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.

3. Scope

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 Arm‟s 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)

Kindly refer to the topic: Arm’s length price determination process - [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for further information.

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

1.     Comparable uncontrolled price method (CUP)

2.     Resale price method (RPM)

3.     Cost plus method (CPM)

Transactional Profit Method

4.     Transactional Profit Method (TPM) /Profit split method

5.     Transactional net margin method (TNMM)

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

Please refer to the topic: Malaysia Taxation: Transfer Pricing Methodologies for Transfer Pricing 2012 for details.

                                                                                                      

 PART IV – COMPARABILITY ANALYSIS

12. Comparable Period

13. Multiple year Data

14. Arm‟s 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 arm‟s 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)

Please refer to the topic: Intragroup Services[in (Malaysian) IRBM Transfer Pricing Guideline 2012] for details.

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)

Please refer to the topic: Intragroup Financing [in (Malaysian) IRBM Transfer Pricing Guideline 2012] for details.

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…

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