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Documentation Key To Malaysia's First Transfer Pricing Case

by Mary Swire,, Hong Kong

18 June 2013

The decision of the Malaysian Special Commissioners of Income Tax delivered earlier this year in favor of the taxpayer highlighted the absolute necessity for businesses to prepare transfer pricing documentation in Malaysia.

The decision was the conclusion of a long battle for the taxpayer MM Sdn Bhd, one of the world's largest shipping and logistics operators, after an audit by the Malaysian Inland Revenue Board (IRB) that had resulted in tax assessments were imposed on the taxpayer. Those assessments were the cause of the dispute in this case.

The disputed issues related to the assessments made in the audit pertaining to commission rates, intercompany charges and the resultant penalties for the 1998 to 2005 years of assessment.

While the issue on commission rates was whether the IRB had a legal basis in the Malaysian tax code to adjust the commission rates received by the taxpayer (the tax authority having increased the commission rates received by the taxpayer from its related party by 0.25 percent for 2002 to 2005), the issue on intercompany service charges was whether the IRB could deem that such services were not provided by its Singapore related party and to disregard the charges for all years from 1998 to 2005.

In fact, the Special Commissioners ruled that the transfer pricing adjustments made by the IRB were to be set aside; and that the IRB Transfer Pricing Guidelines, which were gazetted in May 2012, but were decreed to have retrospective effect from January 2009, have no force of law. It was further decided that transfer pricing was not an exact science, and that the taxpayer's transfer pricing reports and expert evidence were reliable in establishing that the taxpayer's pricing methodology was acceptable.

Nik Armizam, Malaysian partner of Quantera Global, the transfer pricing specialists, has commented that "it is clear from the decisions above that transfer pricing reports are vital instruments in establishing whether a taxpayers' pricing methodology is in compliance with the prevailing regulations. In this specific case, the transfer pricing reports were the key evidence that perhaps won the litigation for the taxpayer."

He added that "it is imperative that all multinational taxpayers look at their transfer pricing systems and explore the steps that can be taken proactively as a risk management procedure. As exemplified by this case the preparation of a quality transfer pricing report is an excellent risk management instrument that can be used as evidence of the arm's length nature of the transfer pricing system of the taxpayer. Transfer pricing reports are also vital instruments for regular compliance purposes, providing evidence that the transfer pricing systems are contemporaneously documented."

TAGS: court | compliance | Transfer Pricing | tax | business | tax compliance | law | corporation tax | tax authority | legislation | transfer pricing | Malaysia | penalties | services

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