Executive Offshore Shipping SDN BHD is in the business of chartering offshore support vessels. It is related to another company, one Eagle High (L) Limited which is a ship-owning company registered in the special tax zone of Labuan where transfer pricing provisions were first introduced in 2020. Eagle High (L) Limited provided (i) charter hire of vessels and (ii) crew management services to Executive Offshore Shipping for the Years of Assessment – 2014 to 2016. In consideration for these services Executive Offshore Shipping paid a cost-plus mark-up rate of 35% as the charter hire and crew management fee. Following an audit the tax authorities asserted that Executive Offshore Shipping SDN BHD had underreported the its taxable income for FY 2014 to 2016. An assessment was issued where additional income of RM19,808,218.39 had been determined by reference to the arm’s length principle. The tax authorities rejected the benchmark study and transfer pricing methods applied by Executive Offshore Shipping. Executive Offshore Shipping filed an application for leave for judicial review with the High Court. The tax authorities submitted that the application should not be granted. “As a general rule, when there is an alternative remedy by way of an appeal, in the instant case, under s 99 of the ITA, it should have been exhausted first before an applicant could commence an application for judicial review.” Judgement of the High Court The High Court Judge granted the application for leave for juridical review. Excerpts “Applying the law to the facts of the case, in para 15(g) of AIS-2, Ms Ling affirmed as follows: The Respondent also failed to take into account that EHLL is governed by the Labuan Business Activity Tax Act 1990 (“LBATA”) in which case the arm’s length principle does not apply prior to the coming into effect of Section 17D of the LBATA on 1.1.2020. This assertion of failure to abide by the statutory provision remains unrebutted, at least at this leave stage. In any event, Ms Ling further alleged that the DGIR had failed to provide supporting transfer pricing documentation to support the DGIR’s contention the applicant’s transfer pricing documentation is inappropriate. This too, is not contradicted by the DGIR, again, at least at this leave stage.” “For the aforesaid reasons, my findings are as follows: (a) Although there is an alternative remedy in the form of an appeal to the SCIT under s 99 of the ITA, the applicant has established exceptional circumstances that justify the grant of leave. (b) One of the exceptional circumstances is that there is an allegation that the putative respondent had ignored the statutory provision under the LBATA. (c) At least at this leave stage, the allegation stands unrebutted.” “In the instant case, the issue that is of significance is whether the DGIR is under a legal obligation to provide supporting transfer pricing documentation to support his contention that the applicant’s transfer pricing documentation is inappropriate. That calls for further arguments at the substantive stage.” “It is, therefore, plain to me that the applicant has crossed the low threshold for leave in a judicial review application.” Click here for English translation ...

The structure that for transfer pricing purposes, replaces that actually adopted by the taxpayers should comport as closely as possible with the facts of the actual transaction undertaken whilst achieving a commercially rational expected result that would have enabled the parties to come to a price acceptable to both of them at the time the arrangement was entered into ...

The key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances, not whether the same transaction can be observed between independent parties. The non-recognition of a transaction that possesses the commercial rationality of an arm’s length arrangement is not an appropriate application of the arm’s length principle. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. It should again be noted that the mere fact that the transaction may not be seen between independent parties does not mean that it does not have characteristics of an arm’s length arrangement ...

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude transactions of a specific nature that are not encountered, or are only very rarely encountered, between independent parties, and may do so for sound business reasons. The transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction. It is also a relevant pointer to consider whether the MNE group as a whole is left worse off on a pre-tax basis since this may be an indicator that the transaction viewed in its entirety lacks the commercial rationality of arrangements between unrelated parties ...

Every effort should be made to determine pricing for the actual transaction as accurately delineated under the arm’s length principle. The various tools and methods available to tax administrations and taxpayers to do so are set out in the following chapters of these Guidelines. A tax administration should not disregard the actual transaction or substitute other transactions for it unless the exceptional circumstances described in the following paragraphs 1.142-1.145 apply ...

