Post on 14-Mar-2021
RE-EXAMINING TRANSFER PRICING DOCUMENTATION
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BY ABDUL RAZAK RAHMAN
THE INLAND REVENUE BOARD MALAYSIA (IRBM)
ANNOUNCED NEW UPDATES TO THE TRANSFER PRICING
GUIDELINES 2012, EFFECTIVE FROM 15 JULY 2017,
WHICH INTRODUCED CHANGES TO THE CHAPTERS ON
ARM’S LENGTH PRINCIPLE, INTANGIBLES, COMMODITY
TRANSACTIONS AND DOCUMENTATION. WE CHECK OUT
THE IMPACTS.
58 ACCOUNTANTS TODAY | MAY / JUNE 2018
The risk analysis for example does not indicate how
the risks are being controlled and managed and
there was no clear indication on the
assumption of risk.
RE-EXAMINING TRANSFER PRICING DOCUMENTATION
NEW updates to the Transfer Pricing
Guidelines 2012 reinforce the application
of the law on controlled transactions and
provide guidance for taxpayers involved
in Transfer Pricing (TP) arrangements to
operate in accordance with the methods
prescribed by the rules as well as to comply
with the administrative requirements of
the IRBM on records and documentation.
To create awareness of the new updates,
MIA called together industry experts,
regulators and tax practitioners for a
dedicated panel session on these issues at
the 2017 Transfer Pricing Conference.
SHORTFALL IN TP DOCUMENTATION: REGULATORS’ PERSPECTIVE
One of the key aims of the updates is to
enhance compliance with TP documentation.
The IRBM Director of International Taxation
Department, Wan Ramiza Wan Ghazali
reiterated that taxpayers are expected to
adhere to the comprehensive rules and
guidelines outlined in the Transfer Pricing
Guidelines 2012. Citing accounting services
as an example, she said that the recipient
of the service is expected to document
and provide sufficient explanation on
the nature of the services, the benefits
derived, frequency of services as well as the
organisation structure. The benefits derived
must either improve efficiency and reduce
costs, or increase the revenue. Frequently,
these are not documented.
Another common shortfall is that the
Functions, Assets and Risks (FAR) analysis
is too brief and not complete. The risk
analysis for example does not indicate
how the risks are being controlled and
managed and there was no clear indication
on the assumption of risk. When selecting
comparable organisations, they should
not only be comparable function-wise but
also in terms of the financials as well,
such as comparable balance sheets. Since
the TP document must reflect the actual
position, it is also important to identify and
justify to the IRBM the entity’s position
within the group and how it is linked to
the value creation. The group structure
is also important to enable the IRBM to
make a comparison. Finally to complete
the picture, the group financial information
must also be part of the TP documents to
support the TP transactions.
THE PRACTITIONERS’ PERSPECTIVE
What should practitioners watch
out for? Philip Yeoh of BDO Malaysia
highlighted that the TP document must
be contemporaneous and of high quality to
meet the standards set by the IRBM as well
as to avoid incurring any penalties arising
from revised assessments.
Further, he noted that the group
financial information must be filed under
the Country-by-Country Reporting (CbCR)
if the threshold is met. It is also important
to align the information reported within
the group with the local information and
to ensure that the disclosure is consistent
with the adopted TP policy.
In the event that the entity’s
performance is found to be below the inter-
quartile or median range of the selected
comparables, the TP policy may need to
be revisited if all the checks have been
exhausted, said Hisham Halim of Ernst
& Young Tax Consultants Sdn Bhd. In
coming up with a robust TP documentation
and selecting suitable comparables, the
emphasis should not only be restricted to
the quantitative information but it is also
important to understand the qualitative
aspect of the comparables. “If there is
limitation in finding suitable comparables,
working capital adjustment could be the
solution, which is widely practised in the
western countries,” he said.
MAY / JUNE 2018 | ACCOUNTANTS TODAY 59
RE-EXAMINING TRANSFER PRICING DOCUMENTATION
Left to right - Thenesh Kannaa, Wan Ramiza Wan Ghazali, Hisham Halim, Chen Voon Ping and Philip Yeoh
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INDUSTRY CONCERNS
In practice, there is frequently a gap
between the implementation of the TP
guidelines and the commercial reality,
said industry experts. For conglomerates
such as Daikin that have a presence
in multiple countries and decentralised
management, there is an added pressure
for the commercial managers to meet
their financial KPIs whilst at the same
time complying with the TP guidelines.
Daikin’s Chief Financial Officer, Chen
Voon Ping argued that a strong foundation
in corporate governance is crucial to
ensuring TP compliance because
preserving a good corporate image
is as important as achieving financial
results, especially for conglomerates and
multinationals.
