Are you well prepared for a Transfer Pricing Audit?

Malaysia’s transfer pricing landscape has seen significant changes over the last decade. Transfer Pricing (“TP”) audits in Malaysia have been on an increasing trend in line with the updated TP requirements and rising expectations from the tax authorities. An important point to note is that a TP audit can be initiated whenever the company enters into inter-company transactions (i.e. domestic or cross border). As such, taxpayers should regularly assess their readiness for a potential TP audit.

Generally when tax authorities perform a TP audit on a taxpayer, they will request comprehensive information, review the company’s documentation, understand the business operations, verify actual substance conducted, provide their audit findings and basis to impose TP adjustments where required. Throughout the TP audit process, it is important for taxpayers to ensure co-operation with the officers, respond on a timely manner and have supporting documentation in place. A TP audit can generally be settled within a reasonable timeframe with the company commonly defending its position whilst the tax authorities challenge areas of interest. 
 

One of the most common challenges observed during TP audits is the lack of supporting documentation where taxpayers would scramble when requested for information to be provided. Incomplete data, unsupportive or lack of documentation and changes in key personnel in the organization would disrupt and cause distress which would prolong the duration and completion of a TP audit.

To mitigate these risks, taxpayers are encouraged to ensure proper documentation, intercompany agreements and supporting information kept in file for a relevant period (at least 7 years for TP audit case). For this purpose, it might be worthwhile for organisations to consider having an internal Standard Operating Procedure (“SOP”) for TP matters particularly if the organisation is large comprising of multiple associated entities and involved in significant inter-company transactions. Furthermore, in order to reduce TP audit risk, it is highly recommended to perform internal health checks in order to identify any issues earlier and strengthen internal compliance processes.