PT Nanindah Mutiara Shipyard Ltd reported losses for FY 2013. The tax authorities issued an assessment where the income of the company was increased by a substantial amount referring to applicable transfer pricing regulations. Nanindah Mutiara Shipyard Ltd filed a complaint with the Tax Court, but the Tax Court upheld the assessment. An application for judicial review was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favor of Nanindah Mutiara Shipyard Ltd. The Tax Court had erred in assessing facts, data, evidence and application of the law. The decision of the Tax Court was canceled and the petition for judicial review was granted. Losses reported by Nanindah Mutiara Shipyard Ltd were not due to non-arm’s length pricing, but rather exceptional circumstances that occurred at the local company in the years following 2010. Excerpts: ” … a. that the reasons for the Petitioner’s petition for judicial review in the a quo case are positive corrections to Business Circulation amounting to Rp45,920,139,538.00; which the Panel of Judges of the Tax Court maintains can be justified, because after examining and re-examining the arguments put forward in the Memorandum of Review by the Petitioner for Judicial Review in connection with the Counter Memorandum of Review, it can invalidate the facts and weaken the evidence revealed in the trial. as well as legal considerations of the Tax Court Panel of Judges, because in the a quo case in the form of substances that have been examined, decided and tried by the Tax Court Judges there are errors in assessing facts, data, evidence and application of the law as well as real mistakes in it, so that the Supreme Court of Justice canceled the a quo Tax Court decision and tried again with the legal considerations below, because in casu it is related to the evidentiary value that prioritizes the principle of material truth and based on the principle of substance over the form which has fulfilled the Ne Bis Vexari Rule principle as which has required that all administrative actions must be based on applicable laws and regulations. Whereas therefore the object of the dispute is in the form of a positive correction of Business Circulation amounting to Rp.45,920,139,538.00;which have been considered based on facts, evidence and application of the law and decided with the conclusion that the Panel of Judges maintains that there are factual errors and legal errors, so that the Supreme Court of Justice overturned the a quo decision and retrial with the consideration that due to in casu, the relationship with a special relationship, there are indications that the indicator of the current level of profit of the Appellant for the Review Applicant for the 2013 Fiscal Year which is below the normal profit range of similar companies, is not due to the existence of transfer pricing or pricing for transactions between parties that have a special relationship, but due to the impact of riots, causing extraordinary costs and companies not operating at full capacity. Thus, the Transfer Pricing Documentation of the present Appellant for the Review of the Appellant for the 2013 Fiscal Year, thus causing the loss suffered by the current Appellant of the Appeal for the Review of the 2013 Fiscal Year is the effect of extraordinary events in 2010 namely riots. at the shipyard in one of the companies belonging to the business group which is located adjacent to the shipyard of the present Appellant of the Applicant for Judicial Review. Besides that, The Panel of Supreme Court Justices is of the opinion that the decrease in income received by the Appellant now, the Petitioner for Review for the Fiscal Year after the riots, is due to the decline in new shipbuilding projects and the cancellation of orders that have caused ongoing shipbuilding projects to be neglected. decisive factors include the decline in new shipbuilding projects. Whereas on the basis of a state of chaos, it is considered as an extraordinary situation (force majeure) or a state of coercion (overmacht) which will directly result in the assessment of legal obligations on the fulfillment of tax obligations not being in the expected level of position, b. whereas therefore, the reasons for the Petitioner’s application for judicial review can be justified and sufficiently based on law because the arguments submitted are decisive opinions and therefore deserve to be granted and because there is a decision of the Tax Court which clearly contradicts the prevailing laws and regulations. applies as stipulated in Article 91 letter e of Law Number 14 of 2002 concerning the Tax Court and related laws, so that the accrued tax is recalculated into overpayment of Rp3,818,166,381.00; with the following details: …based on the above considerations, according to the Supreme Court, there are sufficient reasons to grant the petition for review;” Click here for translation ...

The structure that for transfer pricing purposes, replaces that actually adopted by the taxpayers should comport as closely as possible with the facts of the actual transaction undertaken whilst achieving a commercially rational expected result that would have enabled the parties to come to a price acceptable to both of them at the time the arrangement was entered into ...

The key question in the analysis is whether the actual transaction possesses the commercial rationality of arrangements that would be agreed between unrelated parties under comparable economic circumstances, not whether the same transaction can be observed between independent parties. The non-recognition of a transaction that possesses the commercial rationality of an arm’s length arrangement is not an appropriate application of the arm’s length principle. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. It should again be noted that the mere fact that the transaction may not be seen between independent parties does not mean that it does not have characteristics of an arm’s length arrangement ...

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude transactions of a specific nature that are not encountered, or are only very rarely encountered, between independent parties, and may do so for sound business reasons. The transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction. It is also a relevant pointer to consider whether the MNE group as a whole is left worse off on a pre-tax basis since this may be an indicator that the transaction viewed in its entirety lacks the commercial rationality of arrangements between unrelated parties ...

Every effort should be made to determine pricing for the actual transaction as accurately delineated under the arm’s length principle. The various tools and methods available to tax administrations and taxpayers to do so are set out in the following chapters of these Guidelines. A tax administration should not disregard the actual transaction or substitute other transactions for it unless the exceptional circumstances described in the following paragraphs 1.122-1.125 apply ...