Shifting of Technical Blog

To all my friends, thanks for the looooong supports. Surprise to see hundreds view everyday, even not update for years.
Thanks very much.

9/11/2012

TRANSFER PRICING 2012 - IRBM TRANSFER PRICING GUIDELINES 2012


Abstract

Inland Revenue Board of Malaysia has issued a new Transfer Pricing Guidelines (N1) and Advance Pricing Arrangement Guidelines (N2). While the Rules cover the application of Sections 140A (N3) and 138C (N4) of the Income Tax Act 1967, the Guidelines are intended to explain administrative aspects of the Rules.

As per title, we are mainly focus on the item N1 and N3 (Transfer Pricing) in this topic discussion which the guideline been published by 10th August 2012.

Here provide you a summary of content and further discussion from the summary by click in to the link:-
(Note: Kindly advice if there is any omission or mistake noted. Your feedback is highly appreciated. Thanks very much!!)

**N1                                     :For Transfer Pricing Guidelines, please refer to:
**N2                                     :For Advance Pricing Arrangement Guidelines, please refer to:-
**N3                                     :For 140A. Power to substitute the price and disallowance of interest on certain transaction, kindly refer to:
**N4                                     : For 138C. Advance Pricing Arrangement, please refer to:


=======================================
OECD Transfer Pricing Discussion 

Beyond the exact IRBM Transfer Pricing Guideline 2012, I may also recommended you can refer to the Organization for Economic Co-operation and Development (OECD) discussion on International Transfer Pricing which considered the main and ultimate transfer pricing research body.


Other relevant website:
Transfer Pricing Introduction:-

Transfer Pricing Country Profiles:-

OECD ARTICLES OF THE MODEL CONVENTION

MULTI-COUNTRY ANALYSIS OF EXISTING TRANSFER PRICING  SIMPLIFICATION MEASURES

OECD Transfer Pricing Guideline for Multinational Enterprises and Tax Administrative

=======================================

IRBM TRANSFER PRICING GUIDELINES 2012 SUMMARY


PART I – PRELIMINARY
1. Introduction

2. Objective 
This guideline provide guidance for persons involved in transfer pricing arrangements to operate in accordance with the methods and manner as provided in the Rules, as well as comply with administrative requirements of the IRBM on the types of records and documentations to maintain.


The IRBM Transfer Pricing Guideline 2012 are applicable on controlled transactions for the acquisition or supply of property or services between associated persons, where at least one person is assessable or chargeable to tax in Malaysia.

To justifying whether your company is needed to prepare for Transfer Pricing documents or whether your company is going to growth and potential to be involved, please click on the topic: Scope of guideline applied [in (Malaysian) IRBM Transfer Pricing Guideline 2012]


4. Relevant Provisions
Section 140 of the Income Tax Act 1967 (ITA) empowers the Director General of Inland Revenue (DGIR) to disregard certain transactions which are believed to have the direct or indirect effect of altering the incidence of tax, and make adjustments as he thinks fit, to counter-act the effects of such transactions.

Paragraph 154(1)(ed), also introduced with effect 1.1.2009, empowers the  Minister of Finance to provide for the scope and procedure relating to the implementation and facilitation of section 140A by way of the Income Tax (Transfer Pricing) Rules 2012. 


5. Meaning of Control and Associated
As simple if the same persons participate directly or indirectly in the management, control or capital of both companies, there is element of “Control” and “Associated” appeared.

Section 139 of the ITA refers to „control as both direct and indirect control.

 PART II – THE ARM’S LENGTH PRINCIPLE
6. Meaning of Arms Length Principle
Arm’s length price is the price which would have been determined if such transactions were made between independent entities under the same or similar circumstances.

Kindly refer to the topic : Arm’s Length Principle - Terminology [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for further arm’s length principle terminology discussion.


7. Determination of Arm’s Length Price
From IRBM Transfer Pricing Guideline 2012, Arm’s length price determination process are explained in details in Para 7, which included 6 steps in no particular order.

1.     Analysis of transactions and functions
2.     Characterization of business
3.     Identification of comparable transactions
4.     Tested Party 
5.     Selection and application of Transfer Pricing Methodologies (TPM)
6.     Profit Level Indicator (PLI)



8. Comparability Analysis
A comparability analysis is a pre-requisite in the application of all transfer pricing methods that conform to the arm’s length principle

The topic will be discuss in details in PART IV – COMPARABILITY ANALYSIS, please refer to the topic: Comparability Analysis(Qualitative Presentation) [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for details.


9. Factors Determining Comparability

1.     Characteristics of Property or Services
2.     Functional Analysis of Functions Performed, Risks Assumed and  Assets Employed
3.     Contractual terms
4.     Economic Circumstances
5.     Business Strategies

Of course you may know the factor may influence your pricing better than anyone. If any doubt or information needed, Please do not hesitate to contact me for further clarification or information.


