Tax Compliance on Transfer Pricing Documentation – How would it impact the SMEs?

We understand the pressures faced by SMEs when it comes to compliance with the Transfer Pricing Documentation. Common questions or beliefs floating around their mind would be:

• My companies do not have holding companies.

The scope and definition of the related party in the Transfer Pricing context are broad. Companies with common major individual shareholders are also considered as related parties. If they have RPT between the companies, they must comply with the Transfer Pricing Rules and Guidelines 2012. It also applies to those families that own a few companies and there are RPT between the companies regarded as related parties.

• All my companies are SMEs, and Transfer Pricing Rules and Guidelines 2012 only apply to multinational companies and large corporates.

This view is entirely incorrect. In the relevant legislation such as Section 140A Income Tax Act 1967, Income Tax (Transfer Pricing) Rules 2012, and Transfer Pricing Guideline 2012, Transfer Pricing rules are never specified as only applicable to large corporates or multinational companies. If the companies are involved in RPT, they must comply with the Transfer Pricing rules.

• My group of companies does not have any transactions with a related company in a foreign country where the tax rate is lower than the Malaysian tax rate.

This kind of justification does not have the legal basis to save those companies from complying with Transfer Pricing rules. There is no exemption for any company from complying and preparing the transfer pricing documentation in the relevant legislation. The Transfer Pricing Guideline 2012 provides that if those people, including companies whose gross revenue exceeds RM25 million and the total amount of related party transactions exceeding RM15 million, or a person including a company providing financial assistance exceeds RM50 million, the Guideline applies to them. They are required to prepare the Transfer Pricing Documentation. For those companies outside that scope, they have an option to prepare the full transfer pricing documentation or a minimal transfer pricing documentation according to the Guideline. There is no any specific provisions or paragraph has exempt or exclude any person from preparing the documentation. Strictly speaking, if the companies have RPT, they must prepare the transfer pricing documentation.

• What is the consequence if I fail to prepare the transfer pricing documentation and my related parties’ pricing has no issue of tax avoidance?

The new Section 113B Income Tax Act 1967 provides that if a person fails to provide the transfer pricing documentation as required, if, without conviction, that person can be imposed special penalty by Director General of Inland Revenue a minimum RM20,000 and maximum RM100,000.
Suppose a company do not prepare themselves ready for transfer pricing documentation. In that case, they may risk that when the Inland Revenue Board of Malaysia (IRBM) requests the transfer pricing documentation and that person fails to do so, IRBM may impose that special penalty. However, that person can appeal because their company has no issue of tax avoidance as all the RPT and in Malaysia and all companies are taxed at the same tax rate. The discretion of remit the penalty lies with IRBM, and the stand of IRBM is unknown.

• My companies do not have any related parties’ transactions and only have intercompany loans and advances, so Transfer Pricing documentation is not applicable.

The scope of RPT has covered intercompany loans and advances. As far as the Transfer Pricing Guideline 2012 is concerned, the intercompany loans or advances shall be charged interest on an arm’s length basis.

If you are concerned with the above issues and uncertain about what you shall do next, worry not. Click the button below to get initial complimentary consultation from us, and we will guide you with a simple plan and proposal that fits your budget. Follow the steps below: –

Get complimentary consultation via a short online meeting and obtain some information about the background of your companies.
We study the information and some documentation provided.
We will provide our proposal for a simple plan to help you get ready for transfer pricing compliance. It is your option to execute the plan by yourself, or you may outsource it to us.
Plan execution and monitoring process.

More Details : Transfer Pricing101:Things You Should Know Before IRB Knocks Your Door