Income Tax (Transfer Pricing) Rules 2023

Changes / Updates

Description

Definition of “contemporaneous” for a TP documentation

The TP documentation needs to be prepared and completed prior to the due date for furnishing a tax return. In addition, the date of completion is required to be stated in the TP documentation.

GTT’s comments

It is crucial that TP documentations are prepared on a “contemporaneous” basis. A penalty of RM20,000 to RM100,000 per YA may still be applicable in the situation where a “non-contemporaneous” TP documentation is furnished to the IRBM within 14 days upon its request.

Definition of “arm’s length range”

The “arm’s length range” is now defined as a range of figures or a single figure falling between the interquartile range of 37.5 percentile to 62.5 percentile of the benchmarked data.

If the price of the controlled transaction falls:

a) within the arm’s length range, such price may be regarded to be the arm’s length price; or

b) outside the arm’s length range, the arm’s length price shall be taken to be the median.   

GTT’s comments

There is now clarity on the definition of “arm’s length range”, albeit of a narrower range (the interquartile range of 25 percentile to 75 percentile is commonly assumed to be the arm’s length range).

Nevertheless, the IRBM now has the discretionary power to make adjustment to the price of the controlled transaction, even if the results of the benchmarking falls within the arm’s length range. The IRBM may adjust the price to the median or up to the 62.5 percentile if the comparable data is of a lesser degree of comparability or the comparability defects cannot be qualified, identified or adjusted.

Definition of “intangible property”

The definition of “intangible property” has been revised to include the term “neither a physical asset nor a financial asset” and the examples given in the Rules include customer lists, customer relationships as well as proprietary market and customer data.

GTT’s comments

The above examples are normally not shown in a taxpayer’s financial statements and taxpayers may not realise that they have an intangible property that is subjected to the Rules.  Therefore, it is crucial for a taxpayer to relook at its intangible properties which are “neither a physical asset nor a financial asset”, as the usage of this category of intangible properties (in particular the examples shown in the Rules) by a related party may be subject to a charge of royalty or commission.

Reference of the “best available” data to prepare a TP documentation

The most current reliable information, data or documents can be referred to at the time the contemporaneous TP documentation is prepared.  

GTT’s comments

For the preparation of the benchmarking study in particular, it is a common issue that the financial data of the comparable companies for the similar period are not publicly available by the due date for furnishing a tax return. Therefore, by allowing the use of “best available” data to prepare the benchmarking study, the TP documentation can be completed on a contemporaneous basis.

Nevertheless, the IRBM still reserves the rights to refer to comparable financial data of the same YA in assessing the benchmarking results.

Offsetting adjustment

In the previous Income Tax (Transfer Pricing) Rules 2012, the TP adjustment made by the IRBM on a controlled transaction may be reflected by an offsetting adjustment to the other related party, upon request. However, this rule has been removed in the TP Rules 2023.

GTT’s comments

Double taxation may occur, particularly for controlled transactions involving only Malaysian related parties, if the offsetting adjustment is not allowed by the IRBM.

Clarification from the IRBM on this matter is required.  

Information required in a TP documentation of a Multinational Enterprise (“MNE”) Group

Schedule 1 of TP Rules 2023 has specifically listed the detailed documentation requirements of a MNE Group with business in Malaysia which has been briefly summarised as follows:

a) Information of the MNE Group’s worldwide organisational structure 

b) Description of the MNE Group’s businesses that are relevant to the Malaysian taxpayer

c) Description of the MNE Group’s intangible property that are used or applied in the Malaysian taxpayer’s business 

d) The MNE Group’s financial activities that are connected to the Malaysian taxpayer’s business

e) Financial and tax position of the MNE Group

GTT’s comments

The documentation requirement for a MNE Group or a Malaysian taxpayer who is part of a MNE Group has increased significantly as the above information are mainly available in a Master File, which a MNE Group is only required to prepare if the Group is subject to the CbCR requirements (i.e. EUR750 million or RM3 billion consolidated revenue). 

The MNE Group or the Malaysian taxpayer who is part of a MNE Group may not have access to the above information when preparing the contemporaneous TP documentation.