Caught in the Transfer Pricing Crossfire? Learn From These Real Cases

Do you know what is transfer pricing? Do you know the importance of transfer pricing and the documentation involved?

Do you know that if you FAIL to submit a contemporaneous transfer pricing document within 14 days from the date of notice upon IRBM's request you are at risk of facing fine of up to RM100,000 or jail term of 6 months or BOTH?

You definitely don't want that happening to you!

What is Transfer Pricing (TP)?

Transfer pricing refers to the prices charged for transactions between related parties (entities under common control, such as subsidiaries of a parent company).

It determines how much one part of a business charges another for goods, services, or intellectual property within the corporate group.

Imagine you own two shops—one that bakes cakes and another that sells cakes. The cake shop buys cakes from your bakery. Now, the price your cake shop pays your bakery for each cake is the "transfer price".

If the price is too low, the bakery might not show a profit. If the price is too high, the cake shop might not make money.

Transfer pricing helps ensure both sides of your business stay BALANCED.

Why is Transfer Pricing Documentation Important

Arm's Length Principle: Transfer pricing documentation must adhere to the arm's length principle, which states that prices set between related parties should be SIMILAR to those set between unrelated parties in comparable circumstances.

Legal Requirement: Documentation is mandatory under the Income Tax Act 1967 to ensure transparency and compliance with tax regulations.

Real-Life Case Studies

1. Starbucks:
   • The Issue: Starbucks faced public backlash for using transfer pricing strategies to shift profits from high-tax jurisdictions (e.g., the UK) to low-tax jurisdictions (e.g., the Netherlands).
   • The Outcome: Despite substantial revenues, Starbucks paid minimal taxes in high-tax regions, leading to regulatory scrutiny and public outcry. This eventually forced the company to adjust its transfer pricing practices.
2. Sandakan Edible Oils Sdn Bhd (SEO):
   • The Issue: SEO's transfer pricing documentation was questioned by Malaysia’s Inland Revenue Board (IRB). The IRB rejected SEO’s transfer pricing analysis and conducted their own comparability analysis.
   • The Outcome: SEO won the case, but it highlighted the importance of having robust transfer pricing documentation, which can serve as the final defense in the event of an audit.

 Like all other matters pertaining to taxes, proper and adequate documentation is a must.

As of 2024, there were changes in the Malaysian Transfer Pricing Guidelines.

2024 Malaysian Transfer Pricing Guidelines (MTPG 2024)

Key Changes:

• Threshold Adjustments: Changes in thresholds and clarification on "cross-border" controlled transactions. This will affect businesses' obligations regarding transfer pricing documentation (CTPD), possibly requiring some to prepare only a 'minimum' CTPD rather than a 'full' one.

• Exemptions: Certain entities are exempt from preparing transfer pricing documentation but must still comply with the arm’s length principle and maintain documentation to support the transfer prices used.

• Comparability Analysis: While there’s no explicit requirement for a comparability analysis under the 'minimum' CTPD, taxpayers are still encouraged to prepare one to substantiate their pricing.

You Do The Crime, You Do The Time: Consequences of Non-Compliance

‘Don’t play-play’ when it comes to adhering to income tax laws. The penalties incurred may either empty your pocket or send you behind bars or worse, BOTH.

• Risks for SMEs: Small and medium-sized enterprises (SMEs) may not fully understand their documentation requirements, putting them at risk of significant penalties.

• Penalties: Businesses failing to provide adequate transfer pricing documentation can face a fine of up to RM 100,000 or imprisonment or BOTH.

Transfer pricing and proper documentation are crucial for ensuring compliance with tax regulations and avoiding severe penalties.

Businesses should stay updated on guidelines like the MTPG 2024, conduct regular reviews, and invest in professional training to navigate these complex requirements.

Self Check Transfer Pricing Questions To Ask Yourself

Ask yourself this 3 very important TP questions:

1. Do you have related party transactions?
2. Are your related party transactions/intra group financing more than RM 10 Million?
3. Do you know how to self-prepare your TP documents?

Are you in serious doubts in the know-how of preparing your TP documents meant for submission? Do you have the proper knowledge to do so?

Get in touch with us to clear your doubts.

Be among the first 50 applicants to click and fill in the complete details on the button below and receive a FREE TP consultation and a review of your TP documents from our TP specialist!

Remember, you do not need to live in fear and in doubt when it comes to TP related matters!