Declaration Now Required on Transfer Pricing Documentation in Malaysia

August 7, 2014 Posted by ASEAN Briefing Reading Time: 3 minutes

By Sowmya Varadharajan

In early July, the Malaysian Internal Revenue Board (“IRB”) published the 2014 tax return form that Malaysian corporate taxpayers must submit for Year of Assessment 2014. Notably, the form includes a small addition which requires taxpayers to declare whether they have prepared transfer pricing documentation. Simply put, taxpayers indicate in Section R either “Yes” or “No” as regarding the existence of transfer pricing documentation.

This is a very significant development from a transfer pricing perspective.

In the detailed notes accompanying the tax return, it is made explicitly clear by the IRB that transfer pricing documentation refers to contemporaneous transfer pricing documentation for the current year in question. The definition of “contemporaneous” is based on the revised Transfer Pricing Guidelines issued in 2012 as well as the Income Tax (Transfer Pricing) Rules 2012.

In general, contemporaneous transfer pricing documentation refers to documentation in support of the pricing of related party transactions that occurred during the course of the financial year, and is typically prepared before the tax return for that year is filed. Such documentation, at the very least, should outline the nature of the transactions, a description of how prices were set between the related parties and a description of how this pricing policy was evaluated to be at arm’s length. Although this documentation does not have to be provided to the IRB when the tax returns are filed, it must nonetheless be in existence.

By indicating “Yes,” taxpayers are declaring that they are in possession of transfer pricing documentation. Although in general, such documentation must be provided to the IRB within 30 days of filing, we have seen cases where taxpayers are expected to provide the transfer pricing documentation to the IRB within 14 or even 7 days. One way in which tax authorities can verify the existence of “contemporaneous” transfer pricing documentation is to check the date on which the document was created and finalized either internally / externally (by the transfer pricing consultant).

Needless to say, stating “No” would definitely be a red flag for the taxpayer as it would be an open admission that the company has not complied with the relevant transfer pricing provisions of the Malaysian Income Tax Act. It should be noted that the need for contemporaneous transfer pricing documentation has existed in Malaysia since 1 January 2009. In addition, the IRB has also introduced a penalty regime for the failure to maintain contemporaneous annual transfer pricing documentation.

In conclusion, Malaysian taxpayers that have related party transactions are strongly advised to prepare transfer pricing documentation in support of the arm’s length nature of these transactions. Failure to maintain annual, timely transfer pricing documentation can result in audit scrutiny and financial penalties.

Sowmya Varadharajan, is a founding director of IC Advisors Pte Ltd, a transfer pricing consulting firm. Sowmya has more than 12 years of experience assisting clients in designing, supporting and defending various related party transaction structures. Having been trained in the U.S., Sowmya currently focuses her attention on helping clients in the Asia Pacific region address their transfer pricing issues.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email malaysia@dezshira.com or visit www.dezshira.com.

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