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.

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Audit | Tax | Advisory

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