Transfer Pricing authority and tax law

Inland Revenue Board (IRB). General Anti-Avoidance Provision (§ 140 of the Malaysian
Income Tax Act, 1967: Power to disregard certain transactions if not deemed arm’s length)
and Transactions by Non-Residents (§ 141 of the Malaysian Income Tax Act, 1967: Powers
regarding certain transactions by non-residents).

Transfer Pricing regulations and rulings

The IRB released the Malaysian Transfer Pricing Guidelines on 2 July 2003 which specify
documentation requirements.

OECD guidelines of Transfer Pricing

The Malaysian Transfer Pricing Guidelines are largely based on the governing standard for
transfer pricing, which is the arm’s length principle as established in the OECD guidelines.
The IRB respects the general principles of the OECD guidelines.

Transfer Pricing methods

The IRB accepts CUP, Resale Price, Cost Plus, Profit Split and TNMM. However, the
Malaysian Transfer Pricing Guidelines state that the traditional methods are preferred over the
profit methods and advise that the profit methods should only be used when the traditional
methods cannot be reliably applied or cannot be applied at all.

Penalties in Transfer Pricing

There are no specific penalties for transfer pricing. However, the existing legislation and
penalty structure under the Malaysian Income Tax Act, 1967, are applied. Penalties for
transfer pricing adjustments can range from 100% to 300% of the undercharged tax. There are
no transfer pricing specific documentation penalties.

Penalty relief in Transfer Pricing

A reduction in penalties can be negotiated based on quality of contemporaneous transfer

pricing documentation.

Transfer Pricing Documentation requirements

Contemporaneous documents pertaining to transfer pricing need not be submitted with the tax
return form, but should be made available to the IRB upon request. Al relevant documentation
must be in, or translated into, Bahasa Malaysia (the national language) or English. There is no
disclosure required on a tax return to indicate that transfer pricing documentation has been
prepared.

The IRB has set out a list of information and documentation to be prepared for transfer
pricing purposes. This list is neither intended to be exhaustive nor meant to apply to al types
of businesses. Instead, taxpayers are advised to maintain information and documentation that
are applicable to their circumstances. The list includes:
  Company details:
o Ownership structure showing linkages between all entities within the
Multinational Enterprise (MNE)
o Company organization chart
o Operational aspects of the business including details of functions performed
 Transaction details:
o A summary of transactions with other entities in the same MNE, indicating the
name and address of each entity in the MNE with whom international
transactions have been entered into, and the type of transactions, e.g., purchase
of raw material or fixed assets, sale of finished goods, borrowing of money,
etc.
o A summary of transactions similar to the above that are conducted with
independent parties or information derived from independent enterprises
engaged in similar transactions or businesses
o Economic conditions during the time of the transactions
o Terms of the transactions, including where applicable contractual agreements
with overseas associated parties with regard to technical assistance fees,
management fees, marketing fees, recruitment fees or other services provided,
royalties payable, purchase or rental of equipment or other assets, handling
charges, loans, al ocation of overhead expenses or any specific expenses (e.g.,
promotional or advertising) borne by the foreign entity or other forms of
payment to overseas associates
o Pricing policy over the past seven-year period
o Breakdown of product manufacturing costs
o Product price list
 Determination of arm’s length price:
o The pricing method adopted, showing how the arm’s length price is derived,
and indicating why that method is chosen over other methods
o Functional analysis taking into consideration all risks assumed and assets
employed
o If a comparability analysis results in a range of arm’s length outcomes, then
the furnishing of documents relating to al of the outcomes and the reasons for
choosing that particular arm’s length price from the range of outcomes must be
given

Documentation deadlines for Transfer Pricing

There is no documentation deadline. However, documentation should be prepared

contemporaneously. As tax returns are due for filing to the IRB within seven months after the
close of a company’s financial year-end, it is advisable that transfer pricing documentation is
prepared before the submission date of the return.

Statute of limitations of transfer pricing assessments

There is a six-year statute of limitations for tax adjustments, and documentation must be kept
for seven years. There is no statute of limitations in instances of fraud, willful default or
negligence.

