Transfer Pricing ( TP ) and Advance Pricing Arrangements ( APAs ) Long Overdue Rules Given Retrospective Effect

Size: px

Start display at page:

Download "Transfer Pricing ( TP ) and Advance Pricing Arrangements ( APAs ) Long Overdue Rules Given Retrospective Effect"

Augustus Francis
5 years ago
Views:

1 MALAYSIA Tax Updates 2012/2013 ANAND RAJ FOONG PUI CHI PENNY WONG Transfer Pricing ( TP ) and Advance Pricing Arrangements ( APAs ) Long Overdue Rules Given Retrospective Effect In early 2009 the Income Tax Act 1967 ( ITA ) was amended to include specific provisions on transfer pricing ( TP ) and thin capitalisation vide a new section 140A i and Advance Pricing Arrangements ( APAs ) vide a new section 138C ii. Both sections came into force on 1 st January Section 140A ITA does not distinguish between cross-border and domestic transactions and applies equally to both classes of transactions in regard to the acquisition or supply of both property and services. There is no reference to financial transactions in Section 140A ITA. Although Sections 154(1)(eb) and (ed) ITA (also enacted in early 2009) grant the Minister of Finance ( MOF ) the power to make detailed rules (i.e. subsidiary legislation) for TP and APAs, the rules were only gazetted in May 2012 i.e. more than 3 years later. However, the MOF has sought to give both the TP Rules 2012 and the APA Rules 2012 retrospective effect from 1 January Prior to the 2009 ITA amendments, the Director General of Inland Revenue ( DGIR ) and the Inland Revenue Board ( IRB ) had relied on the general anti-avoidance provision ( GAAR ), contained in section 140 iii ITA in making TP adjustments. The IRB also purported to formulate and issue Transfer Pricing Guidelines in July 2003 ( TPG 2003 ). The TPG 2003 had no force of law. The IRB s stand prior to 2009 was of questionable legality. The subsequent enactment of a specific provision on TP and the issuance of the detailed TP Rules by way of subsidiary legislation, amongst others, appear to support this view. Transfer Pricing Rules 2012 ( TPR 2012 ) and Transfer Pricing Guidelines 2012 ( TPG 2012 ) The TPR 2012 provides that, amongst others, a taxpayer who has entered into a transaction with an associated person must prepare and maintain contemporaneous TP documentation ( CTPD ). CTPD iv means TP documentation which is brought into existence : (a) when developing/implementing transaction; and (b) is to be updated if the controlled transaction has been reviewed and there are any material changes. The CTPD need not be submitted with the annual tax returns but must be made available to the IRB within 30 days of any request for the same. The MOF vide the TP Rules has sought to extend the application of Section 140A ITA and the TPR 2012 by defining services as including financial assistance. This appears to be a (questionable) 1

2 attempt to extend the ambit of a parent statute by use of subsidiary legislation and may well be challenged before the Malaysian courts. The TPR 2012 contains specific rules on separate and combined transactions, intra-group services, cost contribution agreements and intangible property, amongst others. The TPR 2012 also gives the DGIR the power to make adjustments, off setting adjustments, recharacterize transactions, etc. The TPG 2012 indicate that penalties will be imposed on TP audit adjustments under section 113(2) ITA of between 35% (if there is no CTPD) and 25% (if CTPD exists but they do not conform to TPG requirements). The penalty rates may be increased by 20% on the penalty last imposed in the case of second or subsequent TP audits if the taxpayer: (a) obstructs/interferes with the TP audit; or (b) fails to apply an arm s length price after previous TP audits. The prescriptions above are of doubtful legality as the DGIR seeks to impose (by way of guidelines, which do not have the force of law) a mechanical approach to the imposition of penalties under the ITA provision dealing with incorrect tax returns. Although it has not been expressly dealt with, for the purposes of compliance, notwithstanding the retrospective effect of the TP Rules 2012, it would seem unreasonable for the DGIR to impose any penalties for the period between January 2009 and May Despite the introduction of a specific TP provision (Section 140A ITA), the DGIR through the TPG 2012 purports to take the position that the GAAR (Section 140 ITA) can still apply to TP cases. Thin capitalisation Thin capitalisation provision was introduced by way of Section 140A(4) ITA v (with effect from 1 January 2009), which provides that, amongst others, any interest or finance charge on financial assistance which is excessive, may be disallowed as a deduction. However, the uncertainties arising from the scope of section 140A(4) ITA need to be resolved with the introduction of detailed rules. The MOF has yet to issue any rules and announced that implementation would be deferred to the end of December APA Rules 2012 ( APAR 2012 ) and APA Guidelines 2012 ( APAG 2012 ) Under Section 138C ITA, taxpayers may enter into unilateral, bilateral or multilateral APAs with a view to determining the prices in cross border transactions with associated persons for income tax purposes in order to determine the TP methodology to be used in any future apportionment or allocation of income or deduction to ensure the arm s length transfer price in relation to that transaction.... Section 138C ITA does not provide for APAs in relation to transactions with associated persons within Malaysia, despite Section 140A ITA covering domestic transactions. Under the APAG 2012 issued by IRB, an APA will only be considered for cases of taxpayer companies (including permanent establishments) chargeable to tax under the ITA with: (a) a turnover value exceeding RM100 million; and (b) the value of the proposed covered transaction is (i) for sales, if it exceeds 50% of turnover; (ii) for purchases, if it exceeds 50% of total purchase; or (iii) for other transactions, if the total value exceeds RM25 million. 2