On the specific challenges in
implementing BEPS recommendations,
Hisham advised industry to be prudent
in adopting Action 13: Guidance on
Implementation of TP Documentation and
CbCR. “The main challenge is the lack of
clarity or grey areas on the implementation
and application of the guidelines. Whilst
the application of the guidelines is very
clear on the manufacturing and services
companies, it needs clarity for some others
such as private equity funds.”
With regards to identifying
intangibles and establishment of
intangibles ownership through
the Development, Enhancement,
Maintenance, Protection and
Exploitation (DEMPE) requirement,
Hisham explained that the subject has
not really come under scrutiny, with
the exception of big multinationals. “As
a result, most companies are not well
versed with intangibles and the benefits
that can be derived from intangibles.”
According to him, the biggest challenge,
after establishing and applying the
DEMPE requirements, is working out
how to attribute values and allocate
rewards to the respective parties.
It is common practice for local manufacturers to pay royalties to the parent company or the related IP provider for the use of the intangibles.
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INDUSTRY-SPECIFIC CHALLENGES
The moderator for the session,
Thenesh Kannaa of TraTax, touched
on industry-specific challenges arising
from the introduction of the updated
TP Guidelines.
One, payment of royalties for
intangibles in a manufacturing
industry. It is common practice for
local manufacturers to pay royalties to
the parent company or the related IP
provider for the use of the intangibles.
Unless it can be established that the
local company has no R&D capabilities,
it will be difficult to justify continuing
payments of royalties because the
local manufacturers are expected to
have gained the necessary experience
and contributed to the improvement
and efficiency of the manufacturing
processes over the years. IRBM may
also disallow royalties paid if it is not
proven that the royalties currently paid
are for newly developed or enhanced
intangibles as the original intangibles
may became obsolete over the years.
Two, advertising, marketing
and promotion (AMP) functions
undertaken by Malaysian distributors.
When the local distributor undertakes
significant functions, and bears risks
and costs associated with the AMP
of the group’s products, it would be
entitled to a higher return in the form
of a share of profit associated with the
enhanced value of the products, or a
reduction in the royalty rate. On the
other hand, if the local entity performs
marketing activities on behalf of its
principal, it should be compensated at
cost plus service fee for the marketing
activities in addition to the routine
return of its distribution functions.
The practical challenge then lies
in selecting the right and suitable
comparables that can withstand the
IRBM’s challenges. For contract R&D
service providers, a compensation
based on reimbursement of cost plus
will not be accepted if the service
provider performs the control functions
i.e. economically significant functions,
providing assets and necessary
funding, and bears associated risks
relating to the development of the
intangibles.
DECISION OF THE DISCIPLINARY COMMITTEE OF THE MALAYSIAN INSTITUTE OF ACCOUNTANTS (INSTITUTE) AGAINST MEMBER PURSUANT TO RULE 18(1) OF THE MALAYSIAN INSTITUTE OF ACCOUNTANTS (DISCIPLINARY) RULES 2002
MIA NOTICE
Lim Pang Yan (10826) as the Executive Director and person primarily
responsible for the financial management of Halex Holding Berhad
(the Company) for the financial year ended 30 September 2014
(the said financial year) had been punished and imposed a fine of
RM3,000-00, costs of RM2,500-00 and ordered to attend courses rel-
evant to the application of Malaysian Financial Reporting Standards
(MFRS) approved by the Disciplinary Committee of the Institute for a
total of 24 CPD hours by the Disciplinary Committee of the Institute
on 12 January 2018 for failure to carry out his duties as a professional
accountant with due care and diligence for failure to comply the
relevant MFRS during the preparation of the financial statements of
the Company.
Ismail Adam (13746) as the sole proprietor of Messrs. Ismail Adam &
Co (the Firm) had been punished and imposed a fine of RM1,000-00,
costs of RM2,000-00 and ordered to attend a course conducted by the
Institute on Audit Quality Enhancement Program by the Disciplinary
Committee of the Institute on 27 February 2018 after the Firm had
been rated as ‘unsatisfactory’ as indicated in the Follow-up Review
Report dated 31 July 2013 which detailed the weaknesses in the audit
work performed.
Yap Oi Kong (6712) as the sole proprietor of Messrs. O.K. Yap &
Associates (the Firm) had been punished and imposed a fine of
RM3,000-00, costs of RM3,000-00 and ordered to attend a course
conducted by the Institute on Audit Quality Enhancement Program
by the Disciplinary Committee of the Institute on 19 March 2018 after
the Firm had been rated as ‘unsatisfactory’ as indicated in the Follow-
up Review Report dated 23 May 2013 which detailed the weaknesses
in the audit work performed.
RE-EXAMINING TRANSFER PRICING DOCUMENTATION
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Audit | Tax | Advisory
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