Malaysia Transfer Pricing Case: Watsons Personal Care Stores vs Tax Authorities


Case Information:

Court: High Court of Malaya at Kuala Lumpur
Case No: WA-14-20-06/2020
Applicant: Ketua Pengarah Hasil Dalam Negeri (Director General of Inland Revenue)
Defendant: Watsons Personal Care Stores (M) Holdings Limited
Judgment Date: April 17, 2023

Judgment Summary

The High Court dismissed the appeal by the Chief Director of Inland Revenue against the decision of the Special Commissioners of Income Tax (SCIT) in favour of Watson’s Personal Care Stores (M) Holdings Limited. The SCIT had set aside the notices of additional assessment for the Years of Assessment (YA) 2010, 2011, and 2012 issued under section 140A of the Income Tax Act 1967 (ITA), determining that the Director General of Inland Revenue (DGIR) failed to provide sufficient evidence to dispute the company’s transfer pricing documentation.

Key Points of the Judgment:


In 2003 and 2012, Watsons Personal Care Stores Holding Limited borrowed USD 36,842,335.00 and USD 1,276,000.00 from Watson Labuan to finance share acquisitions in Malaysia. The loan agreements stipulated an annual interest rate of 3% plus the London Interbank Offered Rate (LIBOR), with the principal amount payable on demand by Watson Labuan.

In 2013, the Malaysian tax authorities (DGIR) requested information from Watsons for transfer pricing risk assessment purposes. Following an audit for fiscal years 2010-2012, the DGIR informed the company that the interest would be adjusted under section 140A of the Income Tax Act (ITA) and that interest expenses paid would not be allowed as a deduction.

Core Dispute:

The core dispute centred on whether the intercompany loans and associated interest rates were at arm’s length and whether the tax authorities had sufficient grounds to disallow the interest deductions and make transfer pricing adjustments.

Court Findings:

  1. Transfer Pricing Documentation: The court found that Watsons had prepared comprehensive transfer pricing documentation demonstrating that the loan transactions with Watson Labuan were at arm’s length. The documentation included a comparative study showing that the interest rates adopted were lower than commercial loan Base Lending Rates (BLR) in Malaysia.
  2. Burden of Proof: The court emphasized that while the DGIR has the power to disregard structures that differ from those adopted by independent parties, they must provide evidence to support their allegations. In this case, the DGIR failed to present any evidence refuting the company’s transfer pricing analysis.
  3. Commercial Rationality: The court determined that the loans provided to Watsons were similar to uncommitted facilities typically offered by commercial banks, providing flexibility for both borrowers and lenders regarding repayment terms.
  4. DGIR’s Approach: The court criticized the DGIR’s reliance on Investopedia as an authority to disregard the taxpayer’s position, stating that it is not a recognized legal or financial authority.
  5. Arm’s Length Principle: The court reaffirmed the importance of adhering to the arm’s length principle in transfer pricing cases and emphasized the need for tax authorities to provide substantiated evidence when challenging a taxpayer’s transfer pricing arrangements.


The High Court upheld the decision of the Special Commissioners of Income Tax and set aside the assessment issued by the tax authorities. The court ruled that Watsons’ transfer pricing documentation should be maintained, and all adjustments made by the DGIR regarding transfer pricing against the company should be disregarded.

Transfer Pricing Method Used:

While the specific transfer pricing method was not explicitly mentioned in the judgment, it appears that Watsons used a combination of methods, including:

  1. Comparable Uncontrolled Price (CUP) Method: The company compared the interest rates of its intercompany loans with commercial loan Base Lending Rates (BLR) in Malaysia.
  2. Transactional Net Margin Method (TNMM): The company likely used this method to analyze the overall profitability of the transactions and compare them with similar transactions between unrelated parties.

Major Issues or Areas of Contention:

  1. Arm’s Length Nature of Intercompany Loans: The primary contention was whether the loans and associated interest rates between Watsons and Watson Labuan were at arm’s length.
  2. Adequacy of Transfer Pricing Documentation: The case highlighted the importance of maintaining comprehensive and contemporaneous transfer pricing documentation to support intercompany transactions.
  3. Burden of Proof: The judgment emphasized that tax authorities must provide substantiated evidence when challenging a taxpayer’s transfer pricing arrangements.
  4. Commercial Rationality: The court considered whether the loan structures were commercially rational and comparable to arrangements between unrelated parties.
  5. Use of Foreign Comparables: The case touched on the acceptability of using foreign comparables in transfer pricing analyses, particularly in situations where local data may be limited.

Expected or Controversial Decision:

The decision can be considered somewhat unexpected and potentially controversial from the tax authorities’ perspective. However, it aligns with international transfer pricing principles and emphasizes the importance of evidence-based assessments. The controversial aspects include:

  1. Burden of Proof: The court’s emphasis on the tax authorities’ responsibility to provide evidence challenging the taxpayer’s transfer pricing arrangements may be seen as setting a high bar for future transfer pricing audits.
  2. Acceptance of Taxpayer’s Documentation: The court’s willingness to accept the taxpayer’s transfer pricing documentation in the absence of contrary evidence from the tax authorities may be viewed as controversial by some tax administrations.
  3. Commercial Rationality: The court’s interpretation of commercial rationality in intercompany financing arrangements may be seen as favorable to taxpayers and potentially challenging for tax authorities in future cases.

