What happens if you forget to update the transfer pricing document in Malaysia?
Many significant changes have been made in the Malaysian Income Tax Act 1967 through the Malaysian Finance Act 2020. One of these major changes is that if the taxpayers fail to provide proper transfer pricing documentation to the Malaysian Inland Revenue Board (MIRB) within a specified date, a fine that ranges from RM 20,000 to RM 100,000 can be placed.
Similarly, there have been some revisions in other transfer pricing document guidelines by the MIRB. The purpose of this post is to discuss these important aspects of transfer pricing.
Important Changes in Transfer Pricing Policy in Malaysia
Tax authorities and the government have started to place more emphasis to ensure taxpayers comply with the requirements of transfer pricing documentation and other tax-related requirements. MIRB has put strict policies in place to enforce the legislation.
Taxpayers now have a short window of only 14 days to provide transfer pricing documents. Hence, they have to consider various aspects of transfer pricing in Malaysia and ensure maximum compliance with these guidelines.
Similarly, organizations that have already established the process to prepare transfer pricing documents should also focus on reviewing these guidelines and keep them aligned with the latest requirements of the taxation authorities.
Every organization should have reliable financial policies in place to avoid issues during an audit.
Introduction of the Transfer Pricing Documentation Penalty
Generally, taxpayers who are involved in controlled transactions have to maintain up-to-date transfer pricing documents. Moreover, a thorough transfer pricing documentation might include a number of documents and financial records such as:
- Organization structure that shows the entire ownership structure, along with the description of the management structure. If there are any significant changes in the company’s structure, it becomes important to update the transfer pricing document in Malaysia. Otherwise, penalties can be imposed on the taxpayers.
- Description of the controlled transactions, such as details of the involved parties and overall description of the business
- Pricing policies often include mathematical calculations, along with the formulas applied to calculate the pricing.
- Additional information about strategies being used relevant to the transfer pricing
Many companies assume that this document has to be submitted along with the annual income tax returns. However, MIRB has not set any specific date or time of the year at which the corporations must file their transfer pricing documents. Instead, they have to furnish the transfer pricing document whenever the MIRB requests them to do so.
TDP penalty has been introduced to penalize the taxpayers who fail to provide the transfer pricing documentation to the MIRB within the given time. The fine on such a penalty is anywhere between RM 20,000 to RM 100,000. It can also include imprisonment of up to six months.
Therefore, the introduction of the TDP penalty plays an important role in the tax and accounting policies of the companies. It is highly recommended that the companies keep up with these changing requirements to avoid the penalty and get through the audit process easily.
Imposition of a Surcharge
The latest changes in the regulations related to transfer pricing allows the Director-General of Inland Revenue (DGIR) to impose a surcharge of up to 5% on the transfer pricing adjustments, irrespective of the fact that these adjustments have been led to additional tax or not.
Similarly, new provisions have been introduced to increase the power of the DGIR. According to such provisions, the DGIT has the power to make adjustments to the structures adopted in controlled transactions. The purpose of such adjustments is to make sure the transactions are carried out at arm’s length.
In a Nutshell
Keeping up with these different rules and regulations can be challenging for companies, especially when they are already dealing with a wide range of other issues. The introduction of the penalty to provide transfer pricing documents and the power to impose a surcharge on the transfer pricing adjustments have significantly changed the way it works in Malaysia.
Every company should try to keep their transfer pricing document up-to-date in Malaysia because MIRB can ask them at any time to provide this essential document. Failure to comply with the instructions can lead to significant penalties and losses in the company.
Companies with efficient transfer pricing policies and documentation are assured of a smooth audit process. For more information, feel free to get in touch with us.