ALL business transactions should be supported with proper and comprehensive documentation that should be prepared on a contemporaneous basis (i.e. at the time the transaction is taking place, or immediately after the transaction has occurred).
The contemporaneous nature of documentation is not confined to transfer pricing documentation where the law specifically requires it to be “contemporaneous”.
The importance of documenting the transactions at the time they occur is that the parties concerned will be fully aware of the facts and therefore will reflect the authenticity of the underlying facts and circumstances leading to the transaction. Any challenge by the Inland Revenue Board (IRB) on the facts can be easily defended. The volume of documentation will vary from the simple one-off buy-sell transaction to the complex business reorganisation.
Why is it important?
The need to produce the documentation for taxation purposes only comes up when IRB initiates an audit or investigation. It is not uncommon for IRB to take the position where a tax deduction may not be allowed, or a capital receipt is subject to income tax, or the timing of the taxation could be an issue.
Preparing documentation should cover the whole spectrum of the transaction. In any new arrangement between third parties or more importantly between related parties, a starting point will be the correspondence that would have taken place before a contract was entered into, and thereafter the need to memorialise the arrangement into a contract document which will reflect the intention of the parties.
The underlying documents supporting the transaction also need to be supportive of the contract and this will include the description in the accounting entries, documents such as purchase orders, invoices, customs documentation, etc. All documents should be aligned to reflect the true nature of the transaction and, secondarily, it is important that in the case the transactions involve other regulations such as Bank Negara Malaysia applications, Malaysian Investment Development Authority incentive applications, or other applications to various bodies such as Malaysia Digital, etc. These applications should not conflict with the underlying nature of the transaction.
In the case of related parties, significant amount of documentation is prepared for transfer pricing purposes and the information contained therein can lead to conflicts if this is prepared in isolation without reflecting on the original nature of the transaction. For example, if the taxpayer is arguing that he is a limited risk distributor and he is attempting to claim advertising expenses that should have been borne by the principal, the deduction can be denied on the basis that there is a conflict of evidence.
The importance of evidence becomes clear in cases where disputes arise between the treatment of real property gains tax and income tax, claims for reinvestment allowances or capital allowances, difference between domestic source and foreign source income, characterisation of the parties in a transfer pricing arrangement, and the difficulty in distinguishing the simple fact between capital and revenue in a transaction that involves the sale of a business or a portion of the business.
This is just the tip of the iceberg and there are many more transactions that will give rise to disputes between IRB and taxpayer, and the cornerstone of defence for the taxpayer is both the application and interpretation of the law, and the supporting comprehensive evidence which will be the pillar to support the facts and circumstances of the transaction.
IRB officials will do their jobs by scrutinising the the authenticity of the documents supporting the taxpayer’s position. The suspicion of IRB is always whether the documents are prepared on a “post-basis” at a much later date closer to the date the audit is initiated. In simple terms, IRB wants to know whether the taxpayer has concocted a story as an afterthought. At the start of any investigation or audit, the taxpayer should be honest and should not provide any leeway for IRB to have such suspicions.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
Source: The Sun Daily
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