ALL taxpayers undertaking related party transactions other than those who are specifically exempted by the Malaysian Transfer Pricing Guidelines 2024 are mandatorily required to prepare a contemporaneous transfer pricing documentation (CTPD).
Since the majority of Malaysian corporate taxpayers have a Dec 31 financial year end, the deadline to prepare the CTPD is Aug31 2026, which is hardly 40 days away.
Failure to do so before Aug 31 will automatically trigger a minimum penalty of RM20,000 and it could go up to RM100,000. This is non-negotiable as indicated by the tax authorities.
Business enterprises carrying on solely domestic related party transactions which do not enjoy any tax incentives and are taxed at the same tax rate are exempted from preparing the CTPD, provided one of the parties do not suffer losses. The others who are exempted from preparing CTPD are individuals not carrying on a business or if the total related party transactions are less than RM1 million.
Problems to avoid
Do not defer the preparation of the CTPD until after Aug 31 for December year-end cases and attempt to backdate the documentation on the assumption that the tax authorities will not know.
Inland Revenue Board (IRB) officials have clearly indicated at public events that they will scrutinise the authenticity of the dates stated in the CTPD. Verifying the actual preparation date is no longer difficult, as email trails and letters of engagement will often reveal the truth.
Under the Transfer Pricing Rules 2023, taxpayers are required to comply with all requirements under Schedules 1, 2 and 3, involving about 90 disclosure items.
Where a section is not applicable, it is insufficient to merely state “not applicable” – taxpayers must explain why. For example, if the Transactional Net Margin Method or Comparable Uncontrolled Price Method is selected, the taxpayer should explain why the other methods were not suitable for testing arm’s length pricing.
The CTPD cannot be done overnight because there is a significant amount of data that must be provided in relation to the transactions taking place between the related parties to support the pricing policies adopted by the group.
Information to be provided will include information from the equity interest, details of the related party transactions, summary of the legal and commercial relationships, markets in which the parties operate, etc.
The second part of the CTPD is the data that must be collected for benchmarking purposes from external sources which will also take time. It is not too late if you start preparing the CTPD now. Normally, a good set of CTPD will take at least three to four weeks to prepare on a fast-track basis.
There is a possibility that after preparing the CTPD you may discover that your prices don’t meet the arm’s length test before the Aug 31 deadline. You still have the opportunity to correct the situation by making the adjustment in the tax return.
If such an adjustment is made, there will be a difference between the financial numbers reported in the audited accounts and the tax return. That is okay for tax purposes as it will help you avoid penalties and surcharge from the possible understatement of income.
Get it done
There is no room for procrastination. Taxpayers are required to have their CTPD in place by Aug 31. Failing to do so means having to declare in the income tax return (Form e-C) that the CTPD has not been prepared. Such a declaration is likely to attract the attention of IRB and may increase the likelihood of a transfer pricing audit or further enquiries from the tax authorities.
Accordingly, businesses should take proactive steps now to ensure that their CTPD is completed well ahead of the filing deadline.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
