1. Transfer pricing generally refers to intercompany pricing arrangements for the transfer of goods, services and intangibles between associated persons. Ideally, the transfer price should not differ from the prevailing market price which would be reflected in a transaction between independent persons. However, business transactions between associated persons may not always reflect the dynamics of market forces.
2. Transfer pricing affects the amount of corporate tax businesses pay, as such it has become an area of focus internationally, and is today a key focus of Malaysian tax authority. Therefore, it is important to be able to show that intra-group transaction prices are at arm’s length and not used to artificially inflate spending.
3. Withholding taxes are withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia (LHDN). Withholding taxes are taxes that are deducted from the source. The source would usually be other countries.
4. Withholding taxes are withheld by the party making payment (payer) on income earned by a non-resident (payee) and paid to the Inland Revenue Board of Malaysia (LHDN). Withholding taxes are taxes that are deducted from the source. The source would usually be other countries.
COMPLIANCE
1. Taxpayers would need to ensure that the related party transactions are at an arm’s length basis. In a tax audit, the tax authority may make tax adjustments if they are of the opinion that the related party transactions are not conducted at arm’s length and this could lead to tax liability and penalty.
2. To ensure compliance, the tax authority has included a checkbox in the corporate tax return to declare whether transfer pricing documentation has been prepared. Arising from this requirement, taxpayers who had any related party transactions are advised to ensure that transfer pricing documentation is prepared contemporaneously to demonstrate the arm’s length nature of their intercompany transactions.
3. In the absence of any transfer pricing documents, the Company will be required to declare in the Tax Return that there is no such document prepared. Under such circumstances, there is a likelihood that the Company may be selected for transfer pricing audit
4. Contemporaneous transfer pricing documentation means transfer pricing documentation which is brought into existence:-
a) when a person is developing or implementing any controlled transaction; and
b) where in a basis period for a year of assessment, the controlled transaction is reviewed and there are material changes, the documentation shall be updated prior to the due date for furnishing a return for that basis period for that year of assessment.
THRESHOLD
1. To ease the compliance burden, the transfer pricing guidelines clarify that the requirement to maintain contemporaneous transfer pricing documentation will only apply to the following:-
- For a person carrying on a business, where the gross income exceeds RM25 million, and total controlled transactions exceeding RM15 million.
- For persons providing financial assistance, it is only applicable if the financial assistance exceeds RM50 million.
2. Taxpayers who fall outside the above threshold may opt to prepare an abbreviated set of transfer pricing documentation covering only the organizational structure, description of the controlled transactions and relevant pricing policies, rather than full documentation requirements.
3. Effective from 1 January 2021, failure to furnish contemporaneous transfer pricing documentation within 30 days upon request would be subject to penalty of not less than RM20,000 and not more than RM100,000 or imprisonment of up to 6 months, or both.
DEFINITION OF CONTROLLED TRANSACTION
1. Controlled transaction refers to a transaction between:
a) persons one of whom has control over the other;
b) individuals who are relatives of each other; or
c) persons both of whom are controlled by some other person.
2. Examples of controlled transactions may involve sales or purchases of raw materials, stock in trade or other tangible assets, royalties, license fees, management fees, research and development, rents, interests or guarantee fees.
3. Taxpayers who are involved in controlled transactions are generally required to maintain a contemporaneous transfer pricing documentation. This includes taxpayers involved in domestic controlled transactions where at least one party enjoys tax incentives or suffers from continual losses, or is taxed at a different rate, such that the effect of that transaction would result in adjustments that alter the total tax payable.
4. “Control” refers to persons one of whom owns shares of the other person, or a third person who owns shares of both persons, where the percentage of the share capital held in either situation is 20% or more and―
a) the business operations of that person depends on the proprietary rights, such as patents, non-patented technological know-how, trademarks, or copyrights, provided by the other person or a third person;
b) the business activities, such as purchases, sales, receipt of services, provision of services, of that person are specified by the other person, and the prices and other conditions relating to the supply are influenced by such other person or a third person;or
c) where one or more of the directors or members of the board of directors of a person are appointed by the other person or a third person.
COUNTRY-BY-COUNTRY REPORTING (CBCR)
1. With the introduction of the country-by-country reporting system, the Ultimate Holding entity of the multinational company group headquartered here (having total group revenue of more than RM3 billion) is responsible to prepare and file the CbCR to IRB within one year from the end of their financial year.
2. Malaysian taxpayer who is part of the multinational company group that is subject to prepare CbCR in another country, will need to notify IRB of their reporting entity and its residency, before the end of their financial year.
3. To avoid the risks that come with failing to comply with the Transfer Pricing Guidelines in Malaysia, it is imperative to enlist the services of an experienced professional agency who will be able to guide you through all the regulatory requirements efficiently.
TYPE OF INCOME THAT WILL BE LIABLE FOR WITHOLDING TAX
1. The following are payments that will have withholding taxes imposed on them:
- Special classes of income: Technical fees, payments for services, rent/payment for use of movable property (10%)
- Contract payments (10%, 3%)
- Royalties (10%)
- Interest (15%)
- Real Estate Investment Trust (REIT)
-Family funds/Takaful Family Fund/Dana Am
-Income under Section 4(f) ITA 1967 (10%)
-Income of non-resident public entertainers (10%)
2. All withholding tax payments (other than for non-resident public entertainers) must be made with the relevant payment forms, duly completed, together with copy of invoices issued by the NR payee and copy of payment documents as proof of date of payment /crediting to the NR payee.
WITHOLDING TAX ON PAYMENT MADE TO RESIDENT INDIVIDUAL AGENTS, DEALERS OR DISTRIBUTORS
1. Effective from YA 2022, payment made by a company in monetary form to its agents, dealers or distributors (ADDs) arising from sales, transactions or schemes carried out would be subjected to 2% withholding tax.
2. The IRB has issued a FAQ on deduction of 2% withholding tax and salient points from the FAQ are as follows:-
3. Scope of payment - All types of payments arising from sales, transactions or schemes carried out by ADDs of the company such as commissions and incentives in the form of cash.
4. Scope of agents, dealers or distributors (ADDs) - Includes sole proprietors and individual partner of a partnership but excludes payments made to a partnership.
5. Threshold - Applicable in the current year for ADDs who receive payments from paying companies that exceed the threshold value in the previous year. The threshold is RM100,000 in monetary form and/or non-monetary form from one paying company only. The threshold value must be determined each year by the paying company.
Source:
https://www.3ecpa.com.my/resources/guide-to-transfer-pricing-documentation-in-malaysia/
https://www.3ecpa.com.my/resources/malaysia-taxation/malaysia-withholding-tax-guide/