3 The limitations above are sought to be imposed by under the APAG 2012 and appear to fetter the discretion of the authorities in regard to transactions falling below the foregoing threshold. These limitations are subject to challenge before the Malaysian courts. The APA Rules 2012 state that APAs can be issued for between 3 to 5 years and are renewable. The Rules also purport to provide that APAs can be rolled back to cover prior years this seems to go beyond the ambit of the parent statute i.e. Section 138C only provides that APAs are to apply to future apportionment or allocation of income or deduction. In regard to the MOF s intended retrospective effect of the APAR 2012, it seems incongruous that APAs (which are by definition forward looking) should be subject to retrospective rules. Double Tax Agreements ( DTAs ) Malaysia has entered into 72 DTAs with various countries. Malaysia has recently concluded DTAs with New Zealand, Barbados, Denmark, Ukraine and South Korea and is negotiating DTAs with, amongst others, Brazil, Mexico, Finland and Kenya. Proposed Goods and Services Tax ( GST ) The GST Bill 2009 underwent a first reading before the Malaysian Parliament on 16 th December 2009 but the passage of the Bill has since been deferred. GST is intended to be a replacement tax for the present regime of sales and service taxes. Understandably, GST has become a subject of debate between the government and the opposition parties. 2% Compensation for Late Refund of Tax by the IRB Presently, taxpayers who are late in paying their taxes are subject to late payment penalties. Commencing YA 2013, taxpayers will be given compensation of 2% p.a. on any late tax refunds given by IRB. The compensation of 2% will be calculated on a daily basis commencing one day after the 90-day period from the due date for e-filing or after 120 days from the due date from manual tax filings. However, if the refund ought not to have been made by reason of an incorrect return or incorrect information furnished by the taxpayer, a 10% penalty will be imposed on the amount wrongly refunded. Reduction of time bar With effect from 1 January 2014, the time bar for the DGIR to raise an assessment or additional assessment for ITA, PITA and real property gains tax purposes will be reduced from 6 to 5 years save for cases involving fraud, wilful default or negligence. Treatment of interest income as business income With the introduction of a new section 4B ITA, only interest income arising from the business of lending money will be treated as business income. Tax Incentives and Deductions A number of tax incentives and deductions have been introduced and set out below is a summary of selected incentives and deductions. Treasury Management Centre ( TMC ) 3

4 TMCs provide financial and fund management services to a group of related companies within or outside Malaysia. In line with the Government s effort to develop Malaysia as a competitive financial centre and to attract MNCs to establish their treasury management services in Malaysia, TMCs will enjoy the following tax incentive package: (i) (ii) (iii) (iv) 70% tax exemption on statutory income from qualifying services vi rendered by the TMC to its related companies for a period of 5 years; exemption from withholding tax on interest payments on borrowings used for qualifying TMC activities; exemption from stamp duty on all loan and service agreements for qualifying TMC activities; and expatriates working in TMC will be taxed only on their chargeable income attributable to the number of days they are in Malaysia. Industrial Design Services ( IDS ) To promote creativity and innovation, the following IDS providers (registered with the Malaysian Design Council) will be granted Pioneer Status with 70% income tax exemption for a period of 5 years: (i) (ii) new IDS providers who employ at least 50% Malaysian designers; and existing IDS providers undertaking expansion and non-ids providers which would be carrying out industrial design activities: (a) upgrading design facilities by increasing capital investment of at least 50%; and (b) employing an additional 50% qualified Malaysian designers. Investment in refinery activities With a view to encouraging more companies to invest in oil and gas projects in Malaysia, qualifying companies investing in such refinery activities will be given a 100% Investment Tax Allowance for a period of 10 years. Petroleum (Income Tax) Act 1967 ( PITA ) Introduction of TP and thin capitalisation provisions Almost 4 years after the introduction of TP and thin capitalisation provisions in the ITA, the same provisions have been introduced into the PITA. However no TP or thin capitalisation rules have been gazetted under the PITA and the TPR 2012 gazetted under the ITA does not cover PITA transactions. There is no APA provision in the PITA Tax treatment of limited liability partnerships ( LLPs ) With the coming into force of the Limited Liability Partnership Act 2012, the ITA has been amended to tax LLPs in the same way as a companies. As the LLP will be taxed as a corporate entity, any profits paid, credited or distributed to partners by a limited liability partnership will be exempt from tax. Companies or conventional partnerships which convert into an LLP are allowed to carry forward any unabsorbed losses and unutilised capital allowances to be set off in the following year of assessment. IRB Tax Audit Framework 2013 The IRB introduced the IRB Tax Audit Framework 2013 ( Audit Framework ), which came into effect 1 st April This Audit Framework does not have the force of law. 4

