IT IS now mandatory to have the transfer pricing documentation (TPD) to support the arm’s length pricing of transactions undertaken between associated persons of related parties before the due date of filing of the annual tax return of the affected taxpayer.
Any failure to prepare proper TPD can result in adjustments which attract surcharges of up to 5%. Equally importantly, the TPD must be prepared on a “contemporaneous” basis, otherwise business enterprises could also face a penalty ranging from RM20,000 to RM100,000. This imposition of penalty for failing to prepare contemporaneous TPD was not present prior to year of assessment 2023.
Changes to the timing of the contemporaneous TPD
Prior to Jan 1 2023, contemporaneous TPD meant that a TPD should be prepared at the time the taxpayers are undertaking new transactions with their related parties, or if there are material or significant changes to existing related party transactions. Effectively, between Jan 1 2021 and Dec 31 2022, most business enterprises may not need to prepare TPD on a contemporaneous basis, since the definition of “contemporaneous TPD” is narrow for this two-year period. In these circumstances, TPDs can be prepared afterwards for those who are not caught within the above two conditions.
From Jan 1 2023, the same intention of the requirement of taxpayers to prepare contemporaneous TPD remains under the amended Transfer Pricing Rules 2023. However, the timing to prepare contemporaneous TPD has changed. Now taxpayers are required to prepare TPD and have it ready before the due date for filing their tax returns. In the event the company has a financial year end of Dec 31, the TPD for year 2023 should be ready and available when called upon by the Inland Revenue Board (IRB) by July 31 2024 (e.g. companies should file their tax returns within seven months from the end of their financial year).
The current practice of the tax authorities is that at any time after the tax returns are filed, they can request the business enterprise to furnish the TPD within 14 days. If they fail to do so, the above penalty will kick in.
Can you get an extension of time?
The answer appears to be “Yes” and “No”. If you are unable to provide the documentation within the 14-day time limit, the IRB is willing to give you an extension of time. However, it is making it clear that despite providing you an extension, it will still be regarded as a failure to furnish contemporaneous TPD. Therefore, the IRB retains the right to impose the penalty from RM20,000 to RM100,000.
This is rather confusing to taxpayers. There is a contradiction in the position taken by the IRB. On one hand an extension is given, but on the other hand, the extension does not seem to absolve the taxpayer from being penalised.
What needs to be disclosed in a TPD?
From Jan 1 2023, many of the requirements that were present in the 2017 Transfer Pricing Guidelines are now being given the legal authority under the Transfer Pricing Rules 2023. There is a clear set of information that must be provided in the TPD. It is no longer a guide or a choice, it is now mandatory.
The timing of the preparation of TPD and the contents of the TPD to support the arm’s length pricing of intercompany transactions has become more rigorous, will be time consuming and certainly add to the cost of doing business.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
This article was originally published on the Sun daily.