Definition and ObjectiveIRB RequirementsExample & CaseIssuesConclusion and Recommendations 3
. Cross border transaction volumes are increasing significantly and it give a great impact toward country’s income. This can be proven by looking at “Transfer Pricing 1999 Global Survey”, which shows that 92% of international tax issues are on TP. In 2007 survey TP is still a critical issue for tax authority. Objective generally relates to the system of pricing the cross- border transfer of goods, services and intangibles between entities in a group of Multinational Enterprise (MNE) and also applies if such transactions were to take place between associated companies within the country. IRB 4
IRB REQUIREMENTS Legislation Documentation disclosure requirements Statute of limitation Transfer pricing methods Comparables 5
Existence of Transfer Pricing Laws/Guidelines Malaysian Income Tax Act 1967 (Section 141 & 140) Transfer Pricing Guidelines (issued on 8 th July 2003) Transfer Pricing Scrutiny Every company is expected to be subjected to field audit at least once every five years Multinational will be queried on their TP policy 6
Definition of Related Party Direct or indirect control or capital of the other enterprise Transfer Pricing Penalties Apply only to TP adjustments (45% on corporate tax adjustments and 35% on TP adjustments) 7
Required to include inter-company transaction amounts and ownership information Tax Return Disclosure Documented at the time the prices on cross- border transaction are established, or the latest before the tax return for the year is submitted Deadline to Prepare Documentation Should be made available to the IRB upon request Deadline to Submit Documentation 8
- Six years for tax adjustments - In the case of fraud, willful default or negligence, there is no time limit. 9
Traditional Methods Comparable Uncontrolled Price (CUP) Resale priceCost Plus Other Methods Profit Split Transactional Net Margin 10
Traditional Methods CUP - Direct price comparison for the transaction of a similar product between independent parties Resale price - Price at which a product has been purchased from related party, then resold to an independent party Cost Plus - Cost of transferring products between associated parties plus appropriate mark-up 11
Other methods Profit Split - Value of profit earned by both parties are assessed based on how independent parties would expect to split the profits among them Transactional Net Margin - Examines the net profit margin relative to costs, sales or assets attained by multinational company from a controlled transaction 12
Comparability Comparing conditions in a controlled transaction with those in transactions between independent parties Conform the arm’s length principle Arm’s Length Principle Transfer price is acceptable if all transaction between associated parties are done at arm’s length price (price charged on independent parties) 13
Total effect: Total tax expenses of the company : RM 17 + RM 50 = RM 67 Total profit for the company : RM 83 + RM150 = RM 233 Parent Comp Based in Singapore Subsidiary Comp Situated in Malaysia Selling price to Sub Comp RM 300 Cost of a product (RM 200) Profit before tax RM100 Tax rate 17% Tax expenses (RM 17) Profit after tax RM 83 Selling price to M’sia Market RM 500 Cost from parent comp (RM 300) Profit before tax RM 200 Tax rate 25% Tax expenses (RM 50) Profit after tax RM 150
Total effect: Total tax expenses of the company : RM 42.5 + RM 12.5 = RM 55 (save tax expenses by RM 12 mil) Total profit for the company : RM 207.5 + RM 37.5 = RM 245 (increased profit by RM 12 mil) Parent Comp Based in Singapore Subsidiary Comp Situated in Malaysia Selling price to Sub Comp RM 450 Cost of a product (RM 200) Profit before tax RM 250 Tax rate 17% Tax expenses (RM 42.5) Profit after tax RM 207.5 Selling price to M’sia Market RM 500 Cost from parent comp (RM 450) Profit before tax RM 50 Tax rate 25% Tax expenses (RM 12.5) Profit after tax RM 37.5
ATO unable to charge Roche A$126 million increased tax adjustment because of the subjective nature of transfer pricing, where Roche product (Valium) only sell, market and distribute through related company. No comparisons can be made by ATO to decide the agreed transfer price. ROCHE Parent Comp Situated at Swiss ROCHE Subsidiary Comp Situated at Australia Sold their product (Valium) at higher price Higher price charged by parent company reduce profit of subsidiary company. Lower profit cause lower tax paid by subsidiary company to Australian Tax Office (ATO).
- No specific legislation governing APA (Advance Pricing Agreements), they just need to submit declaration form to IRB - Tax adjustment on TP transactions limited to 6 years assessment except for, fraud cases, there is no time limit - No basis to value unique transaction 17 Legal Issues
- The MN exploit the country’s resources, such as minerals, labor and facilities to generate income - Negative impact to the environment and society - Low tax collection by the government 18 Corporate Governance
19 Advance Price Agreement (APA) Thin Capitalisation RECENT DEVELOPMENT OF TP Effective Jan, 2009 RPTs must be carried out on an arm’s length basis be able to prove that the pricing for the RPTs is no different than independent parties - agreement with tax authorities on prices of goods and services to be transacted in future between a taxpayer and its related companies for a specified period - allow them to achieve certainty on their pricing for RPTs and also to minimise penalties - aims to restrict the deduction of interest expenses on loans between associated parties - MIRB indicated 3:1 ratio applied
IRB has a responsibility to employ and to train more expertise in TP so that IRB will be able to challenge taxpayer during tax audit and in court. To create statutory framework on TP which consist specific rules, guidelines and also laws. Other enforcement agencies also should consider TP as one of the crucial part when performing related party transactions.
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