10. Comparability Adjustments
Comparability adjustments are intended to eliminate the effects of differences that may exist between situations being compared and that which could materially affect the condition being examined in the methodology (e.g. price or margin)

Note: Please find the specific circumstances for your judgment onwards any adjustment or you can email me (lcs1234678@hotmail.com) for further discussion (highlight your viewpoint and problem arise) as there is no point for general discussion for the topic.

 PART III – METHODOLOGIES
11. Transfer Pricing Methodologies
The following methodologies can be used in determining arm’s length price:

Traditional Method


Transactional Profit Method

Note : ‘Transactional profit methods’ be used only when traditional methods cannot be reliably applied or exceptionally cannot be applied at all.
                                                                                                      

 PART IV – COMPARABILITY ANALYSIS
12. Comparable Period
13. Multiple year Data
14. Arms length Range
15. Separate and Combined Transactions
16. Re-characterization of Transactions
17. Transfer Pricing Adjustment
18. Losses

Perhaps there may be difficult to get an abstract to look only from the title.
Somehow, I saw it from another perspective of Qualitative Presentation from Financial Reporting perspective may seem complied with the following analysis. Please refer to the topic: Comparability Analysis(Qualitative Presentation) [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for details.


PART V – BUSINESS RESTRUCTURING
19. Business Restructuring

Business restructuring within a multinational group often result in a change of business characterization and reduction of profitability of a local entity. Such reduction of profits is acceptable only with reduced functions performed, assets employed and risks assumed. As long as these functions, assets and risks are actually transferred, it is viewed as commercially rational for a multinational group to restructure in order to obtain tax savings.  However, if it is found that the local entity continues to perform the same functions, and bear the same risks, IRBM will make the necessary adjustments. In an arms length situation, an independent party would not restructure its business if it results negatively for it, where it has the option realistically available not to do so.  


PART VI – SPECIFIC TRANSACTIONS
20. Intragroup Services
21. Cost Contribution Arrangement
Intragroup services are services provided by one or more members of a multinational group for the benefit of the other members within the group.
Content of the segment may include:-
·          Intra-group services prohibited activities
·          Methods of charging for provision of services
·          Determination of arm’s length charge for intragroup services
·          Profit Mark-up
·          Cost Contribution Arrangement (CCA)



22. Intangible Properties
When a company demonstrates a higher than average rate of return on assets or higher than average profits for a given level of physical  assets over a period of time, it indicates the likely presence of intangible properties [N1]. Please refer to the topic: Intangible Properties [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for details.

Note N1: Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, and are created through time and effort, and are identifiable as a separate asset. Please refer to FRS 138 for more accurate and details definition.


23. Intragroup Financing                    
Intragroup financing is another form of service between associated persons, which falls under subsection 140A(2)


PART VII – DOCUMENTATION
24. Retention of records
25. Transfer Pricing Documentation
26. Penalty
Note: Research are still being in process, kindly be patience if you are looking for it…
AND THANK VERY MUCH FOR READING, YOUR SUPPORTING IS HIGHLY APPRECIATED TO PUSH ME MOVING FORWARDS...THANKS...!!

9/10/2012

Intragroup Financing [in (Malaysian) IRBM Transfer Pricing Guideline 2012]


23.1 Financial assistance between associated persons
-       Intragroup financing is another form of service between associated persons, which falls under subsection 140A(2)
-       Reasonable interest rate should be provided for associate person

23.2 Substitution and Imputation of Arm’s length Interest
- Interest rate should be revise while market interest rate appear significant change
Example 26 - Substitution of non arm’s length interest
Company A has obtained a fixed-rate 10%, medium term loan from an associated person which embeds an option to repay the loan prematurely without penalty. In the third year the market interest rate began to decline to 5%, a rate lower than the fixed-rate agreed upon with the associated person. In an arms length situation, Company A would execute its option to repay the loan as it would not make sense to continue paying the high interest rate of 10%. However, Company A did not exercise the option and continued to pay at the higher interest rate.

In this case, the IRBM may substitute the financial assistance arrangement with an interest rate that reflects the current market situation as if Company A had exercised the option at an appropriate time and entered into similar arrangement at a lower rate. 

