this The fiscal year end in December coincides with the tax year, making this the final month for many Malaysian companies. Adjustments are required to accurately reflect the company’s financial position.
Common ones include adjusting accrued revenue and accrued expenses, recognizing deferred revenue, inventory adjustments, transfer pricing adjustments, and depreciation.
Most of these adjustments have implications from both an income tax and indirect tax perspective. All such adjustments must be commercially justified, legally supportable and comply with the necessary provisions of tax law.
The types of adjustments are:
► transfer pricing
Most transfer pricing methods, with the exception of comparable pricing methods, require the transfer price to be adjusted from the budgeted results (costs and charges) to the actual results, or to adjust the margin if the actual margin is not achieved. There is always. Compare at arm’s length with comparable companies in the market. These adjustments are generally reflected in the last month of the fiscal year end or the first month of a new fiscal year.
These transfer pricing adjustments also affect customs duties and sales taxes paid on imported goods, and there is also a service tax impact on imported services. If you have to pay additional taxes due to increases in profits or prices of goods or services, the tax authorities have no problem. But if the adjustment is on the flip side, the question taxpayers need to consider is whether they can get their refund back or whether it will become a sunk cost.
If there is a refund situation, the tax authority will determine whether there is a necessary legal agreement to support such adjustment and whether such adjustment for income tax purposes arises entirely and exclusively in the generation of income. and whether the transaction meets the requirements of ARM. length test.
From a customs perspective, such adjustments may be challenged on the basis that the price declared at the time of import is the true transaction price, and subsequent adjustments may not be accepted.
► Other adjustments
Other common adjustments include accrual adjustments, inventory adjustments, provisions for deferred expenses and revenues, bad debt adjustments, and noncash adjustments such as amortization and depreciation.
The accounting and tax treatment of income and expenses is different. The deductibility of expenses and the taxability of income are very strictly based on tax law. This also applies for customs purposes.
Accounting standards and practices are to be used as a guide only and are not determinants for tax purposes. For example, allowances for loan losses must be subject to strict requirements of law and public judgments, requiring either legal action or follow-up reminders to the debtor, and any actions taken to recover the debt. Although such provisions are sufficient to qualify for tax deductions, different accounting standards may apply to accommodate such provisions. Similarly, the incurrence of an expense for tax purposes must be supported by a legal obligation to incur the expense, the amount of which can be reliably determined.
Why is additional testing necessary?
Tax authorities will pay more attention to year-end adjustments, as taxpayers tend to reduce their taxes by making year-end adjustments without the necessary legal and commercial basis. Avoid abusing the year-end adjustment, such as by introducing commissions, commissions or fictitious sales to shift profits from profitable companies to loss-making companies within the group, or by deferring income to the following year.
Be careful about one-time year-end adjustments that are carried out periodically throughout the year. Documented evidence supporting your tax position should be kept in case it is challenged by tax authorities.
This article was contributed by Thannees Tax Consulting Services Sdn Bhd Managing Director SM Thanneermalai (www.thannees.com).
