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Section 140A of Income Tax Act 1967: The DGIR’s Power to Substitute Prices and Disallow Interest

Updated: Sep 8, 2022

Introduction

The Director General of Inland Revenue (DGIR) has the authority granted to them by section 140A of the Income Tax Act 1967 (ITA 1967), which allows them to substitute prices and prohibit interest on transactions or financial assistance between associated persons.


According to section 140A(2) of the Income Tax Act of 1967, a person who conducts a transaction with associated persons to acquire or supply property or services must determine and apply the arm’s length price for such transactions.


Alternatively, if the DGIR has reason to believe that the property or services are acquired or supplied at a price that is lower or higher than the arm's length price, he may substitute the price in respect of the transaction to reflect an arm's length price under section 140A(3) of the Income Tax Act of 1967.


To make the word "control" mean more

Photo: Cheong Khan Hoong

To broaden the meaning of "control" as described in section 139, subsection 5A of section 140A was added on January 1, 2019, and became effective immediately.


The definition of control for the purposes of transfer pricing has been weakened as a result of the enactment of section 140A(5A), which stipulates that only a 20% shareholding is necessary for a person to be considered in control of an entity if that person exercises substantive control over the company in any of the ways that are described in subsection 5A.


For the purposes of transfer pricing, the number of transactions that could be considered to be those that take place between associated persons would increase as a result of this.


Concerning the DGIR's "power to substitute the price on certain transactions," section 140A has been amended as of January 1, 2021, to grant the DGIR the "power to substitute the price, disregard the structure, and impose a surcharge on certain transactions."


If the DGIR disregards a transaction under subsection (3A), it may apply a 5% surcharge

This modification to section 140A is accomplished by the addition of subsection (3A), which states that the DGIR may disregard any structure of a transaction in the following circumstances:

  • the economic substance of that transaction differs from its form; or

  • the form and substance of that transaction are the same but the arrangements made in relation to the transaction, when viewed in totality, differ from those which would have been adopted by independent persons behaving in a commercially rational manner, and the structure impedes the DGIR from determining the appropriate transfer price.


If the DGIR chooses to disregard the structure of the transaction to exercise his powers under subsection (3A), then he is required, under the new subsection (3B), to make adjustments to the structure to reflect what, in his opinion, would be an arm's length structure taking into consideration the economic and commercial reality.


If the DGIR has disregarded a transaction under subsection (3A), the DGIR may, by notice in writing, impose the taxpayer on paying a surcharge of not more than 5% on the amount of any increase in income or reduction in any deduction or loss. This will be provided for in the new subs (3C).


Definitions

Associated Persons refer to:

  • persons, one of whom has control over the other

  • individuals who are relatives of each other, or

  • persons, both of whom are controlled by some other persons [s 140A(5) of the ITA 1967].

A transaction means any trust, grant, covenant, agreement, arrangement, or other disposition or transaction made or entered into orally or in writing and includes a transaction entered into by two or more persons with another person or persons [s 140A(6); 140(8) of the ITA 1967].


A relative is defined to mean a parent, a child (including a stepchild and a child adopted under any law), a brother, a sister, an uncle, an aunt, a nephew, a niece, a cousin, an ancestor or a lineal descendant [sections 140A(6); 140(8) of the ITA 1967].

Photo: Fu Yu Yen

Income Tax Act 1967


Section 140A power to substitute price, disregard structure and impose surcharge


140A(1) [Application of section]

This section shall apply notwithstanding section 140 and subject to any rules prescribed under this Act.


140A(2) [Transaction with associated person]

Subject to subsection (3), where a person in the basis period for a year of assessment enters into a transaction with an associated person for that year for the acquisition or supply of property or services, then, for all purposes of this Act, that person shall determine and apply the arm’s length price for such acquisition or supply.


140A(3) [Price may be substituted for arm’s length price]

Where the Director General has reason to believe that any property or services referred to in subsection (2) is acquired or supplied at a price which is either less than or greater than the price which it might have been expected to fetch if the parties to the transaction had been independent persons dealing at arm’s length, he may in the determination of the gross income, adjusted income or adjusted loss, statutory income, total income or chargeable income of the person, substitute the price in respect of the transaction to reflect an arm’s length price for the transaction.