23.3 Determination of Arm’s Length Interest
- comparable uncontrolled price (CUP) method is considered to provide the most reliable measure

23.4 Comparability Factors
  1. the nature and purpose of the financial assistance;
  2. the amount, duration and terms of the financial assistance;
  3. the type of interest rate (eg: fixed or floating interest rate);
  4. embedded options;
  5. guarantees involved in the financial assistance;
  6. collateral for the financial assistance;
  7. creditworthiness of the borrower;
h.    location of the lender and borrower

Intragroup Services[in (Malaysian) IRBM Transfer Pricing Guideline 2012]


PART VI – SPECIFIC TRANSACTIONS

20. Intragroup Services

20.2 Intra-group services prohibited activities:-
  1. Shareholders activities
·         meetings of shareholders
·         issuing of shares
·         cost of producing consolidated accounts
·         filing of prospectuses
·         Costs of raising funds

  1. Duplicative services
-       services performed by a group member that merely duplicates a service that another group member is already performing in-house, or that is being performed by a third party (e.g. reviewing of operational budget by parent company’s financial personnel)
-       There is exception of duplicate services which allowed to claim under circumstances such as:-
o   Special circumstances where duplication is only temporary.(e.g. implementing a new system)
o   Getting a second legal opinion on a particular project

  1. Services that provide incidental/passive association benefits
-       This refers to services performed by one member of a multinational group, such as a shareholder or coordinating centre, which relates only to specific group members but incidentally provides a benefit to other members of the group.
-       E.g. an enterprise that had obtained a higher credit rating due to it being a member of a multinational group should not be charged for its mere association with the group. However, if the higher credit rating is due to a guarantee provided by another group member, then an intragroup service can be considered to have been rendered

  1. On-call services 
-       This service is considered non-chargeable under thefollowing circumstances:
       Service is easily and promptly available even without any standby arrangement;
       The potential need for such service is remote
       Where there is no/negligible benefits derived from the service.

-       It is only chargeable when the company can proven that an independent person in comparable circumstances would incur such charges to ensure availability of the services when the need for them arises.

20.5 Methods of charging for provision of services:-
(1)  Direct Charge Method
-       cost incurred and the basis of charge can be clearly identified
-       Specific service forms part of the main business activity of the service provider
(2)  Indirect Charge Method
-       Direct charge method is impractical or if the arrangements for the services provided are not readily identifiable
-       E.g. sales promotion activities, provision of information technology services

20.6 Determination of arm’s length charge for intragroup services
-       Assumption on: The service must be of value to the recipient and the price must be one that an independent party would be prepared to pay.


20.7 Profit Mark-up
- mark-up on a cost base is justifiable since in an uncontrolled transaction an independent person would normally seek to earn a profit from providing services, rather than merely charging them out at cost
- The nature of service and the expected value to a recipient influence the arms length price of the service provider
- It must be ensured that the arms length return is limited to rewarding the agency/intermediary function only if the role of an agent or intermediary to obtain services from independent enterprises on behalf of its group members
- Foreign comparison figure need not automatically be deemed arms length in Malaysia 

21. Cost Contribution Arrangement (CCA)
- is a framework (in the form of contractual agreement) agreed among business enterprises to share the costs and risks of developing, producing or obtaining assets, services or rights, and to determine the nature and extent of the interests of each participant in those assets, services or rights.
- Types of CCA most commonly encountered:-
  • Arrangement for the joint development of intangible property - each participant contributes different assets
  • Service Arrangement - exist for any joint funding or sharing of costs and risks (e.g. developing or acquiring of property)

Table summarizes 



Intangible Properties [in (Malaysian) IRBM Transfer Pricing Guideline 2012]


22.2Existence – When a company demonstrates a higher than average rate of return on assets or higher than average profits for a given level of physical  assets over a period of time, it indicates the likely presence of intangibles.

22.1      Type:-
a.    Trade intangibles – patents, R&D, know-how, designs and models
b.    Marketing intangibles - trademarks and trade name

22.3      Parties entitled to Intangible related returns
  • The parties entitled to intangible related returns must be identified once
  • e party that has developed the property, the developer of the intangible property would be expected to have received an arms length consideration for its development services.
  • If the owner of an intangible property chooses to transfer somthe existence of the intangible has been determined
  • Where the legal ownership of an intangible property does not vest with the or all of the rights to exploit the property, an arms length charge should be imposed for the transfer of those rights
  • Concerning of terms of agreement indication:-
o   Whether the transfer is an outright sale or licensing agreement for royalties to be paid;
o   If royalty is to be paid, the basis of payment;
o   Whether the price of product transferred has included compensation for use of the intangible property; and if so, whether other payments such as royalties or payment for provision of technology are made in relation to the same product;
o   If it involves a marketing intangible where a party that is not the legal owner undertakes marketing activities: how the marketer is compensated.
                                                                                 
22.4      Payment for the transfer of intangible property (Form of Payment):-
  1. an outright sale (lump sum payment); or
  2. a licensing agreement for royalties to be paid.

