KUALA LUMPUR: The new “check-the-box” requirement in the tax return (Form C) for the year of assessment 2014 — to indicate whether transfer pricing documentation has been prepared — represents a significant increase in the Inland Revenue Board’s (IRB) scrutiny of transfer pricing, said tax consultants.

This new requirement replaces the previous disclosure system, where taxpayers only had to disclose if transfer pricing documentation had been prepared if it received a Form MNE 1/2011 from the IRB.

Adeline Wong, partner and head of tax practice at Wong & Partners, said the IRB anticipates this change to inculcate discipline in taxpayers in complying with the arm’s length standard, and documenting their compliance, as mandated by law.

“This change will also facilitate and ease IRB’s collection of information on the level of compliance and assist in identifying high risk audit targets from a transfer pricing perspective,” she said in an email interview.

BDO Malaysia executive director (ED) Philip Yeoh and its tax ED and head of tax advisory David Lai observed that this new requirement shows that IRB is serious about enforcement of transfer pricing legislation and regulations.

“This represents a significant step forward, but stops short of requiring taxpayers to file their transfer pricing documentation annually,” Yeoh and Lai said in an email reply.

This new requirement indicates that transfer pricing documentation should be prepared at least seven months from the close of the financial year.

Companies that meet the compliance requirement of a full contemporaneous transfer pricing documentation have more than RM25 million gross income and more than RM15 million in related-party transactions, or finance assistance of more than RM50 million.

“Accordingly, if the IRB issues a Notice of Additional Assessment which attributes additional taxable income of RM100,000 to a Malaysian company following a transfer pricing audit, the Malaysian company would need to make payment of corporate income taxes amounting to 25% of the RM100,000 and on top of that, pay an additional penalty of 35% of RM100,000 for not having transfer pricing documentation in place. Thus, the total amount payable to the IRB would be RM60,000,” Wong explained.

The Income Tax (Transfer Pricing) Rules 2012, gazetted in May 2012, mandates taxpayers having transactions with related parties to prepare and maintain contemporaneous transfer pricing documentation. Wong noted that globally, one would have observed through the activities of the Organisation for Economic Co-operation and Development and tax authorities of developed economies that there is a heightened focus on base erosion and profit shifting, which is closely aligned with transfer pricing regulation.

This article first appeared in The Edge Financial Daily, on September 29, 2014.