Ketua Pengarah Hasil Dalam Negeri v Sandakan Edible Oils Sdn Bhd [1]
On 17 May 2022, the Kuala Lumpur High Court (KLHC) dismissed the Director General of Inland Revenue’s (DGIR) appeal in Sandakan Edible Oils. This was a landmark decision which vindicated the tax industry’s view on various long-standing points of contention with the DGIR.
On 27 May 2022, the Special Commissioners of Income Tax’s (SCIT) decision [2] which the KLHC affirmed, was recognised by Euromoney’s Benchmark Litigation Asia-Pacific Awards 2022 as Malaysia’s Impact Case of the Year. The full impact of that decision would become evident a year later.
On 5 April 2023, the KLHC issued its grounds of judgment (available here) confirming, amongst others, that:
Erosion of TP Principles by the Income Tax (Transfer Pricing) Rules 2023 (2023 TP Rules)?
On 29 May 2023, the 2023 TP Rules were gazetted [4] (available here). The 2023 TP Rules appears at least in part to be a response to recent judicial trend in transfer pricing, including the SCIT’s and KLHC’s decisions in Sandakan Edible Oils. [5] Amongst others, they purport to:
Divergences in the 2023 TP Rules from the OECD Guidelines?
These changes are startling, to say the least, particularly insofar as they appear to lead Malaysia ever further away from internationally accepted TP understandings and practices. In particular:
The 37.5th to 62.5th percentile now propounded in the 2023 TP Rules represents a narrowing of what is internationally accepted as the arm’s length range in TP.
The 2023 TP Rules however purport to empower the DGIR to make adjustments to the median even when a taxpayer’s price is already within the arm’s length range. [12]
Even if there are comparability defects, the OECD Guidelines do not mandate the use of the median but recognises that appropriate measures of central tendency to be used include the median, the mean, weighted averages, or other measures, depending on the specific characteristics of the data set. [15]
In this regard, it remains to be seen whether the act of rigidly prescribing the median as the arm’s length price is wisdom or folly. One cannot but help recall the KLHC’s observation of the median as a poor determinant and “arbitrary measure” of arm’s length pricing.
Potential Areas of Contentions Arising from the 2023 TP Rules
Contentions are also expected to arise between taxpayers with the DGIR on, amongst others, the following matters:
For instance, it may now be open for a taxpayer to argue that prior to the 2023 TP Rules, there was no express provision whether in the Income Tax Act 1967 (ITA) or the 2012 TP rules which empowered the DGIR to make TP adjustments to the median.
In short, are the additions to the 2023 TP Rules an express recognition of ambiguities in the earlier legal position? If so, it is a trite principle in tax law that any ambiguities ought to be construed in favour of the taxpayer. [16]
What is the extent of the Minister’s powers (if any) under this provision? To what extent, if at all, can they diverge from international TP practice and principles, including as encapsulated in the OECD Guidelines?
With a (figurative) stroke of the pen, the Honourable Minister has reduced the arm’s length range from the IQR (25th to 75th percentile) to the range between the 37.5th to 62.5th percentile. If this is permissible, what is to prevent a future version of the TP Rules from providing a further reduction (or even obliteration to a single point) of the arm’s length range?
Concluding Thoughts
The 2023 TP Rules have only been gazetted for less than a week and its full impact remains to be seen. In next week’s LHAG Insights, our Tax, Customs & Trade Practice will conduct an in-depth analysis and comparison of the 2023 TP Rules vis-à-vis its predecessor (the 2012 TP Rules [17]) and its wider impact on TP matters.
Chris Toh Pei Roo, Senior Associate (tpr@lh-ag.com)
The taxpayer in Sandakan Edible Oils was successfully represented at both the SCIT and the KLHC by Dato’ Nitin Nadkarni, Jason Tan Jia Xin and Chris Toh Pei Roo from Lee Hishammuddin Allen & Gledhill’s Tax, Customs & Trade Practice.
If you have any queries pertaining to the KLHC’s decision in Sandakan Edible Oils, the 2023 TP Rules, or transfer pricing matters generally, please contact the author or his team partners, Dato’ Nitin Nadkarni, Jason Tan Jia Xin and Ivy Ling Yieng Ping, at tax@lh-ag.com.
REFERENCES:
[1] Ketua Pengarah Hasil Dalam Negeri (KPHDN) v Sandakan Edible Oils Sdn Bhd [2023] 1 LNS 616
[2] SEO Sdn Bhd v KPHDN (2021) MSTC 10-129
[3] OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
[4] P.U(A) 165
[5] See also, amongst others, KPHDN v Procter & Gamble (Malaysia) Sdn Bhd (2022) MSTC 30-523 (HC); CFE Ltd v KPHDN (2022) MSTC 10-152 (SCIT)
[6] Rule 13(5), 2023 TP Rules
[7] Rule 13(2)(a) & Rule 13(3), 2023 TP Rules
[8] Rule 13(2)(b) TP Rules
[9] IRAS e-Tax Guide, Transfer Pricing Guidelines (Singapore), paragraph 5.112 (https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_transfer-pricing-guidelines_6th.pdf?sfvrsn=26bfb1a6_9)
[10] International Manual published by HMRC titled “Transfer pricing operational guidance: Evidence gathering: Searching for comparables: range of results” [INTM485120] (United Kingdom) (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm485120)
[11] Regulations under Section 482 of the Internal Revenue Code (Title 26) (United States); Practice Unit (akin to Public Ruling) published by the Internal Revenue Service titled “Large Business & International (“LB&I”) International Practice Service Transaction Unit” [ISI/9422.09_06(2013)] (United States)
[12] Rule 13(2)(a) & Rule 13(3), 2023 TP Rules
[13] Paragraph 3.61, OECD Guidelines
[14] Paragraph 3.62, OECD Guidelines
[15] Paragraph 3.62, OECD Guidelines
[16] Exxon Chemical (Malaysia) Sdn Bhd v KPHDN [2005] 4 CLJ 810
[17] Income Tax (Transfer Pricing) Rules 2012 (PU(A) 132/2012)