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 arm‟s 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 taxpayer‟s controlled transaction)

- This requirement is made on the basis that the arm‟s 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 taxpayer‟s reported loss on a transaction is part of a history of losses on similar transactions

2. Relevance

14. Arm‟s length Range

- An arm‟s length range refers to a range of figures that are acceptable in establishing the arm‟s 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 arm‟s 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 arm‟s 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 arm‟s 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