Introduction to Transfer Pricing
As of 2020, the government has imposed penalties for companies who are non-compliant with transfer pricing regulations. Prior this, such penalties did not exist. The IRB (Inland Revenue Board) has also shown more and more interest on the grey areas surrounding Transfer pricing.
Large companies and multinational companies must prepare proper Transfer Pricing documentation as soon as possible to reduce the risk of being penalised. As of January 2021 onwards, Failure to do so might lead to a 5% surcharge on the Transfer Pricing adjustment.
What is transfer pricing?
Transfer Pricing (TP) refers to the intercompany pricing arrangements for the transfer of goods and services that are exchanged between related commonly controlled legal entities within and enterprise or organisation. Transfer price should not differ from the existing market price.
Transfer Pricing Example
Within a group of 2 companies :
Company A -> purchase goods from Company B
Company B -> Price charge by Company B to Company A is referred to transfer price
There is now a commercial relationship between this two companies.
The current scrutiny of Transfer Pricing
The price of the goods that are being purchased by Company A is begin closely inspected by our tax authorities.
This is because there are companies who misuse Transfer Pricing to obtain tax advantage and re-allocate profits by mis-pricing among their subsidiaries.
Transfer Pricing only impacts multinational companies. How can it affect my SME?
Transfer Pricing can affect local SMEs if the Transfer Price between 2 local companies are seen as having a tax advantage.
For example, performing business transactions with local SMEs that are enjoying local tax incentives and/or suffering from losses, can give the impression that this transaction is performing a “transfer mis-pricing”. This is why proper Transfer Pricing documentation must be kept in place.
In order for a Transfer Pricing scrutiny to be triggered, there just needs to be 2 companies that transact with each other. The companies need to be associated or related to each other.
What is an associated company?
- One of the companies directly or indirectly participates in the management control or capital of the other company
- The same individual participates directly/indirectly in the management control or capital of BOTH companies.
This makes the companies related or considered as companies in the same group. Companies in the same group will have a holding company and subsidiary companies. This companies are provided for under subsection 2(4) of the Income Tax Act 1967.
Transfer Pricing affects companies within this scope
- Gross income exceeding RM25 million
- Total related party transactions exceeding RM15 million
- 50 million worth of financial assistance
Companies that fall within this scope MUST prepare a detailed and complete Transfer Pricing Document.
Companies that do not fall within this scope are still required to prepare a condensed version of Transfer Pricing Documentation
Practices to avoid when for Transfer Pricing
- Selling below market value
- Providing services for free
- Absence of standardized pricing policies
- Providing interest free loan or advances
- Implementing cost sharing or cost reimbursement approach