5 The Audit Framework is split into 3 sections and covers: (a) audits under the ITA; (b) audits under the PITA; and (c) TP Audits under the ITA. i Section 140A ITA - Power to substitute the price and disallowance of interest on certain transactions 140A. (1) This section shall apply notwithstanding section 140 and subject to any rules prescribed under this Act. (2) Subject to subsections (3) and (4), where a person in the basis period for a year of assessment enters into a transaction with an associated person for that year for the acquisition or supply of property or services, then, for all purposes of this Act, that person shall determine and apply the arm s length price for such acquisition or supply. (3) Where the Director General has reason to believe that any property or services referred to in subsection (2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm s length, he may in determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm s length price for the transaction. ii Section 138C Advance Pricing Arrangement (1) Subject to this section and any rules prescribed under this Act, on the application made to the Director General by any person who carries out a cross border transaction with an associated person (a) (b) the Director General may enter into an advance pricing arrangement with that person; or in the case where section 132 applies, the competent authorities may enter into an advance pricing arrangement, in order to determine the transfer pricing methodology to be used in any future apportionment or allocation of income or deduction to ensure that the arm s length transfer prices in relation to that transaction. (2) An application under subsection (1) shall be made in the prescribed form and shall contain particulars as may be required by the Director General. iii Section 140(1) ITA Power to disregard certain transactions The Director General, where he has reason to believe that any transaction has the direct or indirect effect of (a) (b) (c) (d) altering the incidence of tax which is payable or suffered by or which would otherwise have been payable or suffered by any person; relieving any person from any liability which has arisen or which would otherwise have arisen to pay tax or to make a return; evading or avoiding any duty or liability which is imposed or would otherwise have been imposed on any person by this Act; or hindering or preventing the operation of this Act in any respect, may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the transaction and make such adjustments as he thinks fit with a view to counter-acting the whole or any part of any such direct or indirect effect of the transaction. iv Rule 4 of the TP Rules 2012 provides that the CTPD shall include records and documents that provide a description of the following matters: (a) organizational structure, including an organization chart covering persons involved in a controlled transaction; (b) nature of the business or industry and market conditions; (c) the controlled transaction; (d) strategies, assumptions and information regarding factors that influenced the setting of any pricing policies; (e) comparability, functional and risk analysis; (f) selection of the transfer pricing method; (g) application of the transfer pricing method; (h) documents that provide the foundation for or otherwise support or were referred to in developing the transfer pricing analysis; (i) index to documents; and (i) any other information, data or document considered relevant by the person to determine an arm's length price. v Section 140A(4) ITA where the Director General, having regard to the circumstances of the case, is of the opinion that in the basis period for a year of assessment the value or aggregate of all financial assistance granted by a person to an associated person who is a resident, is excessive in relation to the fixed capital of such person, any interest, finance charge, other consideration payable for or losses suffered in respect of the financial assistance shall, to the extent to which it relates to the amount which is excessive, be disallowed as a deduction for the purposes of this Act. vi The qualifying services are cash management, current account management, financing and debt managements, investment, financial risk management and corporate and financial advisory 5

2014 Budget Highlights

October 2013 (Special Edition No. 2) Hyperlinks Advent Consulting Group Inland Revenue Board 2014 Budget Highlights Further to our Tax Flash October 2013 (Special Edition) and with the issuance of Finance