The application of surcharge was introduced by way of the Finance Act 2020, effective from 1 January 2021 onwards. Surcharge can be imposed by the Inland Revenue Board of Malaysia (IRB) of not more than 5% on transfer pricing related adjustments.
The concept of surcharge vs penalty regime
The concept of surcharge is different as compared to the previous penalty regime applied by the IRB where differing rates of penalty can be imposed on additional tax payable, depending on the type of offences. Previously, a taxpayer who did not prepare transfer pricing documentation would be subject to a penalty of 50% on additional tax payable. In the case where the Company has sufficient losses or allowances to offset any upward transfer pricing related adjustments made by the IRB, there may be little or no additional tax payable, and the corresponding penalty would also be lesser.
In the surcharge regime, it can be imposed on any transfer pricing adjustments, whether it would result in an increase in income or a reduction of any deduction or loss. In other words, a surcharge can be imposed regardless of whether the taxpayer is in a loss position or whether they are a tax-exempt company.
Imagine a scenario where a company is in a loss position and has sufficient losses to cushion the impact of transfer pricing adjustments made by the IRB. In the penalty regime, there will not be additional tax payable as well as penalty. However, effective 1 January 2021, the IRB could apply a surcharge of not more than 5% on the transfer pricing adjustment amount, even though the company has sufficient losses. The IRB had confirmed in its FAQ issued on 18 January 2024 that the general rate to be applied in imposing surcharge is 5% and there will be no scale available for reference. A lower surcharge can be considered for voluntary disclosure cases.
Rights of appeal
Taxpayers who are aggrieved with the surcharge imposed can appeal to the IRB for a reduction provided a reasonable justification is provided.
In the same FAQ, the IRB had clarified that the existing processes for the taxpayer to appeal to the Specal Commissioners of Income Tax would not be applicable to surcharges. Instead, a written appeal application should be submitted to.
