SURCHARGE is a new concept to the Malaysian tax regime and we do not know the rationale behind it – where additional taxes can be collected by the Inland Revenue Board (IRB) through existing legislation by imposing such additional taxes and penalties when taxpayers have committed wrongdoings.
Surcharges are confined to adjustments to transfer prices between related parties made by the Director General of Income Tax where he is of the opinion that either the transfer prices do not meet the arm’s length test, or he disregards a structure adopted by the related parties on the grounds that the structure is not commercially rationale, or the actual conduct or substance differs from what is stated in the contract.
What is a surcharge?
To a common man, a surcharge is an extra payment of money in addition to a usual payment. In this case, the intention of the authorities is to impose an additional tax/surcharge up to 5% on top of the normal tax that is payable on any transfer pricing adjustments. Effectively there can be a double taxation in the form of additional taxes together with a surcharge and possibly penalties on any transfer pricing adjustments.
However, based on the manner the law has been introduced effective from Jan 1, 2021, it appears that the surcharge is not regarded as a tax or a penalty since the law does not allow the taxpayer to appeal on any surcharge to the courts. The taxpayer’s avenue to appeal on a surcharge is confined to seeking the Director General of Income Tax’s discretion to abate or remit the surcharge.
The surcharge mechanism appears to be lopsided in favour of the tax authorities whilst the rights of the taxpayer have not been protected.
When will transfer pricing adjustments arise?
Transfer pricing adjustments are highly subjective since they rely entirely on the arm’s length principle. There is no single answer as, in the marketplace, what is arm’s length price or market price in an open market situation will vary from transaction to transaction and therefore there will be a range of prices or profit margins that will be regarded as arm’s length.
In such a fluid situation where the tax authorities and the taxpayer have good arguments to support their positions, imposing a surcharge in addition to the additional penalties will only lead to litigation. Please be reminded that the taxpayers have to pay the taxes upfront despite appealing to the courts.
Surcharges applicable even though no additional tax payable
This is a unique provision in the Income Tax Act 1967 that imposes surcharge whether or not additional tax is payable because of a transfer pricing adjustment imposed by the IRB. The situation where this can arise is where both parties to the transaction are in a loss position or they are enjoying tax incentives, etc, where any adjustments will not result in additional tax liabilities.
The way forward
The authorities need to rethink whether there should be an additional tax in the form of a surcharge in addition to the tax imposed on transfer pricing adjustments. The right of appeal to the courts on the surcharge should be introduced without relying on the discretion of the Director General of Income Tax to remit or abate the surcharge.
If the authorities have good grounds to make transfer pricing adjustments, currently there are sufficient provisions in the law to impose the additional taxes and penalties for any wrongdoings. Introducing a surcharge mechanism in an area that is highly debateable on who is right and wrong is unwarranted at this point.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.