The transfer pricing climate in Malaysia over the past 12 months has been abuzz with activity. In addition to BEPS-related developments (which are pretty much moving in line with other major jurisdictions), KPMG professionals have also seen some significant changes within the Malaysian Inland Revenue Board (MIRB), as well as an increased emphasis on transfer pricing compliance not just by the MIRB but also by other local regulators.
Transfer pricing enforcement
The Malaysian government has appointed a new CEO of the Inland Revenue Board whose term took effect from December 12 2016. Since then, KPMG professionals have noticed an enhanced MIRB approach to audits and an increased focus on aggressive tax planning structures.
A special team – the LHDN tax investigation team 2017 was set up in December 2016. It comprises 272 intelligence officers and tax investigators who look into tax evasion, increasing compliance and managing gaps in tax, as well as increasing the country's direct tax collection. It was also reported that part of this team's focus is to audit multinational corporations (MNC) that transfer their profits to countries with lower tax regimes as a means of base erosion, causing a loss in income to the country. The team's aim is to achieve a tax collection of RM 2 billion ($467 million).
Recent publications in local media also report that the MIRB is currently conducting tax audits and investigations on 30 large enterprises, and is looking at clawing back some RM 1.9 billion in additional taxes and penalties. Out of these 30 enterprises, most are Malaysian companies, with one or two multinationals. Although the RM 1.9 billion might not be fully due to transfer pricing non-compliance, it is still daunting to know that the MIRB had focused its attention on so many local large enterprises in a relatively short period of time. This gives us a glimpse of the tax enforcement environment in the near future, as well as the degree of seriousness the MIRB is taking on tax compliance.
Attention and involvement of other regulators
In August 2016, the Central Bank of Malaysia (Bank Negara Malaysia – BNM) issued a direction to all licensed locally incorporated foreign banks, locally incorporated foreign Islamic banks, and all insurers and Takaful operators. This direction addresses the payment of intercompany charges, where BNM expects that these intercompany charges are governed by a comprehensive service level agreement (SLA) and complying with the MIRB's transfer pricing guidelines.
Subsequently, in March 2017, BNM issued a supplementary direction to clarify that the external auditors are expected to validate and certify the intercompany charges paid, in the form of review engagement and agreed-upon procedures reports. These reports are to be submitted to the board of the licensed financial institutions, to be deliberated and agreed upon prior to the board submitting to BNM.
The above letters are the first transfer pricing related direction issued by a regulator other than the MIRB. Historically, little attention on transfer pricing was paid to financial institutions as they are governed by strict regulations imposed by BNM. However, this recent development shows that financial institutions can no longer gloss over their intercompany charges, and must pay more attention on the arm's-length nature of their intercompany payments.
In addition, other regulators have also teamed up with the MIRB. The tri-partite effort consisting of the MIRB, BNM and the Malaysian Anti-Corruption Commission (MACC) hopes to strengthen the country's financial system, increase national revenue and fight corruption and abuse of power through the exchange of information between these three agencies. With the free exchange of information between these three parties, tax compliance enforcement is expected to tighten significantly. It should also be highlighted that this is in addition to the existing cooperation that MIRB already has in place with the Malaysian Royal Customs Department.
Transfer pricing audits
As mentioned, KPMG professionals have noticed enhanced strategies adapted in tax audits. Previously, tax audits were specialised, i.e. a specific unit would handle corporate tax audits, whilst another unit would handle transfer pricing audits. However, in recent months KPMG professionals have noticed that the MIRB no longer conducts specialised audits, and letters which usually precede tax audits do not just request for the usual documents relating to corporate income taxes, but also include a request for the submission of the company's transfer pricing document as well as a summary of the company's intercompany financing details. This is also a shift in focus, as transfer pricing was previously predominantly targeted at MNCs. With this change, it is obvious that the MIRB is stepping up and looking into transfer pricing compliance in Malaysian corporations and also intercompany financing transactions.
KPMG professionals have also noticed a new trend in the MIRB's audit letters, where the MIRB is currently requesting details in relation to intercompany borrowings. This seems to be a clear signal on the MIRB's attention to intercompany financing, especially on interest-free financing between corporations. Corporations with intercompany lending and borrowings should relook into their financing arrangements and take steps to ensure that intercompany financing complies with the arm's-length principle.
Based on the MIRB's 2015 annual report, total tax collection in 2015 was RM 121.2 billion. Table 1 depicts the MIRB's tax collection specifically from transfer pricing audits from 2012 to 2015.
|Table 1: Transfer pricing audits resolved|
|Taxes and penalties (RM million)||No. of cases resolved|
The number of transfer pricing audit cases resolved by the IRB has been increasing year on year, which corresponds with the increase in the headcount of its transfer pricing team.
In a media release dated April 17 2017, the MIRB has also released a statement on the imposition of penalty at a rate of 100% for the offence of undeclared or under-declared income which is subject to tax. This increased rate will take effect from January 1 2018, and is a steep increase from the current imposed general rate of 45%. For transfer pricing cases, the current penalty rate imposed is 35% (25% if transfer pricing documentation has been prepared) but KPMG professionals are expecting new penalty regime to be announced soon.
