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The contractual arrangements between related parties should always be supported by the actual conduct of the parties. For some taxpayers, contracts and conduct were aligned initially but deviated over time as business arrangements had inevitably evolved due to various reasons. These changes have not been updated in the TPD to reflect the actual conduct of the transactions.

Paragraph 11.3.2 of Chapter XI of the MTPG states that:

"In cases, such as, where the facts presented by the taxpayer in the transfer pricing documentation are different from the actual conduct of the taxpayer, the information provided will be considered as incorrect information and be subjected to the penalty under paragraph 113(2)(b) of the Act."

During a TP audit, the IRB often scrutinizes whether the taxpayers in a controlled transaction have conducted the transaction in a manner which is in accordance with the terms set out in the TPD. Where inconsistency arises, the “substance” argument shall prevail over any “form” of written documents in the final assessment by the IRB. This will possibly result in additional tax assessment and penalties on the taxpayers.

For instance, Company A received management services from its related company which are supported by a service agreement. During a TP audit, it was found that the services provided to Company A were substantially narrower in scope. In such case, the IRB would have no hesitation in denying the management fee expense as a tax deduction on grounds of substance over form, leading to additional tax and penalties for Company A.

To mitigate the potential tax risk in future tax audits, taxpayers are advised to review their intercompany arrangements against the TPD to ensure that the actual conduct is aligned with the contractual arrangements. If required, the contracts and documents should be updated to reflect any changes in the actual conduct between the parties.

Paragraph 11.1.2. to Chapter XI of the MTPG states that:

"For transfer pricing purposes, a taxpayer who has entered into a transaction with an associated person in the basis year for a year of assessment is required to not only maintain the above records, but also prepare and keep contemporaneous documentations."

It is crucial that the TPD is contemporaneous. This means that the TPD must be developed at the time of entering into the controlled transaction, and updated for changes prior to yearly submission of tax returns. In particular, the financial data and suitability of the comparables (comparable data) should be reviewed and updated yearly in order to apply the arm’s length principle reliably. As a concession, the MTPG prescribes that a company should perform a fresh search of the comparables through a benchmarking study at least once every 3 years, on condition that all other factors remain unchanged.

Once a company is selected for a TP audit by the IRB, the TPD must be submitted within 30 days from the date of the IRB’s written request. There is a clear advantage in terms of cost saving for timely submission of TPD, as seen from the penalty regime in the IRB’s Transfer Pricing Audit Framework issued on 15 December 2019, which is reproduced in the following table:

As an illustration, Company B has updated its TPD based on the IRB’s requirements and submitted the TPD to the IRB within 30 days from the date of written request from the IRB. On completion of the TP audit, the IRB made a TP adjustment resulting in additional tax payable of RM2,000,000 for the years of assessment 2017 to 2019. Where the TPD is of acceptable quality, it is possible that Company B will not suffer any penalty as the TPD has been submitted in a timely manner to the IRB. In contrast, where the TPD was only submitted after the stipulated deadline of 30 days, Company B will have to suffer a hefty penalty of RM600,000 (30% x RM2,000,000). The late submission of TPD is usually an indication that the TPD has not been prepared or updated in a timely fashion.