Transfer Pricing Documentation

Based on the Transfer Pricing Guidelines 2012 (updated in 2017) and the Transfer Pricing Regulations 2012, all companies that have related party transactions are required to prepare contemporaneous documentation.

With effect from 1^st January 2021, failure to prepare transfer pricing (TP) documentation on a contemporaneous basis will give rise to a penalty of between RM20,000 to RM100,000 and a prison term for 6 months if criminal prosecution is taken. If no criminal prosecution is taken, then the penalty of between RM20,000 to RM100,000 will be applied.

The time frame for furnishing the TP documents to the Inland Revenue Board (IRB) is within 14 days upon the request being made.

Although the TP Guidelines mention that companies which have (i) a turnover of more than RM25 million and related party transactions exceeding RM15 million; or (ii) companies (non – banks) who provide financial assistance to related parties exceeding RM50 million are required to prepare full TP documentation, companies that do not meet the above thresholds are also required to prepare the following limited TP documentation to support the related party transactions:

	Organisation structure of the company.
	Details of the controlled or related party transactions carried out in the year and the basis of the determination of an arm’s length transfer price for these transactions. This could be done through an external benchmarking exercise where comparable transactions of other companies (that do not have related party transactions) are required to be benchmarked against the existing company to arrive at a conclusion that the pricing being charged is within the arm’s length range of charges.
	Details of the pricing policies and explanation on how the policy and pricing was adopted. This is linked to a certain extent to point (2) above.

Prior to 1^st January 2021, companies that are loss making and enjoying tax incentives will not be in a tax payable position even if any TP adjustments are made, as the losses or tax incentives will shelter the adjustment made. However, with the change in the legislation, these companies will have to pay a surcharge of 5% of the TP adjustment amount even though the company is not in a tax payable position.Pursuant to the 2019 TP Audit Framework, a penalty of 50% will apply if tax payer did not prepare the TP documentation and is subject to a TP audit. If tax payer prepared TP documentation but it did not comply with the TP Guidelines, the penalty is 30%. These penalties will be on the additional tax payable in respect of any adjustment the IRB makes to the transfer price. A penalty of between RM20,000 to RM100,000 will also apply for not having adequate documentation to support the pricing of related party transactions.

Therefore it is essential that all companies review their tax position in relation to related party transactions as the loss position or enjoyment of a tax incentive will not shelter them from the 5% surcharge.

Finally, please take note that the filing of the company’s statutory tax return (Form C) requires a taxpayer or the tax agent (if they are signing the form on behalf of the client) to indicate on the tax return by way of a tick (√) in a box whether the company has prepared the TP documentation in accordance with the requirements of the Transfer Pricing Regulations:

	If the company does not tick the box, this will result in the IRB taking action against the company for non – compliance and imposing a fine of RM20,000 to RM100,000 for the non – preparation of the TP documentation.
	On the other hand, if the company places a tick in the box and does not prepare the TP documentation, when the IRB request for the transfer pricing documentation and the company is not able to produce the TP documentation within 14 days from the request being made, then the IRB will impose a fine of a similar amount as indicated above.
	The IRB can also propose adjustments to the transfer price and impose penalties.

If you have questions or require our assistance, please email us at taxservices@mustapharaj.com or contact our Ms. Priya at priya@mustapharaj.com.As the above changes will have a significant impact on the company, please promptly attend to the requisite TP requirements, if applicable.