Highlights of transfer pricing proposals in Finance Bill 2020 (Budget 2021)

Malaysia’s Budget 2021 (Finance Bill 2020), which was tabled for its third reading in parliament on 15 December 2020, proposes some landmark changes to the transfer pricing compliance and audit regime. The proposed changes would affect corporate income tax returns for 2021 and subsequent years, and the transfer pricing compliance strategy for multinational enterprises. The changes would also have implications for open years of assessment (the statute of limitations is seven years for transfer pricing purposes).

The proposals entail, among other things:

• Tightening the compliance requirements around contemporaneous documentation, through the introduction of a penalty of MYR 20,000-100,000 for failure to furnish contemporaneous transfer pricing documentation, essentially targeting companies that either do not have transfer pricing documentation for open years or do not prepare transfer pricing documentation by the return filing due date.
• Introduction of a “surcharge” of 5% that would be imposed on the transfer pricing adjustment amount, thereby widening the base for collection, by extending the cash tax implications of a transfer pricing adjustment to companies enjoying incentives or with other tax attributes, such as unabsorbed business losses, capital allowances, etc.
• Addition of a “recharacterization” power in the Income Tax Act with respect to controlled transactions, thereby further strengthening the Inland Revenue Board’s ability to make adjustments to aggressive tax planning structures, disregard loans and disallow interest expense thereon, disregard interest-free loans (“quasi-equity”) and deem interest income, etc.