Return disclosures/related-party disclosures

Disclosure of arm’s length values is required in the tax return for the following transactions:

 Sales to related companies

 Purchases from related companies
 Other payments to related companies
 Lending to and borrowing from related companies
 Receipts from related companies

Transfer Pricing Audit risk/transfer pricing scrutiny

The risk of transfer pricing scrutiny during an audit is high. Tax audits are carried out under a
self-assessment regime. Every company is expected to be subject to a desk or field audit at
least once every five years. With the release of the Malaysian Transfer Pricing Guidelines,
greater scrutiny on transfer pricing has been observed in these field audits. Our experience is
that every multinational corporation that was audited over the last 12 months was scrutinized
on its transfer pricing policy. Since the beginning of 2005, the number of transfer pricing
audits and investigation activity by the IRB increased significantly. There is a specific transfer
pricing unit in the IRB to handle al transfer pricing audits.

Advance Pricing Agreements of tansfer pricing

APAs are available upon request. However, at this stage, there are no formal guidelines on
APAs, and the IRB has indicated that it wil consider any terms and conditions which are the
norm observed in the transfer pricing regimes in other jurisdictions. The IRB is wil ing to
accept requests for both unilateral and bilateral APAs. To date, we are not aware that any
APA has been concluded.

Calculating Arm's Lenth Principle

A deal between two interrelated or enterprise associates parties. That is behavior as if they
were not related, so that there is no query of a disagreement of attention. In simple way we
can describe this as “a deal between two unconnected or associate parties”.

OECD introduce the transfer pricing guidelines for multinational enterprises and tax
administrations in 1995. OECD guidelines are appreciated globally. In the transfer pricing
system, the transfer pricing has to be resolute on the basis of the arm’s length principle so
price determined is the Arm’s Length Price (ALP). According to the ALP there are two type
of transfer pricing method

 Traditional Transaction Method

 Transactional profit method or Non Transactional Method

Traditional transaction method:

These methods highlight each transaction particularly relatively in view of the overall profit
shape of connected entities at the ALP. OECD Guidelines submit to the next methods as
transactional method

1. Comparable Uncontrolled Price method (CUP)

 2. Resale Price Method (RPM)
3. Cost Plus Method (CP method or C+)

Comparable Uncontrolled Prices method (CUP):

In this method, price charged in an uncontrolled deal between comparable entities is

recognized and evaluate with the verified entity price to determine the Arm’s Length
Principle.

The CUP method offer the finest evidence of ALP. A arm’s length price may arise where:

 Tax payer or another member of the associate group sells the product, in comparable
sizes and in the comparable terms to ALP in similar promote markets (internal
comparable).
 An ALP party sells the similar product, in similar size of quantity and in the
comparable conditions to other arm’s length party in similar markets (an external
comparable).
 The taxpayer of the entities buys the similar quantities, in comparable quantities and in
the similar terms from the associate parties in the comparable markets (internal
comparable).
 An ALP party buys the particular goods, in comparable quantities and in the similar
terms from the other arm’s length associate party in similar markets (external
comparable).

Cost Plus Method (CPM):

In this method, the total price of intangible incurred by the tested parties in transferring
products and services to Associated Enterprises is measured and the sum of gross profit spot
used by similar enterprises in comparable transactions with self-determining associated
enterprises is determined. The sum of gross spot arrived at is used to take into account
functional and other variation to determine ALP. The extra similarities in the functions, risks
and property, the extra likely it is that the cost plus method will create an suitable estimation
of an arm's length result.

In common, for reason of apply a cost-based method, costs are divided into three categories:

1. Direct costs:- raw materials;

2. Indirect costs:- repair and maintenance which may be allot among several goods.
3. Operating expenses:- selling, general, and organizational expenses.

The cost plus method uses limits calculated after direct and indirect costs of goods. Correctly
shaping cost under the cost plus method is important. Cost is typically calculated in agreement
with accounting values that are usually accepted for that exacting industry in the region where
the products are produced.

The cost base of the deal of the associated parties to which a mark-up is to be applied be
calculated in the same way and returns comparable functions, risks, and properties as the cost
base of the similar transactions. Where cost is not exactly resolute in the same way, both the
mark-up and the transfer will be used.
Resale Price Method (RPM):

RPM method is related to CPM. This method is used where the vendor adds similarly little
value to goods owned from associate enterprises. Here, Arm’s Length Price is determined by
reducing the relevant gross profit mark-up from the sale price charged to free entity.

