On 16 November 2020, Malaysia issued the Finance Bill 2020 (Bill No. DR 17/2020) including following proposals related to transfer pricing provision.
Penalties for failure to prepare transfer pricing documentation
There is currently no specific provision that provides a penalty for failure or late submission of TP documentation. The 2020 Finance Act included the new Section 113 (B) that penalizes a taxpayer for failing to submit transfer pricing documents in a timely manner with a fine of RM 20,000 to RM 100,000 or upon conviction, a fine of RM 20,000 to RM 100,000 or imprisonment for a term not exceeding six months, or both.
Power to disregard structure in a controlled transaction
The current Section 140A of the Act gives the DG the power to replace pricing of controlled transactions, but does not specifically give the DG the power to re-characterize / ignore any structure related to controlled transactions. The proposed amendment to the law gives DG the power to ignore structures or transactions where the economic substance of the transaction differs from its form and the DG is of the view that the related-party transactions need to be evaluated differently.
Surcharge for transfer pricing adjustment
According to current practice in transfer pricing audits, any tax that is underpaid as a result of a transfer price adjustment is subject to a penalty regime that is regulated in the provision of the law “Incorrect tax return”. Such penalties only apply if additional taxes are payable. The proposed introduction of a surcharge of not more than 5% on increase of any income or a reduction of any deduction or loss means that a surcharge would apply on the quantum of such TP adjustment, whether or not such an adjustment leads to any additional taxes to be paid. This application of a surcharge, effective January 1, 2021, may be particularly burdensome for taxpayers that have an adjusted business loss or carryforward business losses, or are operating under a tax incentive that may not otherwise have been subject to any tax or penalty cost.
