The Malaysian Inland Revenue Board (MIRB) has in recent years placed great emphasis on transfer pricing enforcement activities on multinational companies. Malaysian companies are also not spared from scrutiny as transfer pricing issues might arise due to tax holiday or incentives enjoyed by certain local companies.
Transfer pricing enforcement
In addition to the introduction of the transfer pricing checkbox in the Year of Assessment (YA) 2014 tax return form, taxpayers are required to declare whether or not contemporaneous transfer pricing documentation has been prepared for the relevant YA. The multinational tax department that oversees cross border transfer pricing matters, was converted into a Branch in January 2015, as the MIRB aims to consolidate all large or high profile taxpayers under the purview of this Branch, also known as the Large Taxpayer Branch. From this restructuring, the MIRB can focus its attention on the larger or higher profile taxpayers, as these companies' tax files will be directed to this Branch. In order to handle the increased enforcement activities, there was a redeployment of resources, especially in the field audit team.
Transfer pricing audits and resolution
Based on the MIRB's 2014 annual report, tax collection has been on an increasing trend year on year, hitting a record high of Ringgit Malaysia (RM) 133.7 billion ($33 billion) in 2014. Table 1 depicts the upward trend of the MIRB's tax collection from transfer pricing audits in 2011 to 2014.
|Table 1: Transfer pricing audits resolved|
|Taxes and Penalties (RM million)||No. of cases resolved||% increases (in cases)|
The number of transfer pricing audit cases resolved by the IRB in the year 2014 increased slightly to 160 cases, from 154 cases in the prior year, with a total tax collection of RM 156.6 million (inclusive of penalties). Though the official number of cases resolved in 2015 is not yet released, it is reported that the MIRB had collected a total of RM 111.8 billion in income tax in 2015, with a target collection of RM 118.5 billion for 2016, according to a news story published March 14 2016 in the New Straits Times.
Referring to the table above, the number of transfer pricing audit cases resolved by the MIRB in 2014 did not experience as sharp an increase compared to previous years. However, it has been increasingly challenging to resolve transfer pricing audits with the MIRB where taxpayers did not prepare its documentation or defences appropriately. As the MIRB tightens its efforts to ensure companies' compliance to transfer pricing rules, taxpayers who are unprepared or non-compliant would face an uphill battle during an audit by the MIRB.
Following the increase in transfer pricing audits, more taxpayers are also beginning to appeal through the judicial system – the Special Commissioner of Income Tax (SCIT) to settle their transfer pricing disputes with the MIRB. This might be due to an increased awareness and understanding of transfer pricing concepts amongst taxpayers, who might take the view that they would have a better opportunity to defend their case in the Malaysian Courts. The first level of appeal would be heard at the SCIT, following by the High Court and Court of Appeal.
As a result, the Dispute Resolution Panel (DRP) was set up by the MIRB in 2013 as an avenue for taxpayers to resolve cases before proceeding to the SCIT. The DRP consists of the MIRB's legal counsel who are independent of the transfer pricing audit officers in the MIRB. Through the efforts of the DRP, the MIRB hopes to be able to re-evaluate cases, with the hopes of coming to an out-of-court settlement with the taxpayer. This would in turn reduce the number of resources needed for a full-fledged legal suit. Since the setting up of the DRP, we have seen quite a number of disputes which are concluded by the DRP. This is a positive move by the MIRB to resolve cases before proceeding to the Malaysian court system, leaving those that ought to be heard and deliberated at the SCIT.
Business restructuring activities
Given the fast changing global economy and corporations' efforts in maximising operational efficiency, there have been quite a number of corporations which have undergone business restructurings over the recent years. The movement of functions and risks from one related entity to another is a common business restructuring exercise, where large multinational corporations attempt to, amongst others, restructure its operations to minimise costs or improve operational efficiencies.
The MIRB is aware of this, and has been keeping a close watch. A sudden decline in profits, especially when the Malaysian entity has just come out of a tax incentive period would highly likely trigger an audit by the MIRB.
Whilst the MIRB would generally accept a corporation's restructuring exercise due to an economic or business reason, most taxpayers face difficulty in convincing the MIRB on the substance of the restructuring. More often than not, the business restructuring exercises would impact the profitability of the Malaysian entity, and the Malaysian entity is not able to substantiate to the MIRB's satisfaction that there has been changes to the functions and risks of the Malaysian operations, thereby impacting the remuneration it is entitled to. In cases which lacks substance, it is not surprising that the MIRB would challenge the legitimacy of the business restructuring exercise, especially when the profits are "shifted" out to a lower tax jurisdiction.
