In late 2015, the final deliverables for each of the 15 Action Items under the Organisation for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project were released. A large number of countries have subsequently joined the BEPS Inclusive Framework (IF), indicating their participation in the BEPS agenda and at minimum adopting the four 'minimum standards' to be a BEPS Associate. Malaysia is one such country.
Tax payers in turn have been seeking to understand what this means for them and how it may affect their existing structures, compliance positions and what they may need to do to address any issues arising. This alert considers and provides guidance on these issues.
Where Does Malaysia Stand in relation to the BEPS Project?
Although Malaysia is not an OECD member, Malaysia is a keen observer of OECD policies. The key milestones for BEPS adoption in Malaysia are as follows:
- January 2016
- Malaysia signed the Multilateral Competent Authority Agreement (MCAA)
- August 2016
- Malaysia signed the Convention on Mutual Administrative Assistance in Tax Matters (Convention) which indicated its support of the BEPS initiative and commitment to implement the Automatic Exchange of Information.
- December 2016
- The following rules and orders were gazetted:
- Income Tax (Country-By-Country Reporting) Rules 2016 (CbCR Rules)
- Income Tax (Convention on Mutual Administrative Assistance in Tax Matters) Order 2016
- Income Tax (Multilateral Competent Authority Agreement on the Exchange of Country-By-Country Reports) Order 2016
- January 2017
- Malaysia's Second Finance Minister, Datuk Johari Abdul Ghani announced Malaysia's entry into the BEPS IF at the second IF meeting in Paris.
- Subsequently, OECD made an official announcement in March 2017 welcoming the entrance of Malaysia as a BEPS Associate.
In this regard, it is apparent that Malaysia is taking an active role in addressing perceived tax leakages through its participation in the MCAA, the Convention and through the introduction of domestic legislation and guidance to combat BEPS-related issues.
Following the implementation of new domestic legislation and the updating of the Malaysian Transfer Pricing Guidelines 2012 (TP Guidelines 2012) by the Inland Revenue Board (IRB), it would be prudent for MNCs to be mindful and comply with Malaysian transfer pricing obligations.
These obligations now include:
a. The requirement to prepare and file a country-by-country report (CbCR)
The CbCR Rules, which came into force on 1 January 2017, requires certain MNCs to prepare and file a CbCR in Malaysia.
The CbCR Rules apply to MNCs that:
1. have cross border transactions between its constituent entities;
2. have a total consolidated group revenue in the financial year (FY) preceding the reporting FY of at least RM3 billion;
3. have its ultimate holding company incorporated under Companies Act 1965 (CA) and resident in Malaysia; and
4. have its constituent entities incorporated or registered under CA or any written law or under the laws of a territory outside Malaysia and resident in Malaysia.
The key requirements in relation to the CbCR are summarised as follows:
1. Preparation of CbCR - Reporting FY
The CbCR must be prepared and filed in a prescribed form, or through an electronic transmission in extensible mark up language format. While the prescribed form has yet to be released, it is expected to mirror the templates provided under the OECD BEPS Action Item 13 on Transfer Pricing Documentation and Country-by-Country Reporting;
2. Notify the DGIR - On or before the last day of the Reporting FY
The relevant MNC is required to notify the Director General of the Inland Revenue (DGIR) in writing on or before the last day of the reporting FY. On the other hand, where a constituent entity of an MNC is not the reporting entity, the constituent entity is required to notify the DGIR in writing of the identity and tax residence of the reporting entity on or before the last day of the reporting financial year.; and
3. File CbCR - 12 months after the last day of the Reporting FY
The relevant MNC must file the CbCR within 12 months after the last day of the reporting FY.
b. The requirement to prepare a Master File
MNCs which are required to prepare a CbCR will also be required to prepare a Master File, to be submitted together with the transfer pricing documentation upon the IRB's request.
Where the parent company of the MNC prepares a Master File for the group, a copy of the Master File is required to be submitted together with the transfer pricing documentation by the Malaysian subsidiary company.
c. Preparation of transfer pricing documentation under the updated TP Guidelines 2012
Additionally, the IRB has announced that the TP Guidelines 2012 will be gradually updated and have started making amendments to some of the chapters under the TP Guidelines 2012. As such, businesses should review their current transfer pricing documentation to ensure that it is compliant following the new amendments.
What are the key implications for tax payers?
With the additional obligations imposed in relation to the preparation and filing of the CbCR and Master File (which will reveal the aggregate, jurisdiction-wide information on the global allocation of income, taxes paid, and economic activity in all jurisdictions in which the MNC group operates), it is crucial for MNCs to review their tax compliance position, value chain, operating structures and transfer pricing policies to ensure that the substance of the business operations are aligned with their transfer pricing policies.
While the CbCR is intended to be used for purposes of assessing transfer pricing risks (and potentially other base erosion and profit shifting related risks) at a high level, it is likely that tax audits and transfer pricing controversies will increase substantially with the exchange of information facilitated through information contained in the CbCR. As a participant in CbCR, it will be the case that Malaysia will receive the CbCR's prepared in other jurisdictions where a constituent entity of the group exists in Malaysia (and the criteria to prepare CbCR are met). This information is likely to be used in audits.
Transfer pricing planning and well documented pricing policies are now crucial in the BEPS climate where tax authorities have more access and understanding of the global operations and supply chain of the MNCs. Given the aggression in tax and transfer pricing audits by the IRB, it would be prudent for MNCs to invest in transfer pricing planning measures and documentation preparation at an early stage.