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FAQs on Matters Arising from Section 140A(3C) of the ITA

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The Inland Revenue Board of Malaysia (HASiL) has provided a comprehensive set of Frequently Asked Questions (FAQ) regarding the implementation and implications of Section 140A(3C) of the Income Tax Act 1967, specifically addressing concerns related to transfer pricing.

The FAQ document, dated 18 January 2024, aims to clarify the rationale, application, and enforcement of surcharges on transfer pricing adjustments, even in cases where there is no immediate loss of tax revenue, such as loss cases or tax-exempt cases.

Below is a summary of the key points addressed in the FAQ:

  • A surcharge is imposed on transfer pricing adjustments that result in increased income or reduced deductions or losses, irrespective of the taxpayer’s profit or tax-exempt status.
  • The surcharge is intended to ensure equal tax treatment for all taxpayers who fail to comply with the arm’s length principle and to promote compliance with the transfer pricing legal framework in Malaysia.
  • The surcharge under Subsection 140A(3C) applies to transfer pricing audit cases that commence on or after 1 January 2021, regardless of the assessment years covered.
  • For ongoing audits initiated before 1 January 2021 but concluded after this date, Subsection 140A(3C) will not apply; however, penalties under subsection 113(2) of the ITA may still be imposed for any tax undercharge.
  • The surcharge rate can be up to 5%, with the specific rate determined by factors such as the comprehensiveness of transfer pricing documentation and the degree of deviation from the arm’s length range.
  • Adjustments to the surcharge may be made in line with any adjustments under a Mutual Agreement Procedure (MAP).
  • The surcharge applies to all IRBM branches conducting tax audits that result in transfer pricing adjustments, and these branches are expected to follow the Malaysia Transfer Pricing Guidelines (MTPGL) and Transfer Pricing Tax Audit Framework.
  • Companies with tax incentives, including those with 100% tax exemption, are also subject to the surcharge if a transfer pricing adjustment is made.
  • Taxpayers have the right to appeal the surcharge imposed, and the Director-General (DG) has the authority to abate or remit the surcharge on a case-by-case basis, provided that taxpayers submit reasonable justification for their appeal.
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