into this chapter (largely, the list of information is consistent with the master file’s documentation requirement suggested by the OECD).
Submission of transfer pricing information
Over the past six months, there appears to have been an increase in the number of taxpayers receiving Form MNE [1/2017]. This form was first introduced by the MIRB in 2011 to collect certain information from selected taxpayers relating to their cross-border transactions for TP risk assessment purposes. Selected taxpayers would receive a letter with the attached form and were required to complete and submit the form within 30 days from the date of the letter.
Form MNE (1/2017) is comprehensive and includes a wide coverage of key information to be collected from the selected taxpayers, including amounts transacted with related parties both inside and outside Malaysia.
In brief, the existing Form MNE (1/2017) requires the taxpayer to disclose the following information:
- A list of affiliates operating in countries having a lower tax rate than Malaysia with which the taxpayer has carried out transactions (if any);
- Details of business restructurings (if any have been carried out during the past five years);
- Details relating to research and development (R&D) activities carried out by the taxpayer (if any);
- Details relating to financial assistance received by taxpayers from related parties;
- Name of the company and country if the group or any of its related parties has any trade/brand name or IP or are performing R&D activities; and
- Particulars of transactions with related companies (both domestic and cross-border transactions).
As can be seen above, some of the information required may not necessarily be readily available locally, but would require support from taxpayers' headquarters. Further, most of the information sought through the form also seems to be part of the requirements under CbCR and the enhanced TPG. Taxpayers will need to exercise due care in completing Form MNE. Inaccurate disclosure of information may attract questions by the MIRB and result in taxpayers being considered as high risk for TP purposes when, in fact, that may not be the case.
Transfer pricing audits and recent updates
Reports in local media have indicated that the MIRB had launched an operation called 'Mega Operation', involving 23 tax departments, 12 state tax offices, 37 tax branches, 17 tax investigation branches and a total of 4,219 of its 11,000 strong workforce in the country. This Mega Operation (the largest Malaysian tax audit operation to date), which was concluded in early December 2017, signifies the MIRB's commitment in closing tax loopholes and ensuring the tax compliance of the taxpayers.
Notably, during the Mega Operation, the MIRB performed tax audits on 15 banks (both local and foreign) in Malaysia that had offshore dealings, particularly with related parties in Labuan, as the tax authority is of the view that there is an unequal distribution of profits between financial institutions (FIs) in Peninsular Malaysia and Labuan, mainly driven by the different tax regimes in the two jurisdictions.
In the past, there was little focus on TP matters when tax audits were carried out on FIs by the MIRB. However, this has changed and the FIs must now pay attention to their TP policies as the MIRB is looking into FIs' compliance with TP rules and regulations.
To add to this, the Central Bank of Malaysia (Bank Negara Malaysia – BNM) is also scrutinising the inter-company charges paid by all licensed commercial, Islamic and investment banks and licensed insurers and Takaful operators to their foreign shareholders/related entities. The external auditors of the licensed FIs are required by BNM to validate and certify the inter-company charges paid. Bank Negara Malaysia expects the boards of the licensed FIs to critically scrutinise, validate and approve the inter-company charges. This involvement of BNM in scrutinising the inter-company charges paid by the licensed FIs mean that FIs must ensure they are able to justify the arm's-length nature of their intercompany payments.
The new government is focusing on the 'rule of law'. Transfer pricing requirements will continue to evolve in the coming years, as the authorities in Malaysia, whether the MIRB or BNM, will be stepping up their enforcement efforts to reduce non-compliance. Businesses can expect greater challenges by the authorities and if they are not well prepared or there is inadequate documentation, there will likely be some repercussions.
Level 10, KPMG Tower
Bob Kee advises on various transfer pricing (TP) issues, including formulating defence strategies for tax audit situations, planning for TP risk mitigation and supply chain restructuring. Bob is also experienced in indirect taxes, specifically in the areas of goods and services tax (GST) and World Trade Organisation (WTO) rules of valuation. In 2011, Bob earned the distinction of being the first expert witness in Malaysia's first TP court case. Bob co-leads KPMG in Malaysia's TP practice and is also the indirect tax and GST leader for KPMG in Malaysia.
|Chang Mei Seen|
Level 10, KPMG Tower
Chang Mei Seen has been involved in transfer pricing (TP) work since 2002. Mei Seen advises multinational companies on TP issues, including preparation of TP documentation, TP advisory and planning for risk mitigation. She is also heavily involved in dispute resolution cases. Mei seen co-leads KPMG in Malaysia's TP practice.
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