APAs and MAP
The 2014 MIRB annual report states that seven cases of MAP were conducted which involved transfer pricing issues, interpretation and application of Double Taxation Avoidance Agreement (DTAA), technical fees and Bilateral APAs.
The MIRB has always encouraged the application of APAs, especially bilateral APAs as a tool for taxpayers to manage their transfer pricing risks rather than being engaged in time consuming transfer pricing audits. This is an option worth considering for taxpayers with large inter-company transactions with foreign related parties, especially when a business restructuring to the local operations has been planned. Taxpayers should take the opportunity to explore the feasibility of an APA as a tool to manage its TP risks.
Although Malaysia is not an OECD member country, the MIRB recognises the significant impact of BEPS on its tax base, and has been closely tracking BEPS Action Plan developments and voicing out its query and concerns as a developing nation. Over the last couple of years, Malaysia has been actively involved in selected BEPS working party and OECD meetings, and had also participated in the Subcommittee on BEPS for Developing Countries which was headed by the United Nations.
A BEPS Action Committee has been set up in the IRBM, which acts as the coordinating forum to discuss results from various BEPS meetings, suggestions or follow up on certain issues, implications on domestic law, as well as recommendations to the government, where applicable. Several roundtable discussions with both taxpayers and tax consultants alike have been conducted to obtain feedback on the BEPS climate in Malaysia, and whether taxpayers are aware and ready for the changes to come.
Based on the questionnaire by the UN on Malaysia's experiences regarding BEPS issues, Malaysia has specifically identified the following as common profit shifting structures:
- Excessive or unwarranted intragroup payments such as interest on loans, management fees or technical services fees, or payment for intellectual properties;
- Global value chain models; and
- Mispricing of services rendered.
It is also interesting to note that Action 10 – Transfer pricing and other high risk transactions has been singled out as the most important Action Point for Malaysia in the questionnaire. This is consistent with the MIRB's comments during transfer pricing audits where the MIRB finds it difficult to accept that the transfer pricing outcomes are not in line with value creation (especially in the case of management fee payments).
Regarding reporting requirements, high level guidelines on how Action 13 would be applicable in Malaysia have been released by the MIRB. A summary of CbCR requirements for companies operating in Malaysia are presented in Table 2.
|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 750 million Euros and above as at January 1 2016|
|How and where to submit?||Parent: |
Local Tax Authority
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|
Though there are at present, many discussions revolving around Action 13 and how it will affect transfer pricing reporting in Malaysia, it is worthwhile to note that the MIRB is also placing a strong emphasis on Actions 8-10 (Intellectual Property (IP) and TP). IP and royalties have long been the topic of discussions and focus in transfer pricing audits, and it will be no surprise that the MIRB would delve deeper into these areas.
The MIRB has through various media releases and announcements stated that it will continue to closely monitor TP and BEPS developments, and will update and revise the Malaysian Income Tax Act to align with international standards, where relevant. Certain changes to the legislation have been proposed, and amendments to the Malaysian Transfer Pricing Guidelines as well as the introduction of CbCR Guidelines by the MIRB is expected to be released mid-2016. Although the MIRB acknowledges that the BEPS Action Plans may not be fully applicable in Malaysia, we foresee that the MIRB would largely adopt the concepts put forth by the OECD.
As preparations are underway for the implementation of CbCR in Malaysia, as well as the changes to the Malaysian TP Guidelines, we expect exciting and challenges times ahead as taxpayers, tax practitioners and the IRBM alike grapple with the concepts and practicalities of implementing CbCR.
KPMG in Malaysia
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 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 co-leads KPMG Malaysia's transfer pricing practice and is also the Indirect Tax and GST leader for KPMG in Malaysia.
Mei Seen Chang
KPMG in Malaysia
KPMG Tax Services Sdn Bhd
Mei Seen has been involved in transfer pricing work since 2012. Mei Seen advises multinational companies on transfer pricing issues, including preparation of transfer pricing documentation, transfer pricing advisory and planning for risk mitigation as well as heavily involved in dispute resolution cases. Mei Seen co-leads KPMG Malaysia's Transfer Pricing practice.
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