THE Budget 2021 announcements which have now become the law under Finance Act 2020 have made very important changes to the transfer pricing regime in Malaysia. The two changes that will affect all companies and limited liability partnerships from Jan 1 2021 will be: 1) the introduction of penalties for failing to provide transfer pricing documentation (TPD) within 14 days of request made by Inland Revenue Board (IRB). 2) the introduction of 5% surcharge on any transfer pricing adjustment made on transactions between the related parties, notwithstanding whether the adjustment will result in any additional taxes.
How would it impact the companies especially SMEs
The penalty for failing to provide TPD within 14 days of request made by IRB can range from RM20,000 to RM100,000 or imprisonment for the term not exceeding six months or to both upon conviction in court. However, if no prosecution is instituted, the Director General can impose penalty of RM20,000 and not more than RM100,000.
With the introduction of penalty for non-compliance of TPD, the requirement to prepare TPD is absolute and mandatory, otherwise you face the fines. There is no discrimination, or any special allowance made between the large companies and the SMEs.
In addition to the above penalty, any transfer pricing adjustment made by the IRB in the audit or investigation will automatically give rise to 5% surcharge on the gross adjustment, whether or not the adjustment will result in any tax liabilities. Therefore, transactions between companies, both of whom have losses or enjoying tax holidays or exempt from taxes will still be subject to 5% surcharge.
SMEs and Micro SMEs are small companies who now find themselves having firstly to prepare the TPD before the authorities ask for it and secondly to ensure the documentation prepared is robust and able to defend the transfer prices meet the arm’s length test is becoming a tough proposition and a costly one as many of them have not prepared TPD in the past.
Should the SMEs and micro SMEs be excluded from compliance requirement
Preparing the TPD for the first time can be time consuming and secondly in many cases, the SME management may not have the capabilities to prepare the TPD themselves. They need to engage external consultants which inevitably force them to incur additional cost. In the current economic slowdown period, imposing such additional compliance requirement adds a further burden without any economic benefit to the entity concerned.
A win-win solution to SMEs and IRB can be for the Authorities to exclude all SMEs and Micro SMEs from the TPD requirements. However, a proviso or exception can be made to allow the IRB to call upon specific SMEs and Micro SMEs to prepare TPD within 60 or 90 days upon their request where the IRB have reasons to believe that selected companies may have manipulated their transfer prices to show lower profits and therefore pay lower taxes. In this scenario, the request for TPD will be only on an exceptional basis for SMEs and Micro SMEs rather than the blanket requirement for all companies to comply.
More guidance needed
IRB should provide more guidance beyond the existing transfer pricing guidelines to enable the smaller companies to comply the transfer pricing requirements to avoid any adjustments. An alternative to preparing TPD is to design a standard questionnaire for SMEs which could cover most of the concerns of the IRB rather than preparing TPD based on the guidelines which is subject to interpretational difficulties.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.
This article was originally published on the Sun daily.