Introduction
Understanding the relevant tax laws is crucial for businesses operating in Malaysia to ensure compliance with transfer pricing regulations. This blog post aims to provide an in-depth analysis of the statutory framework and regulations governing transfer pricing, along with the role of case law in shaping the interpretation and application of these laws.
Statute and Regulations
Section 140A of the Income Tax Act, 1967 (ITA), introduced by the Finance Act 2009, serves as the key statutory provision empowering the Director General of the Inland Revenue Board (IRB) to make adjustments to transactions between related companies based on the arm’s length principle. This provision covers related party transactions within domestic groups and transactions involving the acquisition or supply of property or services.
While the ITA does not provide a specific definition of “property or services,” it remains uncertain whether interest-free loans are included. Taxpayers are required to determine and apply arm’s length prices to transactions with associated persons. The DGIR has the authority to substitute arm’s length prices if there are reasons to believe that the transactions are not conducted at arm’s length.
In addition to Section 140A, the IRB can invoke the anti-avoidance provisions of Sections 140 and 141 of the ITA to address tax avoidance arising from transfer pricing arrangements. Section 140 is a general anti-avoidance provision, while Section 141 deals specifically with arrangements between controlled companies involving non-residents. These provisions grant the IRB the power to disregard transactions that are not arm’s length and make necessary adjustments to revise or impose tax liabilities on the parties involved.
The Transfer Pricing Guidelines (TP Guidelines), initially introduced in 2003 and subsequently replaced by the TP Guidelines 2012, provide further guidance on the operation of the arm’s length principle. Although the TP Guidelines do not have the force of law, they serve as essential guidance for taxpayers, outlining transfer pricing methodologies, documentation requirements, and administrative obligations. They clarify that transfer pricing rules also apply to transactions between a permanent establishment (PE) and its head office or other related branches, treating the PE as a separate entity subject to the arm’s length principle.
Case Law Precedent
Malaysia, being a common law jurisdiction, considers case law as having precedent value. A notable case before the Special Commissioners of Income Tax in January 2019 involved a Malaysian subsidiary of a multinational company operating in the fast-moving consumer goods sector. The IRB disagreed with the taxpayer’s characterisation of the subsidiary as a limited-risk distributor, asserting that it should receive greater compensation.
The taxpayer appealed, highlighting several grounds, including the IRB’s failure to consider the assets owned and risks assumed, improper selection of comparables, and lack of disclosure of comparative data. The IRB argued for the ability to adjust transfer pricing to the median of the arm’s length range, even when the price was already within that range, contrary to the OECD guidelines. The IRB also disallowed the taxpayer’s adjustments for ensuring an arm’s length return. Ultimately, the Special Commissioners ruled in favor of the taxpayer, allowing the appeal in full.
Conclusion
Comprehending the relevant tax laws and regulations governing transfer pricing is essential for businesses operating in Malaysia. Adhering to the statutory provisions, such as Section 140A of the ITA, along with the guidelines outlined in the TP Guidelines 2012, will help businesses ensure compliance and minimize the risk of transfer pricing disputes. Additionally, staying informed about relevant case law precedents will provide valuable insights into the interpretation and application of transfer pricing laws in Malaysia. By navigating the complexities of relevant tax laws, businesses can effectively manage their transfer pricing obligations and maintain transparency in their cross-border transactions.