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published on 26 February 2021 | reading time approx. 3 minutes
The Finance Act 2020 which has been gazetted on 31 December 2020 and effective 1 January 2021, introduced several new provisions that seek to strengthen the transfer pricing compliance amongst taxpayers in Malaysia.
Effective 1 January 2021, a new Section 113B was introduced into the Malaysian Income Tax Act (“the Act”), setting out the penalty for failure to furnish contemporaneous transfer pricing documentation.
This change is effective for transfer pricing audits which commence from 1 January 2021 for the open years of assessment (the statute of limitation is 7 years for transfer pricing). This new punitive provision is a premiere in relation to transfer pricing documentation compliance. In the past, there were no specific penalty provisions imposed on taxpayers for failure to furnish transfer pricing documentation.
The Malaysian Transfer Pricing Guidelines have been updated to reflect that the transfer pricing documentation needs to be made available to the Malaysian tax authorities within 14 days from the date of request. Prior to 1 January 2021, taxpayers had 30 days to submit their transfer pricing documentation upon request from the Malaysian tax authorities. This applies to transfer pricing audits that commence from 1 January 2021 for the open years of assessment.Taxpayers who fail to submit the transfer pricing documentation within this shortened timeframe will be subject to the new penalty provisions under Section 113B of the Act.
Prior to 1 January 2021, the Director General of Income Tax (“DGIR”) merely had the power to substitute the pricing of controlled transactions without explicitly giving the DG the power to disregard a structure. With effect from 1 January 2021, Section 140A(3A) & (3B) has been introduced into the Act, giving the DGIR the power to disregard and re-characterize structures adopted by a person if the economic substance of that transaction differs from its form, or the form and substance of that transaction are the same, but the arrangement made in relation to the transaction, viewed in totality, differs from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price.
Prior to 1 January 2021, taxpayers were only subject to penalties for transfer pricing adjustments if the adjustment resulted in additional tax payable. Effective 1 January 2021, with the introduction of Section 140A(3C) into the Act, the DGIR may impose a surcharge of 5 percent on any transfer pricing adjustment regardless of whether it results in additional tax. The application of this surcharge would have an impact on taxpayers with business losses or tax incentives, as they may previously not have been subject to any penalty for a transfer pricing adjustment.
These new provisions indicate an increased focus by the Malaysian tax authorities on transfer pricing compliance. In the past, many taxpayers have taken a more reactive approach with ensuring their transfer pricing compliance. With the introduction of these new punitive measures, taxpayers will no longer be able to continue with a reactive strategy.
With more powers being given to the DGIR, it is important for taxpayers to review their transactions and ensure that form meets substance. The onus will be on taxpayers to prove that their structures and transactions are at arm’s length.
The introduction of these new punitive measures indicates that enforcement is an increased priority for the Malaysian tax authorities. As such, taxpayers are advised to review their transfer pricing strategies to mitigate transfer pricing risks.
Priya Selvanathan
Associate Partner
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