Transfer pricing penalties can have significant financial and reputational implications for businesses operating in Malaysia. To ensure compliance with transfer pricing regulations, it is crucial for taxpayers to understand the penalty framework, including penalty rates and potential relief mechanisms. In this blog post, we will delve into the intricacies of transfer pricing penalties in Malaysia and discuss ways to mitigate risks and secure penalty relief.
I. Transfer Pricing Penalty Rates
Under the Transfer Pricing Audit Framework 2019, penalty rates for non-compliance have been revised. The following penalty rates are applicable:
1. No Transfer Pricing Documentation: If a taxpayer fails to prepare transfer pricing documentation, a penalty equal to 50% of the tax adjustment will be imposed.
2. Incomplete Documentation: If the taxpayer has prepared transfer pricing documentation but it does not fully comply with the requirements of the transfer pricing guidelines, or if comprehensive and good-quality documentation is not submitted within 30 days from the audit notification, a penalty of 30% (or 20% with voluntary disclosure) will be applied.
Additionally, the Finance Act 2020 introduced Section 113(B), which penalizes taxpayers for failing to submit transfer pricing documentation in a timely manner. The penalty ranges from RM 20,000 to RM 100,000, and upon conviction, may include imprisonment for a term not exceeding six months, or both.
Moreover, the Finance Act 2020 empowered the Inland Revenue Board (IRB) to impose a surcharge of up to 5% on any transfer pricing adjustment made during tax audits and investigations, regardless of whether additional tax is payable or not.
II. Penalty Relief
To address penalty impositions, the Director General has the authority under subsection 124(3) of the Income Tax Act 1967 to abate or remit the penalties imposed. This discretionary power allows for potential relief based on the merits of each case.
It is important to note that penalty relief is granted on a case-by-case basis, and taxpayers must demonstrate valid reasons and provide supporting evidence to support their request for relief. Factors such as the taxpayer’s compliance history, level of cooperation during the audit, voluntary disclosure of non-compliance, and steps taken to rectify any deficiencies in transfer pricing documentation may be considered in determining the outcome of penalty relief requests.
III. Mitigating Risks and Ensuring Compliance
To mitigate transfer pricing penalties and ensure compliance with regulations, businesses should consider the following strategies:
1. Comprehensive Transfer Pricing Documentation: Maintaining robust and accurate transfer pricing documentation that complies with the requirements of the transfer pricing guidelines is essential. This documentation should include detailed information on controlled transactions, pricing policies, comparability analysis, and the selection and application of transfer pricing methods.
2. Timely Submission: Timely submission of transfer pricing documentation is crucial to avoid penalties. Businesses should establish internal processes to ensure that all required documentation is prepared and submitted within the specified timelines.
3. Expert Guidance: Engaging qualified transfer pricing professionals or advisors can help navigate the complexities of transfer pricing regulations. They can provide expert guidance on transfer pricing methodologies, documentation requirements, and compliance strategies.
4. Proactive Compliance Measures: Conducting regular internal transfer pricing reviews and audits can help identify and rectify any non-compliance issues before they are flagged by the tax authorities. Proactively addressing transfer pricing risks demonstrates a commitment to compliance.
5. Voluntary Disclosure: If non-compliance is discovered, taxpayers should consider making a voluntary disclosure to the tax authorities. Voluntary disclosure demonstrates a proactive approach to rectifying errors and may lead to a more favorable treatment in terms of penalty rates and relief.
Navigating transfer pricing penalties is a critical aspect of ensuring compliance and avoiding financial and reputational risks in Malaysia. By understanding the penalty rates, pursuing penalty relief through valid applications, and implementing robust compliance measures, businesses can mitigate risks and demonstrate a commitment to adhering to transfer pricing regulations. Engaging qualified professionals and maintaining comprehensive transfer pricing documentation are key components of a proactive approach to transfer pricing compliance, safeguarding businesses in an increasingly complex regulatory landscape.