Key Insights from Recent Transfer Pricing Cases: A Must-Read for Businesses
Introduction
Transfer pricing has been a hot topic in Malaysia’s tax sphere lately. Since the start of the year 2021, the government has made changes to the transfer pricing legislation such as the introduction of the Section 113B (penalty for a failure to furnish transfer pricing documentation on a timely basis) and Section 140A (3A) (surcharge of up to 5% on transfer pricing adjustments).
Most recently, the Inland Revenue Board (IRB) has expanded the transfer pricing disclosure section in the income tax return form (i.e., Form C) in requiring companies engaged in controlled transactions to declare their functional profile in the Form C. The slew of new measures significantly tightened the transfer pricing regime within Malaysia.
Amidst the backdrop of these changes, transfer pricing centric litigation is increasing in number as we march into the 15th anniversary since the introduction of Section 140A in 2009. The frequency of litigation is signaling that transfer pricing disputes are becoming more significant.
High Court decisions on Sandakan Edible Oils Sdn Bhd’s case and Procter & Gamble Malaysia Sdn Bhd’s case
The two most recent cases that have been widely discussed are:
- SEO case: Ketua Pengarah Dalam Negeri v Sandakan Edible Oils Sdn Bhd decided at the High Court.
- PGM case: Ketua Pengarah Hasil Dalam Negeri v Procter & Gamble (Malaysia) Sdn Bhd.
SEO Case
In the SEO case, the Special Commissioners of Income Tax (SCIT) held that the IRB had failed to support its decision to utilize the median point of a benchmarking analysis, done at the request of the IRB, as a basis for adjustment. The taxpayer had proved that the additional assessments imposed by the IRB were exaggerated or wrong, and such a decision was reaffirmed by the High Court on 17 May 2022.
This case is significant as it highlights the importance of a well-prepared and robust transfer pricing documentation. It also underscores the need for taxpayers to be proactive in managing their transfer pricing risks.
PGM Case
As for the PGM case, the taxpayer had defended the appeal filed by the IRB at the High Court which reaffirmed the decision made by the SCIT in a previous judgement. It was made clear in the judgement issued that the taxpayer did not attempt to evade or avoid tax, had sought professional advice concerning its transfer pricing policy and tax matters, and that the main issue of contention was a technical disagreement regarding transfer pricing policy.
This case demonstrates the importance of seeking professional advice when dealing with complex transfer pricing issues. It also shows that even when taxpayers have sought professional advice and have not attempted to evade tax, disagreements can still arise due to the technical nature of transfer pricing.
Conclusion
These recent court decisions have provided valuable insights into the interpretation of transfer pricing legislation. It is through the courts’ interpretation of transfer pricing legislation that we develop a more matured transfer pricing regime. As we continue to navigate the complexities of transfer pricing in Malaysia, it is crucial for taxpayers to stay informed and prepared for any possible challenges to their transfer pricing practices.
The lessons learnt from these cases will undoubtedly shape the future of transfer pricing in Malaysia. It is clear that transfer pricing is not just a tax issue, but a business issue that requires careful management and planning. As the transfer pricing landscape continues to evolve, taxpayers must remain vigilant and proactive in managing their transfer pricing risks.
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