KPMG professionals have also in recent years seen an increase in the number of taxpayers appealing against tax audit findings through the judicial system through the submission of the form Q to the dispute resolution panel (DRP). The DRP is divided into two units, which are the Tax Resolution Department and the Tax Litigation Department. The MIRB's 2015 annual report shows the statistics listed in Tables 2 and 3.
|Table 2: Form Q – Tax Resolution Department|
|Appeals (No. of applications)||Income tax for companies|
|In progress (b/f from previous year)||190||67|
|Filed in current year||362||331|
|In progress (c/f to following year)||102||190|
|Table 3: Form Q – Tax Litigation Department|
|Appeals (No. of applications)||Special Commissioner of|
|High Court||Court of Appeal|
|In progress (b/f from previous year)||267||197||61||47||36||44|
|Filed in current year||268||196||15||22||12||12|
|In progress (c/f to following year)||360||267||64||61||35||36|
From these tables, it is clear that the number of taxpayers appealing through the judicial system and the number of cases resolved at the Tax Resolution Department have been increasing, which is encouraging as it shows the success of this independent group of legal counsel in the MIRB to re-evaluate cases which could not be resolved between the tax officers and the taxpayers.
Mutual Agreement Procedure (MAP)
According to MIRB's 2015 annual report, there were no new MAP applications in 2015. However, it has been reported that there has been in total six MAP applications which have been processed, where one has been concluded. The existing cases involve four countries and touch on various issues such as transfer pricing, technical fees, bilateral APA applications as well as representative office.
Base Erosion and Profit Shifting (BEPS)
Since the release of the 13 Actions by the OECD, the MIRB has indicated that Actions 8-10 and 13 would be the MIRB's main focus for the time being. This is evidenced by the release of the final rules in relation to country-by-country reporting (CbCR), which is effective January 1 2017. The newly introduced rules apply to Malaysian-parented multinational corporation (MNC) groups with total consolidated group revenue of at least RM 3 billion in the financial year (FY) preceding the reporting FY. For example, for an MNC group with financial year ending December 31 2017, the total consolidated group revenue as of December 31 2016 will be considered for determining whether the MNC group exceeds the threshold.
The information submission mandated by the rules will be in the form of the CbC report to be submitted to the Director General on or before 12 months from the last day of the reporting FY. The content of the Malaysian CbCR is the same as the CbCR recommended by the OECD.
A summary of CbCR requirements for companies operating in Malaysia are presented in Table 4.
|Master file||Local file||CbCR|
|What?||Overview of MNE group business||Detailed information on inter-company transactions affecting local jurisdiction||Exchange mechanism: Automatic Exchange of Information (AEOI) IT Platform|
|Who should prepare?||Ultimate parent / surrogate||Subsidiary (Malaysia)||Parent (ultimate / surrogate) with a consolidated revenue of RM 3 billion and above as at FY 2016|
|How and where to submit?||Parent local tax authority||Subsidiary local tax authority||Subsidiary local tax authority||Parent local tax authority|
|When to submit?||30 days on request (Malaysia)||30 days on request (Malaysia)||12 months after end of fiscal year|
In general, the new rules align closely with the report on Action 13 of the OECD and Group of Twenty ("G20") BEPS Project in relation to CbCR. Although the rules pertaining to master and local files have not yet been released, the MIRB has indicated that the revised transfer pricing guidelines which will cover information regarding master and local file requirements would be released any time now.
In summary, 2017 promises to be an extremely challenging year ahead with the anticipation of the revised transfer pricing guidelines as well as BEPS-related developments. From the MIRB's activities in the first few months of 2017, it is clear that the MIRB is stepping up and taking a more active role in terms of tax compliance and clamping down on aggressive tax planning. Therefore, both local corporations and MNCs should relook into their intercompany transactions and tidy up if necessary, before the MIRB comes knocking.
KPMG Tax Services Sdn Bhd
Bob advises on various transfer pricing issues, including formulating defence strategies for tax audit situations, planning for transfer pricing risk mitigation and advising on supply chain restructuring. Bob is also experienced in indirect taxes, specifically in the areas of GST and WTO rules of valuation. In 2011, Bob earned the distinction of being the first expert witness in Malaysia's first transfer pricing court case. Bob currently co-leads KPMG in Malaysia's transfer pricing practice and is also the indirect tax and GST leader for KPMG in Malaysia.
|Chang Mei Seen|
KPMG Tax Services Sdn Bhd
Mei Seen has been involved in transfer pricing work since 2002. With 15 years of transfer pricing experience, she advises multinational companies on various transfer pricing issues, including preparation of transfer pricing documentation and transfer pricing advisory and planning for risk mitigation. Mei Seen is also heavily involved in representing her clients in tax audits and appeals before the dispute resolution panel of the Inland Revenue Board. Mei Seen currently co-leads KPMG in Malaysia's transfer pricing practice.
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