The resale price method starts with the resale price to arm's length entities (of a goods buy
from an non-arm's length entities ), minimized by a similar gross margin. This similar gross
margin is resolute by reference to either:

1. The resale price margin earned by a associate of the group in similar uncontrolled
transactions (internal comparable); or
2. The resale price margin earned by an arm's length enterprise in similar uncontrolled
transactions (external comparable).

Beneath this method, the arm's length price of products obtain by a taxpayer in a non-arm's
length deal is resolute by reducing the price understand on the resale of the products by the
taxpayer to an arm's length entities, by an suitable gross margin. This gross margin, the resale
margin, should allow the vendor to:

1. Recover its operating costs; and

2. Earn an arm's length profit support on the factors achieve, properties used, and the
risks understood.

Transactional Profit Methods:

: In transactional profit methods, related parties profit statistics are measured and adjusted
relevantly to their share. These are:

Profit Split Method (PSM):

This method is used when associate enterprise transactions are included that it becomes very
hard to conduct a transfer pricing analysis on a transactional base. The priority function to do
is combined net profit acquiring to connected entities from a transaction is decide. After that
combined net profit is allotted in between connected entities with mention to market income
gained by free enterprises in comparable transactions.

In this Profit Split Method (PSM):

1. First move is to decide the sum of profit gained by the associate parties from a
controlled transaction. The Profit Split Method (PSM) allots the total incorporated
profits connected to a controlled transaction, not the total profits of the associate group
as a complete. The profit to be split is usually the operating profit, before the reduce of
interest and taxes. In some satiations, it may be suitable to split the gross profit.
2. Second move is to split the profit among the associate parties base on the comparative
price of their assistance to the non-arm's length dealings, allowing for the functions
assumed, the properties used, and the risks understood by each non-arm's length
associate parties, in connection to what arm's length parties would have taken.

Profit Split Method (PSM) applied where:

 1. The functioning of two or more non-arm's length associate parties are extremely
included, making it hard to assess their dealings on an entity basis; and
2. 4. The continuation of valuable and sole intangibles makes it hard to set up the proper
stage of comparability with uncontrolled dealings to relate a one-sided method.

Due to the difficulty of international operations, one group of the global group is rarely
allowed to the total return attributable to the important properties, such as intangibles.

Transactional Net Margin Method (TNMM):

Generally accepted in cases of transfer of semi-completed products, distribution of completed

goods and transactions linking the condition of services.

In this method:

1. Relatively the net profit margin of a entities take position from a non-arm's length deal
with the net profit margins understand by arm's length associate parties from
comparable transactions; and
2. Observe the net profit margin relation to suitable base such as price, sales or
properties.

This vary from the cost plus and resale price methods that balance gross profit margins.
though, the TNMM need a stage of similarity to that necessary for the request of the cost plus
and resale price methods. Where the applicable information exists at the gross margin stage,
associate enterprises should apply the cost plus or resale price method.

Most Appropriate Methods:

Cost plus method (CPM): this method is generally used where semi finished products are
transferred.

Comparable Uncontrolled Prices Method (CUP): ): this not favorable as no public

database is accessible concerning prices apply by autonomous enterprises in import of
comparable products.

Resale Price Method (RPM):): In this method the vendor adds comparatively small or no
value to goods taken from associate enterprises. In the current case in this method may be
taken as the very important method as similar data of comparable deals by independent
entities is available.

Profit Split Method (PSM): PSM method is used when associate enterprises are so
combined that it turns into difficult to make transfer pricing analysis on transactional methods
basis.

Transactional Net Margin Method (TNMM): In this method generally apply in the case of
transfer of partially completed products, distribution of completed goods and where RPM
cannot be sufficiently applied. In general RPM more suitably applied in this case, TNMM is
also not right.

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Toyota's $247 million tax slug
Toby Hagon
July 6, 2010

A massive one-off tax bill has driven Australia's largest car maker into the red.

Toyota has been driven into the red for financial year ended March 31 by a quarter-billion
dollar slug from the Australian Tax Office.

