Introduction
Transfer pricing audits pose significant challenges for businesses operating in Malaysia. The Malaysian Inland Revenue Board (IRB) conducts thorough assessments to ensure compliance with transfer pricing regulations and the arm’s length principle. In this blog post, we will explore the key aspects of transfer pricing audits in Malaysia, including the audit framework, areas of scrutiny, risk assessment, timelines, adjustments, and potential resolutions through the mutual agreement procedure (MAP).
I. Transfer Pricing Audit Framework
In December 2019, the MIRB introduced a new transfer pricing audit framework, which streamlined the audit process. Under this framework, taxpayers are required to provide detailed PowerPoint slides about their business at least seven calendar days before the audit visit. The response time for taxpayers to provide documentation and information in a typical transfer pricing audit has been reduced to 14 days. Failure to respond within the specified timeline may lead to the MIRB proceeding with the audit using an appropriate method or approach.
Additionally, the IRB administers a Transfer Pricing Awareness Survey Form to gauge management’s understanding of transfer pricing policies and transaction pricing. This survey is given to taxpayers at the beginning of the audit and helps assess their awareness and compliance with transfer pricing regulations.
II. Areas of Scrutiny and Risk Assessment
The IRB selects companies for transfer pricing audits based on a risk analysis using defined criteria. These criteria include information disclosed in the tax return (Form C), outstanding tax enquiries, risk areas such as sustained losses and the use of tax havens, compliance records, financial ratios of comparable businesses, desk audit referrals, and third-party information. The IRB may also target specific industries or companies based on the interval since their last audit.
III. Timelines and Scope
The 2019 TP Framework clarifies that transfer pricing audits may cover up to seven years, aligning with the seven-year time bar period stated in Section 91(5) of the Income Tax Act 1967. The audits may take the form of desk audits or field audits. In the case of a field audit, the taxpayer will be issued a notice prior to the commencement of the audit. The framework outlines the documentation that may be audited and establishes the rights of the taxpayer, tax administration, and any involved agents.
With the change to the statute of limitations for transfer pricing, it is expected that the number of transfer pricing audits initiated by the IRB will increase in the coming years.
IV. Adjustments and Consequences
If a taxpayer fails to conduct its transactions on an arm’s length basis, the IRB has the authority to make transfer pricing adjustments. Assessments or additional assessments can be made within seven years after the expiration of the relevant year of assessment. However, there is no time limit in cases of fraud, willful default, or negligence.
Previously, taxpayers were given 21 days to object to the proposed transfer pricing adjustments. However, under the 2019 TP Framework, this period has been reduced to 18 days. In the event of a transfer pricing adjustment, additional taxes may be payable on the adjusted income, even if the income is already subject to tax in another jurisdiction.
V. Resolutions through Mutual Agreement Procedure (MAP)
Taxpayers may seek resolution through the Mutual Agreement Procedure (MAP) under the provisions of a double tax treaty. Corresponding adjustments can be pursued if the taxpayer requests a MAP, providing an avenue for resolving transfer pricing disputes between jurisdictions.
Conclusion
Transfer pricing audits present complex challenges for businesses operating in Malaysia. Adhering to the transfer pricing audit framework, understanding areas of scrutiny, conducting thorough risk assessments, meeting timelines, and preparing for potential adjustments are essential for compliance. By maintaining comprehensive transfer pricing documentation, collaborating with tax professionals, and exploring dispute resolution mechanisms such as the Mutual Agreement Procedure, businesses can navigate transfer pricing audits effectively, mitigate risks, and maintain a strong compliance posture.