22.5      Marketing Intangibles
  • The value of marketing intangibles depends on many factors including the reputation and credibility of the trade name or trademark fostered by the quality of the goods or services provided under the trade name or trademark in the past
  • The distributor will be expected to obtain a share of the intangible related returns from the owner of the trademark or related intangibles to cover cost of its marketing activities

22.6      Application of Arm’s Length Principle
Consideration
  • Transferor shall recover the costs associated with developing an intangible and earn a reasonable return
  • Understanding the type and the characteristics of intangible properties
  • Other factors:-
a.    Expected benefits and usefulness of the intangible property;
b.    Prevailing industry rates;
c.    Terms of the agreement including geographic limitations, duration of the license, any termination or negotiation rights and exclusivity rights;
d.    Benefits to the licensor, arising from sharing of information on the experience of the licensee contributing towards further developments of the property;
e.    Possibility of sub-licensing;
f.     The extent of any capital investment, start-up expenses or development work required;
g.    Rights to receive update, revisions or modifications of the intangibles; or
h.    Technical assistance, trademarks and know-how provided along with access to any patent.

22.6.4 Transfer Pricing Methodologies for Intangible Property
  • CUP Method is recommended
  • Following issues may need to be considered:-
i.      Perform a functional analysis which covers:
a.    the type of intangible involved;
b.    the value of the intangible;
c.    the opinion of industry experts on the value of the intangible, if necessary;  
d.    the duration that the intangible is expected to maintain its value.
ii.     Determine the rate of return that commensurate with the amount of royalty paid by performing a financial analysis;
iii.    Ensure that the amount of consideration paid make economic sense and the person is better off with utilizing an associated persons intangible property.

9/09/2012

Comparability Analysis(Qualitative Presentation) [in (Malaysian) IRBM Transfer Pricing Guideline 2012]



PART IV – COMPARABILITY ANALYSIS
As all person who dealing with Transfer Pricing we may have a similar characteristic – “we are playing with account”. Characteristics of Financial Reporting may have somehow inhered into the guideline.
Let’s look at them closer from the familiar- Financial Reporting characteristic view for the Part IV – COMPARABILITY ANALYSIS.

1. Timeliness
12. Comparable Period
- taxpayer should endeavour to determine its transfer pricing for tax purposes in accordance with the arms length principle, based upon information reasonably available at the time of the determination (e.g. uncontrolled transactions that were undertaken or carried out during the same year as the year of the taxpayers controlled transaction)
- This requirement is made on the basis that the arms length principle must be complied with contemporaneously, on a year by year basis

13. Multiple year Data
- Use of multiple year data does not imply the use of multiple year average
- The use of data from past years will show whether a taxpayers reported loss on a transaction is part of a history of losses on similar transactions

2. Relevance
14. Arms length Range
- An arms length range refers to a range of figures that are acceptable in establishing the arms length nature of a controlled transaction. The facts and circumstances of a case are therefore important in determining a range, or the point in a range, that is the most reliable estimate of an arm's length price or allocation. 

>>> Reflecting the more reliable adjustment for any uncountable factors.

3. Understandability
15. Separate and Combined Transactions
- Arm's length principle should ideally be applied on a transaction-by-transaction basis; taxpayers should set prices separately for each transaction they enter into with an associated person

>>>to promote clean and clear evidence in the sense of higher persuasive value

4. Faithful Representation
16. Re-characterization of Transactions

- IRBM may disregard and re-characterize a controlled transaction under the following circumstances:
(a) where the economic substance of a transaction differs from its form; or
(b) where the form and substance of a transaction are the same; the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have beenadopted by independent persons behaving in commercially rational manner and this actual structure practically impedes the IRBM from determining an appropriate transfer price.
                         
- The need to re-characterize a transaction is based on the rationale that the character of the transaction is derived from the relationship between the parties and is not determined by normal commercial conditions.
(a) associated persons are able to enter into a greater variety of contracts and agreements compared to independent persons because the normal conflict of interest which exist between independent parties is often absent;
(b) associated persons often conclude arrangements of a specific nature that are not, or very rarely, encountered between independent persons; and
(c) contracts under a controlled transaction are quite easily altered, suspended, extended, or terminated according to the overall strategies of the multinational group as a whole and such alteration may even be made retroactively.

5.Verifiability
17. Transfer Pricing Adjustment
- DGIR may have the right to make an adjustment to reflect the arms length price or interest rate for that transaction by substituting or imputing the price, or interest.
- Adjustments will be made where:-
(a) For the supply of property or services, the consideration is less than the consideration that would have been received or receivable in an arms length arrangement; 
(b) For the acquisition of property or services, the consideration is more than the consideration that would have been given or agreed to be given in an arms length arrangement; or
(c) No consideration has been charged to the associated person for the supply of property or services.


6.Going Concern
18. Losses
- With an assumption that an independent enterprise would not endure continuous losses without taking appropriate measures to correct the situation within reasonable time, as it would contradict fundamental business objectives of making profits.
- In determining whether the losses are acceptable, it is important to ensure that the controlled transaction entered into is commercially realistic and make economic sense
- Contemporaneous documentation which outlines the non-transfer pricing factors that have contributed to the losses may need to be prepared and keep