Transfer Pricing Malaysia Penalty

Transfer pricing penalty from LHDN

Budget 2021 was announced on 06.11.20, Inland Revenue Board of Malaysia (IRBM) has proposed a new Section 140A(3A) to penalize incompliance of Transfer pricing (TP) rule.

As we can see, transfer pricing has becoming increasingly important and practically all tax payers that have related party transactions need to pay attention to this penalty.

In simple terms, taxpayer who has entered into controlled transactions with “associated persons” is required to prepare transfer pricing documentation.

Key takeaways:

You will understand: -

1. Who is “Associated person”

2. Penalties for non-compliance

Summary of learnings:

A) Associated persons:

i) person one of whom has control over the other. For examples: companies are having a common director or shareholder.

ii) individuals who are relatives of each other. For examples such as parent, a child, brother, sister, uncle, aunt, nephew, niece, cousin, an ancestor or a lineal descendant.

iii) persons both of whom are controlled by some other person. For examples:

(a) Holding and subsidiary company

(b) associated company (who having same holding company)

B) Penalties for non-compliance:

IRB will issue a letter (request for documents and information) to the taxpayer. The taxpayer is required to reply to the letter within 14 days and submit TP documentations within 30 days.

i) Failure to prepare TP documentations or TP documentations not prepared according to TP guideline: -

30% to 50% penalties on additional tax payables

With effective of 1/1/2021,

ii) Taxpayers that fail to submit TP documentation within 30 days upon request can be fined between RM20,000 and RM100,000 and/or to imprisonment for a term not exceeding six months

iii) A ‘Surcharge’ up to 5% of the total TP adjustments might be imposed. (This is to imposed penalty on company not paying taxes after the TP adjustments)

Sources:

- Transfer Pricing Rules 2012:

http://www.hasil.gov.my/bt_goindex.php?bt_kump=5&bt_skum=20&bt_posi=1&bt_unit=1&bt_sequ=3&bt_lgv=2

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