As the tax filing deadline approaches, Transfer Pricing (“TP”) compliance remains a key area of focus for taxpayers with Controlled Transaction(s). In Malaysia, TP Documentation is not merely a post filing exercise but must be prepared contemporaneously – meaning it must be brought into existence prior the filing of the Corporate Income Tax Return.
With enforcement intensifying and audit timelines tightening, taxpayers should assess now whether their TP Documentation is truly ready.
What Is Contemporaneous TP Documentation?
Contemporaneous TP Documentation refers to documentation that is prepared, completed and dated prior to the income tax filing deadline for the relevant year of assessment in which Controlled Transaction(s) is entered into. Where an extension of time to file the tax return is granted, the documentation deadline is aligned with the extended filing date.
This requirement applies regardless of whether the Inland Revenue Board of Malaysia (“IRB”) has requested the documentation to be furnished. Preparing TP documentation only when an audit commences may expose taxpayers to penalties and weaken their audit defence position.
Who Needs to Be Concerned?
Taxpayers engaging in Controlled Transactions, such as sale or purchase of goods, provision of services, intra-group financing arrangements or royalty fees, should evaluate whether they are required to prepare Full or Minimum TP Documentation based on the applicable thresholds.
Even if a taxpayer falls below the prescribed thresholds (i.e., exempted from preparing Contemporaneous TP Documentation), the arm’s length principle still applies. Taxpayers must still comply with the arm’s length principle for all Controlled Transactions entered into. The IRB expects that all relevant documents to be made available to support and prove the application of arm’s length pricing, particularly where the Controlled Transactions are material or recurring.
Why the Filing Deadline Matters
The period leading up to the filing deadline is a critical risk window. Common issues identified during audits, among others, include:
- Documentation that was not in existence at the time requested or brought into existence only after the filing deadlines
- Benchmarking studies based on outdated or inappropriate comparables
- Misalignment between documented functions and actual business operations
- Significant year end adjustments made without contemporaneous analysis
Once a TP audit is initiated, taxpayers are typically given 14 days to submit their TP Documentation. At that stage, it is often too late to remedy gaps or weaknesses.
Key Questions Taxpayers Should Ask Before Filing
Before submitting the tax return, taxpayers should at least consider the following:
- Have all Controlled Transactions been accurately identified and documented?
- Does the functional and risk analysis reflect actual conduct during the year?
- Is the benchmarking analysis relevant, defensible, and up to date?
- Are intercompany agreements consistent with how transactions are priced in practice?
- Are any year end adjustments properly supported by contemporaneous analysis?
A Common Misconception: “We Can Finalise It Later!”
A frequent misconception is that TP Documentation can be finalised after filing, as long as it is available when requested. This approach is increasingly risky. TP Documentation that is not contemporaneous may be viewed as non compliant, even if the pricing outcome appears reasonable.
Practical Takeaways
With the filing deadline approaching, taxpayers should:
- Begin TP Documentation early and align it with tax return disclosures
- Review whether business or pricing changes during the year require updated analysis
- Ensure TP Documentation is completed and dated before filing deadline
- Seek professional advice for complex or high risk transactions
Conclusion
Contemporaneous TP Documentation is a cornerstone of tax compliance under Malaysia’s TP regulation. As audit scrutiny continues to increase, taxpayers that ensure their documentation is ready before the filing deadline will be far better positioned to manage audit risk and avoid unnecessary penalties.
If external support is required, the TP Team in RKT Tax Consultants (APAC) Sdn Bhd is ever ready to provide you such support.
