Transfer Pricing Alert - Budget Announcement 2019 - EY
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Special Edition
December 2018 - Issue 02
EY Tax Alert
Transfer Pricing
Alert – Budget
Announcement
2019
Highlights
Budget 2019 was delivered by the Minister of Finance, YB Lim Guan
Eng on 2 November 2018. The following developments, which have
• Expansion of the definition of been briefly discussed in earlier EY Tax Alerts, pertain to transfer
“Control” pricing:-
• Implementation of earning • Expansion of the definition of “Control” to ascertain related
stripping rules parties to be covered for transfer pricing purposes; and
• Introduction of an earning stripping section to restrict deduction
of interest on financial assistance granted in a controlled
transaction
1| EY Tax Alert No. 2/2018 24 December 2018Expansion of the definition of “Control” to ascertain related
parties to be covered for transfer pricing purposes
Current definition of “Control”
Based on Section 139 (1), a person shall be taken to have control of a company –
a. If he exercises or is able to exercise or is entitled to acquire control (whether direct
or indirect) over the company’s affairs and in particular, without prejudice to the
generality of the preceding words, if he possesses or is entitled to acquire the
greater part of the share capital or voting power in the company;
b. If he possesses or is entitled to acquire either -
i. the greater part of the issued share capital of the company;
ii. such part of that capital as would, if the whole of the income of the company
were in fact distributed to the members, entitle him to receive the greater part of
the amount so distributed; or
iii. such redeemable share capital as would entitle him to receive on its redemption
the greater part of the assets which, in the event of a winding-up, would be
available for distribution among members; or
c. If in the event of a winding-up, he would be entitled to the greater part of the assets
available for distribution among members
Note that there are other areas of Section 139 which are not replicated above.
Proposed definition of “Control”
A new Section 140A(5A) will be introduced to define and expand the meaning of
“Control”. Based on the proposed Section 140A(5A), without prejudice to the generality
of Section 139 -
“Control” refers to the ownership of share capital by another person or by a third person
who owns shares of both persons where the share capital held in either situation is 20%
or more and-
a. The business operations of that person depends on the proprietary rights, such as
patents, non-patented technological know-how, trademarks or copyrights, provided
by the other person or third person;
b. The business activities, such as purchases, sales, receipt of services, provision of
services, of that person are specified by the other person, and the prices and other
conditions relating to the supply are influenced by such other person or a third
person; or
c. Where one or more of the directors or members of the board of directors of a person
are appointed by the other person or a third party
2| EY Tax Alert No. 2/2018 24 December 2018 Special EditionImplementation of Earning Stripping Rules to restrict deduction
of interest on financial assistance granted in a controlled
transaction
Thin Capitalisation Rules (“TCR”) in relation to financial assistance between associated
parsons where the borrower is tax resident in Malaysia were introduced via Section
140A(4) of the Income Tax Act 1967. Enforcement of the TCR under Section 140A(4)
was deferred until 31 December 2017 to allow taxpayers sufficient time to prepare for
the implementation of the TCR. However, the TCR was never implemented in Malaysia.
With effect from 1 January 2018, Section 140A(4) which provides for TCR was deleted
following the gazette of the Finance (No. 2) Act 2017 (801). In its stead, it is proposed
that Earning Stripping Rules (“ESR”) be implemented with the introduction of Section
140C.
New Section140C, proposes the following:-
• In ascertaining the adjusted income of a person from each of his sources consisting
of a business for the basis period for a year of assessment, no deduction from the
gross income from that source for that period shall be allowed in respect of any
interest expense in connection with or on any financial assistance in a controlled
transaction granted directly or indirectly to that person which is in excess of the
maximum amount of interest as determined under any rules made under the Income
Tax Act 1967.
• Financial assistance in a controlled transaction includes loans, interest-bearing trade
credit, advances, debt or the provision of any security or guarantee
• “Interest expense” means interest on all forms of debt or payments economically
equivalent to interest (excluding expenses incurred in connection with the raising of
finance)
The IRB has indicated that ESR is likely to only apply to cross-border loans, though this
will need to be confirmed based on the reading of the Rules. The rules governing the
implementation of the ESR are expected to be released by the Malaysian Government
soon with the impending implementation date of 1 January 2019.
Observations
• Taxpayers would now need to re-assess the transactions to which transfer pricing
rules would apply and would need to ensure that such transactions:
i. Meet the arm’s length standard; and
ii. Are included within the scope of transfer pricing documentation
• Taxpayers would now need to reassess the number of companies that are required
to comply with the Malaysian Transfer Pricing regulations and the number of
controlled transactions to be analysed in transfer pricing documentation
3| EY Tax Alert No. 2/2018 24 December 2018 Special Edition• Any form of interest payments arising from financial assistance provided between
associated enterprises or related parties may be subject to restriction. However, it
would be difficult for companies to assess the impact of the ESR until the relevant
Rules are released.
Section 140A(5A) and 140C are effective from 1 January 2019.
How EY can help you
• Review the shareholding structure and other relevant factors to evaluate the
implications of the new “Control” definition on historical positions taken by companies
from a transfer pricing standpoint
• Assist in preparing the transfer pricing analysis for new transactions identified with
associated enterprises or related parties
• Review and assess the impact of ESR on the interest expenses incurred by your
business
• Review and evaluate the existing intercompany loans/ financial assistance
arrangements between associated enterprises or related parties and undertake
transfer pricing analysis to support the arm’s length nature of interest rate applied
Contact details
Sockalingam Murugesan Vinay Nichani
Partner and Head of Transfer Pricing – Partner – Transfer Pricing
ASEAN and Malaysia Ernst & Young Tax Consultants Sdn. Bhd.
Ernst & Young Tax Consultants Sdn. Bhd. vinay.nichani@my.ey.com
sockalingam.murugesan@my.ey.com +603 7495 8433
+603 7495 8224
Hisham Halim Jasinderpal Singh Dhillon
Partner – Transfer Pricing Director – Transfer Pricing
Ernst & Young Tax Consultants Sdn. Bhd. Ernst & Young Tax Consultants Sdn. Bhd.
hisham.halim@my.ey.com Jasinderpal.Singh.Dhillon@my.ey.com
+603 7495 8536 +603 7495 8357
4| EY Tax Alert No. 2/2018 24 December 2018 Special EditionAnil Kumar Puri Gary Ling
Partner – International Tax Services Director – Transfer Pricing
Ernst & Young Tax Consultants Sdn. Bhd. Ernst & Young Tax Consultants Sdn. Bhd.
anil-kumar.puri@my.ey.com gary.ling@my.ey.com
+603 7495 8413 +603 7495 8388
5| EY Tax Alert No. 2/2018 24 December 2018 Special EditionEY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2018 Ernst & Young Tax Consultants Sdn. Bhd. All Rights Reserved. APAC no. 07001547 ED None. This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com
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