Transfer Pricing Implications Post-COVID-19: Malaysia Perspective
Explore the transfer pricing implications in Malaysia post-COVID-19, covering issues faced by different industries, loss allocation, advanced pricing arrangements, and more. Understand the impact of the pandemic on businesses and the government's responses, and delve into comparability analysis for transfer pricing compliance.
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Presentation Transcript
Working Group 1: The Transfer Pricing Implication Of The Covid-19 Pandemic: Malaysia s Perspective 50th SGATAR Annual Meeting Melissa Mentoh MALAYSIA Date of Presentation: 26-October, 2021
Agenda Country Overview Malaysia s Perspective on the Transfer Pricing Implications Post- COVID-19 Comparability analysis Loss and allocation of COVID-19 specific costs Advance Pricing Arrangement Treatment of new existing APA Failure to fulfi critical assumptions Treatment of non-compliance for existing APA Other Practical Issues on APA Treatment of new APA application Adjustment for APA in COVID19-Period
Introduction Malaysia is an industrial country. Economy comprise: manufacturing & construction = 37.8% of GDP service industries = 54.8% of GDP Agriculture, forestry & fishing = 7.3% Common MNE business structure: LRD, Contract Manufacturer Subsidiaries with Guaranteed business margin Majority of business were severely impacted by COVID19
Malaysias COVID-19 Impact Malaysia government has imposed stringent restrictions on mobility through the Movement Control Order: Temporary to partial business closure Reduced working hours or retrenchments Adoption of digital technology Introduction of various stimulus packages (fiscal & non fiscal aids: 2020 : RM305 Billion 2021 : RM 225 Billion Covid19 outlook expectation to move from epidemic phase to endemic phase
Transfer Pricing Implications Post- COVID-19 The COVID-19 pandemic impact different industry at different level: Different Industry i.e. Surgical Glove Manufacturer vs Hotel Operators Different Channel Physical Store Sales vs Online Sales Firms face problems of lower demand, difficulty procuring supplies of products or services, or extraordinary and non-recurring operational expenditures Issues arising on the distribution of these losses or COVID-19 specific expenses across related companies
Comparability Analysis Comparability analysis needs to be performed annually to justify the transfer price complies with the arm s length principle Sources of contemprenaous information Treatment of loss-making comparables Loss and Allocation of COVID-19 Specific Costs LRDs and business loss treatment a guaranteed return company with no changes in FAR should not be making losses. need to justify and proof any changes of FAR and economic character using a detailed comparability analysis. Treatment of comparables with operational or exceptional costs arising from COVID-19 allowance on operational costs and exceptional cost if it relates to business operation based on case to case basis.
Advance Pricing Arrangement APA program is seen as the best option to gain certainty while avoiding tax audits Malaysia recently signed its first BAPA, relatively new in its APA experience compared to other countries FAQs on Advance Pricing Arrangement (APA) treatment due to the COVID-19 pandemic 7 October 2020. Treatment of existing APA in COVID-19 period taxpayers are required to comply with all the critical assumptions stated in the APA agreement with no exception.
Advance Pricing Arrangement (cont) Failure to Fulfil Critical Assumptions taxpayer can either revise or apply for the cancellation of the APA in case failure to meet critical assumptions. Treatment of non-compliance for existing APA may result in the cancellation of the APA agreement should the revision is not warranted
Other Practical Issues on APA Treatment of New APA Application IRBM is not accepting any new APA application from businesses which are significantly affected by Covid-19. based on the benchmarking analysis of normal economic and market conditions no amendment or substantial updates on material changes to the on-going application Adjustment for APA in COVID19 Period IRBM may consider the application of term test and any compensating adjustment shall be made at the end of the APA covered period. case-by-case basis depending on the facts and circumstances subject to negotiation / agreement with the Competent Authorities / taxpayer
Conclusion More challenging to approximate the reliable arm s length transfer price due to the unavailability of reliable data and uncertainty of the impact COVID-19 Taxpayers would need to provide detailed analysis of the transactions, and sufficient supporting documentation in relation to its conduct, and ensuring that its conduct is truly aligned to its business characterization Overall, IRBM approach accepts sound analysis which is supported by sufficient and detailed documentation that does not change the characterisation of the business.
