Maintain documentation of transfer pricing — Deloitte
KUCHING: Taxpayers and companies will now find that they are not just encouraged but required to maintain documentation of transfer pricing, says Deloitte Tax Services Sdn Bhd ( Deloitte).
According to Abhijit Patne, manager of Deloitte’s transfer pricing division, this came due to the recent release of the first set of revisions to the Malaysian Transfer Pricing Guidelines ( MTPG) 2012.
The revisions now mean that transfer pricing documentaiton will have to conform to the Organisation for Economic Cooperation and Development’s Base Erosion and Profit Shifting recommendations.
“The guidelines has been present for a while now, but with not much clarity on the requirements of documentation or frequency of transfer pricing.
“The new revisions provide more guidance on the arm’s length principle (ALP) and documentation, and more clarification of intangibles and commodity transactions,” said Abhijit to the press during Deloitte’s annual tax seminar, ‘ Deloitte TaxMax’ held yesterday.
Based off explanations from Deloitte TaxMax session on TP, the ALP is a condition whereby parties of a transaction are independent and acting in their own self-interest and not subject to any pressure or duress from the other party.
The revisions were made in mind of deterring transfer mispricing whereby related companies may trade with each other at distorted prices to minimise the overall tax bill they incur.
The guidelines has been present for a while now but with not much clarity on the requirements of documentation or frequency of transfer pricing. Abhijit Patne, Deloitte manager
“For example, you may have some groups with a loss-making company and a profit making company. Their loss making company may give a loan to the profitable company at an excessive interest rate.
“What happens then is that the profitable company will have reduced profit and be taxed less while the interest earned by the loan will be sheltered from taxes by the losses of the loss making company.
“When you look at it from a group perspective, the taxes the group will have to pay will be significantly reduced due to the unnecessarily high market rate charge,” explained Tham Lih Jiun executive director of Deloitte’s corporate tax division.
Under the new revisions, companies will now be required to maintain their documentation of transfer pricing in order to show case that they are transferring assets, commodities and intangible assets at equitable rates.
Penalties for not practicing TP documentation or poor TP documentation may range between 25 to 45 per cent per audit framework, while the penalty of getting caught with TP documentation not aligned with coporate activities could go up 100 per cent.
“IRB has actually guided that for repeat offenses, the penalty exposure could go as high as 100 per cent,” added Tham.
Due to the heavy penalties, Abhijit advised companies to prepare comprehensive TP documentation because it is the first line of defence against a TP audit.
“If they (auditors) look at it and they understand what you are doing, they may not do any adjustment or penalty.”
However, not all companies are subjected to full TP documentation.
Under the new revisions, companies that do not exceed RM25 million in gross income and RM15 million in total related party transactions need only prepare a limited TP documentation that at least covers, organisational structure, detailed nature of controlled transactions and pricing policy, and comparability study.
Stressing the importance of compliance to transfer pricing documentation now that greater clarity on its requirements have been given with the revision of the MTPG, Chai Suk Phin associate director of Deloitte Corporate Tax said, “In the last one year, the Inland Revenue Board ( IRB) has really intensi fied the tax audit activity in the market, and they have actually guided that they will not be focusing in on group relief and transfer pricing.
“So it is important for taxpayers to identity any potential areas of risk or gaps in their intragroup pricing pol icies, actual practices, transfer pricing documentation, and make desired changes or bui ld adequate defensible position for audits.”
And touching on the concern of added compliance cost, Kane Hansel Bong senior tax manager of Deloitte GST guided that in the larger picture, the cost would be minimal.
“Of course there will be compliance cost, but against the whole text of thei r business and third party transactions, the cost is very minimal against all these things.
“Instead it will be mostly about how they restructure t h ems e lve s to re duc e the risk of TP audit and minimising non- compliance errors.”