Transfer Pricing Dispute Successfully Resolved

This article is written by Lee Hishamuddin and Gledhill (LHAG) and was first published in their Transfer Pricing e-Alert in September 2019. Reproduced with permission from LHAG.

 In FSB vs Ketua Pengarah Hasil Dalam Negeri, a transfer pricing appeal before  the DGIR made transfer pricing adjustments on the ground that services provided by the holding company were duplicative of the activities carried out by the taxpayer. The DGIR invoked Section 140(1) of the Income Tax Act 1967 and applied the general tax avoidance provision to perform transfer pricing adjustments. Tax assessments were raised and the taxpayer appealed against the assessments to the SCIT.

Brief Facts

The taxpayer is a Malaysian company that provides technical support services to the construction industry and is held by an overseas holding company known as FF Ltd. FF provided a number of services, including management, advisory and training support, to the Malaysian company. The taxpayer paid for the services rendered and deducted these as a business expenditure for income tax purposes.

DGIR'S Assessments 

The DGIR conducted a transfer pricing audit and raised a number of queries on the following services:- 

a) An increase in the Management and technical fees, Human Resourse Fees, Finance and audit advisory fees and IT services fees. 


The DGIR disallowed the payments incurred by the taxpayer for Human Resources services (HR) on the basis that those services were irrelevant to the taxpayer. The DGIR stated that the taxpayer had a managing director and a management team who can provide human resources services so it is not necessary for them to use the HR services carried out by FF as the nature of human resources services is geared towards monitoring activities.

Then, the DGIR disallowed the payments incurred for the Finance and audit advisory services on the basis that the taxpayer had employees carrying out similar services which made the DGIR some to a conclusion that the services rendered by FF were duplicative.

Lastly, the DGIR disallowed the payments for the IT services as those services were seen as a form of shareholder activity provided by FF.


Taxpayer's contention

The taxpayer argued that there was no duplicity of services for the following reasons:

a) The Human Resource services rendered by FF were important to ensure proper management of staff, assistance relating to personal evaluation and development, formulation human resource policies and managing succession planning process and the taxpayer had only employed one human resource personnel under them. Given the limited resources, the Malaysian company had to sought extra hand from FF. 

b) The finance and audit advisory services included personnel salary costs, outsourced consultancy & professional fees, and travel costs. Based on the supporting documents of the taxpayer, the services provided cost savings in the form of proper management of key financial indicator, effective cost control measures and ensuring financial personnel are fully updated on the latest accounting standards to ensure competency.

c) According to the OECD Transfer Pricing Guidelines, “shareholder activities” refer to activities performed by a group entity solely because of the ownership interest in other group companies even though the other group entities may not require these activities. In this case, there was ample evidence that the IT services were needed to enhance the taxpayer’s business operations in Malaysia. The services resulted in cost savings through group purchase of software licence with group discount. Besides that, the group service developed more efficient and effective IT systems for the taxpayer through the use of a secure and stable internet platform which increased efficiency within the taxpayer’s company and its business interactions with the group due to a common IT system in place which standardizes processes and procedures.

 Additionally, the taxpayer also argued that the DGIR’s transfer pricing audit was invalid as Section 140(1) cannot be invoked to raise transfer pricing assessment as Parliament had specifically enacted the section for that purpose. The transfer pricing adjustments by the DGIR were based on the Transfer Pricing Guidelines issued in 2003, which the High Court and the SCIT held in the Maersk Malaysia case to be not legally enforceable. The Taxpayer also stated that the additional assessments for the years 2003 to 2006 were time-barred as they have exceeded the timeline prescribed under the law.

Conclusion

In light of the evidence and the legal arguments put forward on behalf of the taxpayer during the hearing, the DGIR reviewed his position and negotiated an out-of-court settlement that was acceptable to the taxpayer. Recent trends suggest an increase in transfer pricing audits by the DGIR. Hence, it is important that transactions between inter-related companies and the corresponding transfer price policy are well documented with sound commercial justification. Further, where there are intra-group services being received, taxpayers must have the necessary documentary evidence to demonstrate that the payment for such services is at arm’s length in addition to establishing that they were rendered and not fictitious, essential for the taxpayer's nature of business and not duplicative in nature Our Tax, SST & Customs partners also successfully represented the taxpayer in Maersk Malaysia, which is the first transfer pricing dispute to be reported in Malaysia. 

Our Tax, SST & Customs senior partner Datuk D P Naban and partner S Saravana Kumar successfully represented the taxpayer in the Power Root case at the Court of Appeal.

For any questions in relation to tariff classification in respect of sales tax, please contact our Tax, SST & Customs partners at tax@lh-ag.com