The car maker refused to discuss the massive tax bill in detail other than to say it was for
"prior years" but Toyota Australia has previously been investigated for transfer pricing,
whereby profits are shifted overseas.

"Intercompany pricing is complex and we've had discussion with the tax office and overseas
tax authorities," said Toyota Australia spokesman Glenn Campbell, refusing to confirm the
bill was for transfer pricing.

"This settlement has been reached following a thorough review with the ATO on a very
complex issue. We believe we conduct our operations according to all relevant rules and
regulations regarding financial matters.

"Toyota Australia will continue to work with the ATO to ensure we have tax clarity and
certainty to all parties."

Overall, the car maker reported an after tax loss of $107.9 million in a challenging year that
saw its Japanese parent establish a committee for quality following a series of high profile
vehicle recalls overseas.

The largest of Australia's three remaining car makers made $182.3 million before tax
following cost cutting but was forced to account for a $246.7 million one-off "tax adjustment"
(among other tax costs) that put the figure into the red.

Of $8.6 billion in revenue, $1.2 billion came from exports, which experienced a sharp 28 per
cent slide to a still industry leading 68,652 vehicles.

Despite a GFC downturn in new-vehicle sales and pressure earlier this year from the global
turmoil that's forced Toyota to defend its quality the brand is still comfortably number one in
a market experiencing record sales in four-wheel-drives and a trend to smaller vehicles.

Vehicle sales figures released yesterday showed a record 108,722 cars were sold in June, with
Toyota's share at 20.2 per cent.

Toyota also credited the second-half buoyancy on the Federal Government's investment
allowance.

"The global financial crisis affected demand for Toyota vehicles, but by mid-year, improved
market conditions, boosted by the Federal Government's investment allowance helped Toyota
Australia achieve 214,465 domestic vehicle sales for the financial year," said president and
CEO Max Yasuda.
"Fluctuations in currency, price increases in raw materials, increased global competition from
global car importers and global recall activity in late 2009 made local conditions difficult,"
said Yasuda.

Sales for the Camry Hybrid - the first mass produced petrol-electric car to be produced in
Australia - are also picking up following a disappointing start. Toyota says larger fleet and
government deals are expected to be sealed in the second half of 2010 ensuring the car
achieves its annual target of 10,000.

Toyota's operating profit was in sharp contrast to US-owned Ford and Holden, with the latter
battling the bankruptcy of its parent, General Motors, in reporting a net 2009 loss of $211
million. Ford, however, was the only local car maker to report a net profit, breaking its string
of losses since 2005 to post a $13 million gain.

Toyota has also been forced to respond to a string of embarrassing safety recalls, which
included addressing brake feel issues on 2378 of its environmental hero, the Prius hybrid.

Toyota is also in the throes of recalling 1120 of its luxury Lexus vehicles for engine problems
that could lead to stalling.

While none of the recalls that made front page news for weeks did not affect cars produced in
Australia, Toyota Australia says it has responded with improved quality measures for its local
operations.

"Having participated in this recall activity, we have responded by undertaking new activities
to ensure high quality standards are achieved. This includes further developing our capability
for early detection of quality issues and rectification.

"Toyota Motor Corporation has formed a Special Committee for Global Quality and Toyota
Australia's manufacturing plant at Altona plays a role in this activity."

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ATO wipes out Toyota profit

 Philip King
 From: The Australian
 July 06, 2010 12:00AM

UNDER-PAYMENT of tax to the tune of nearly $247 million has turned Toyota
Australia's latest financial result on its head.

It has forced the company to record a net loss of more than $100m.

The results for the period to the end of March show pre-tax profit rising slightly to $182m
compared with the previous year's figure of $174m, on a small decline in revenue to $8.6
billion.

However, "a one-off tax adjustment to prior years" turned this into a post-tax loss of $107.9m
compared with a post-tax profit of $123.3m for 2008-09.

Toyota Australia spokesman Glenn Campbell said the turnaround was due to a $246.7m
"underprovision", but declined to give details or say whether the figures represented the
settlement of long-standing negotiations with the tax office. "Toyota Australia believes it has
been conducting its operations in line with the rules," he said.

A string of weak profit results in the first half of the last decade aroused concerns at the ATO
that transfer pricing within the car giant was allowing it to shift profits offshore.

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