(Tax update) What Is The Surcharge For Transfer Pricing (TP) Malaysia?

Surcharge 5%

With effect from 1 January 2021, the IRBM may impose a surcharge of up to 5% on any increase in income or reduction of any deduction / loss arising from these adjustments.

A surcharge is imposed on a Transfer Pricing (TP) adjustment made under Section 140A of the Income Tax Act 1967 (ITA) which results in an increase in income or a reduction of any deduction or loss. When any taxpayer does not comply with the arm’s length principles, a surcharge will be imposed on that adjustment regardless of whether the taxpayer is in a loss position or a tax exempt company.

The imposition of surcharge of up to 5% on any transfer pricing adjustment under Section 140A(3C) was released on 18 January 2024 in Frequently Asked Question (FAQ) in IRBM website.

Key Takeaways of the FAQ

Surcharge on incorrect transfer prices

Starting from January 1, 2021, the IRB can impose a surcharge of up to 5% on any transfer pricing adjustments. This applies even if the adjustment doesn’t result in additional tax payable, affecting loss-making or tax-exempt companies.

Application of surcharge

The surcharge applies to tax audits initiated from January 1, 2021, onwards, regardless of the financial year being audited. Only a surcharge will be imposed in cases where transfer pricing adjustments result in additional income, not a penalty for submitting an incorrect return.

Non-appealability of surcharge

The surcharge, which is not a tax, cannot be appealed through legal processes but only to the Director General of Inland Revenue on a case-by-case basis.

Penalties for not furnishing documentation

Failure to provide contemporaneous transfer pricing documentation within 14 days of request can result in penalties ranging from RM20,000 to RM100,000, and potentially a prison term of up to six months.

Mutually Exclusive with Section 113 (2)

The FAQ states that the surcharge is mutually exclusive with the penalty under Section 113(2).

What is the new TP rule in Malaysia?

The documentation must be prepared before the due date for submitting income tax returns and must include the date of completion.

The IRB scrutinizes various aspects like sales/purchase margins, profitability, intragroup services, and intragroup financing. Lack of benchmarks, consistent losses, and insufficient supporting documents are some of the red flags.

Even companies enjoying tax holidays or incurring losses must adhere to transfer pricing rules, as any adjustments by the IRB will attract a surcharge.

Taxpayers are advised to scrutinize their related company transactions to ensure compliance with the arm's length principle to avoid penalties and fines.

Failure to provide contemporaneous transfer pricing documentation within 14 days of request can result in penalties ranging from RM20,000 to RM100,000, and potentially a prison term of up to six months.

The transfer pricing scene in Malaysia is rapidly evolving, and taxpayers are advised to stay informed and compliant to avoid severe penalties and fines.

Sources

IRBM : FAQ on TP 18/1/2024

https://www.hasil.gov.my/media/w0ag5bsp/faq-on-matters-arising-from-subsection-140a-3c-ita-1967.pdf

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