Significance for Multinationals and Revenue Services:

For Multinationals:

  1. Documentation Importance: The case underscores the critical importance of maintaining comprehensive and contemporaneous transfer pricing documentation to support intercompany transactions.
  2. Proactive Approach: Multinationals should adopt a proactive approach to transfer pricing, ensuring their intercompany arrangements are well-documented and aligned with arm’s length principles.
  3. Local Comparables: The case highlights the potential importance of using local comparables where available while also recognizing that foreign comparables may be acceptable in certain circumstances.
  4. Financing Structures: Multinationals should carefully consider the commercial rationality of their intercompany financing structures and ensure they can demonstrate alignment with arm’s length principles.

For Revenue Services:

  1. Evidence-Based Assessments: Tax authorities need to ensure that their transfer pricing assessments are based on substantiated evidence and thorough analyses.
  2. Burden of Proof: The case emphasizes the importance of tax authorities providing clear evidence to support their positions when challenging taxpayers’ transfer pricing arrangements.
  3. Commercial Understanding: Revenue services should develop a deep understanding of commercial practices and financing arrangements to effectively challenge taxpayers’ positions.
  4. Resource Allocation: The case may prompt tax authorities to allocate more resources to developing transfer pricing expertise and conducting thorough analyses.

Value of Transfer Pricing Expertise:

The Watsons case demonstrates the significant value of transfer pricing expertise in managing and resolving complex transfer pricing disputes. Key aspects include:

  1. Documentation Preparation: Expert knowledge is crucial in preparing comprehensive and defensible transfer pricing documentation that can withstand scrutiny from tax authorities.
  2. Comparative Analyses: Transfer pricing experts can conduct robust comparative analyses using appropriate databases and methodologies to support arm’s length pricing.
  3. Industry Knowledge: Expertise in specific industries and transaction types is valuable in demonstrating the commercial rationality of intercompany arrangements.
  4. Dispute Resolution: Transfer pricing experts play a critical role in managing disputes with tax authorities, including preparing technical arguments and representing taxpayers in negotiations or litigation.
  5. Risk Assessment: Transfer pricing expertise is essential in identifying and mitigating potential transfer pricing risks before they escalate into disputes.
  6. Policy Development: Transfer pricing experts can help multinationals develop and implement robust transfer pricing policies that align with both business objectives and regulatory requirements.

Preventative Measures and Tax Risk Management:

To avoid or better manage cases like Watsons, companies should implement a proper tax risk management process and establish a tax steering committee. Key steps include:

  1. Establish a Tax Steering Committee: As highlighted by, a tax steering committee can provide strategic oversight of tax matters, including transfer pricing. This committee should include representatives from finance, legal, and operational departments to ensure a holistic approach to tax risk management.
  2. Develop a Tax Risk Management Framework: Implement a comprehensive framework that identifies, assesses, and mitigates tax risks, including transfer pricing risks.
  3. Regular Transfer Pricing Reviews: Conduct periodic reviews of transfer pricing policies and practices to ensure ongoing compliance with arm’s length principles and local regulations.
  4. Contemporaneous Documentation: Maintain up-to-date transfer pricing documentation that reflects current business realities and market conditions.
  5. Advance Pricing Agreements (APAs): Consider pursuing APAs with tax authorities to provide certainty on transfer pricing arrangements for significant transactions.
  6. Technology Integration: Utilize transfer pricing software and data analytics tools to enhance the accuracy and efficiency of transfer pricing analyses and documentation.
  7. Training and Awareness: Provide regular training to relevant staff on transfer pricing principles and the importance of maintaining proper documentation.
  8. Cross-Functional Collaboration: Foster collaboration between tax, finance, and operational teams to ensure transfer pricing policies align with business realities.
  9. External Advisor Network: Maintain relationships with external transfer pricing experts and legal advisors to provide additional expertise when needed.
  10. Monitoring Regulatory Changes: Stay informed about changes in transfer pricing regulations and practices in relevant jurisdictions to ensure ongoing compliance.

By implementing these preventative measures and establishing a robust tax risk management process, companies can significantly reduce the likelihood of transfer pricing disputes and be better prepared to defend their positions if challenges arise.

In Summary

The Watsons Personal Care Stores case in Malaysia serves as a landmark decision in transfer pricing jurisprudence, emphasizing the importance of comprehensive documentation, commercial rationality, and the burden of proof in transfer pricing disputes. It highlights the significant value of transfer pricing expertise and underscores the need for both multinationals and tax authorities to adopt rigorous, evidence-based approaches to transfer pricing. By implementing proper tax risk management processes and establishing effective tax steering committees, companies can better navigate the complex landscape of international taxation and minimize the risk of costly and time-consuming transfer pricing disputes.

Related Articles