Withholding Tax on Services Rendered Outside Malaysia
Taxand understands that the Government has agreed to grant a withholding tax exemption on services rendered outside Malaysia. The effective date is expected to be 6 September 2017, subject to the ministerial exemption being issued. However, withholding tax on services rendered outside Malaysia will continue to apply prior to this effective date.
Further details will be advised forthwith.
In line with the recommendations outlined under the Base Erosion and Profit Shifting (BEPS) Project led by the Organisation for Economic and Co-operation Development (OECD), specifically Action Plans 8, 9 and 13, the Inland Revenue Board of Malaysia (IRBM) has recently updated various Chapters of the 2012 Transfer Pricing Guidelines.
The updated Chapters, which take effect from 15 July 2017 are summarised below:
- Updated Chapter II – The Arm’s Length Principle, Chapter VIII – Intangibles and Chapter XI – Documentation
- New Chapter X – Commodity Transactions
In this INSIGHTS edition, we wish to draw your attention to the key changes as addressed in the revised Guidelines:
1. Requirement for all taxpayers to maintain contemporaneous transfer pricing documentation
- Revised Guidelines indicate that taxpayers are required to maintain contemporaneous documentation regardless of exclusion under Paragraph 3 of the Guidelines.
2. Definition of “material changes”
(i.e. changes to operational/economic conditions)
- This refers to changes in shareholding, business model and structure, business activities, financial or financing structure, transfer pricing policy or mergers and acquisitions.
- The occurrence of any material changes would necessitate the preparation of contemporaneous transfer pricing documentation.
3. Expanded list of documentation
- Companies are expected to include:
- More detailed information on the local entity’s business strategy and pricing policy.
- Taxpayer’s worldwide organisational and ownership structure covering all associated persons whose transactions directly or indirectly affect the pricing of the documented transactions.
4. Master File requirement
- Companies which are obliged to prepare the Country-by-Country (CbC) Report are also required to prepare a Master File for submission to the IRBM, together with the transfer pricing documentation for the company (upon request).
- For companies which are not obliged to prepare the CbC Report but the holding company of the multinational group prepares a Master File for the group, a copy of the Master File must be submitted together with the company’s transfer pricing documentation upon request by the IRBM.
5. Update of comparable searches
- The update of the comparable searches should be performed every 3 years rather than annually, if there are no operational changes.
- Nonetheless, financial data and suitability of the existing comparables should be reviewed and updated every year in order to apply the arm’s length principle reliably.
6. Selection of transfer pricing methods
- The revised Guidelines align the evaluation of the transfer pricing methods as espoused in the OECD Transfer Pricing Guidelines.
- It prescribes the selection of the most appropriate transfer pricing method, rather than a hierarchy of methods.
7. Working Capital Adjustments (WCAs)
- WCAs should not be automatically made and the adjustments will not be automatically accepted by IRBM.
- Adjustments should only be considered when the reliability of the comparables will be improved and reasonably accurate adjustments can be made, and should only result in minor differences to the result when reliable comparables have been selected.
8. Substantiating payments for intangibles
- If the entity associated with the legal owner performs advertising, marketing and promotional (AMP) functions which benefit the legal owner of an intangible, the distributor / marketer should be compensated for its AMP activities.
- The companies need to demonstrate the reason(s) for royalties paid over a long duration of time i.e. the company should be able to demonstrate that the original intangibles continue to provide value over time and/or the royalties paid are for newly developed/enhanced intangibles.
- Otherwise, the IRBM may disallow the deductions taken in relation to the royalty payments.
9. Commodity transactions
- The revised Guidelines state that “quoted prices” can be used as a reference for the purpose of pricing commodity transactions between associated persons.
- Emphasis is also placed on the consistency of the application of the appropriately selected quoted price.
- Adjustments should be made to ensure that the economically relevant characteristics of the transactions are comparable.
10. Penalty imposition
- The revised Guidelines highlight various circumstances in which penalty may be imposed:
- Inaccurate or misleading explanation of its functional profile which is not consistent with disclosure in audited accounts;
- Where the selected comparables do not meet all of the economically relevant characteristics or comparability factors.
What should companies do in light of the revised Guidelines?
It is crucial for companies to evaluate these changes in the revised Guidelines within the context of its operations and understand the impact on the documentation that it is required to maintain for the purpose of supporting the arm’s length nature of its related party transactions.
If transfer pricing documentation are already in place, it is timely for companies to re-assess the level of documentation available in line with the changes and update the documentation where necessary.