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Guidelines for Transfer Pricing Documentation in Malaysia
Transfer pricing generally refers to intercompany pricing arrangements for the transfer of goods, services and intangibles between associated persons. Ideally, the transfer price should not differ from the prevailing market price which would be reflected in a transaction between independent persons. However, business transactions between associated persons may not always reflect the dynamics of market forces.
Transfer pricing affects the amount of corporate tax businesses pay, as such it has become an area of focus internationally, and is today a key focus of Malaysian tax authority. Therefore, it is important to be able to show that intra-group transaction prices are at arm’s length and not used to artificially inflate spending.
Transfer Pricing Compliance in Malaysia
The IRB is increasingly focused on related party transactions involving both multinational and domestic groups. Companies must ensure that such transactions are conducted at arm’s length. During a tax audit, if the IRB concludes that this principle has not been applied, it may impose tax adjustments, resulting in additional liabilities and penalties.
To monitor compliance, the IRB has introduced a checkbox in the corporate tax return for taxpayers to declare whether contemporaneous transfer pricing documentation (CTPD) has been prepared. If a company does not prepare such documentation, it must declare this in the tax return, increasing the likelihood of being selected for a transfer pricing audit.
Additionally, failure to prepare or submit the documentation by the prescribed deadline may lead to substantial penalties, including fines and possible prosecution.
Under the Malaysia Transfer Pricing Guidelines 2024, TP documentation must be dated and completed before the due date for submitting the tax return for the relevant year of assessment.
Effective from 1 January 2021, failure to furnish contemporaneous TP documentation within 14 days upon request, where such documentation must be completed before the due date of furnishing the annual tax return, would be subject to penalty of not less than RM20,000 and not more than RM100,000 or imprisonment of up to 6 months, or both.
Effective from 1 January 2021, a surcharge of up to 5% could also be imposed on TP adjustments where the IRB is in opinion that arm’s length principle is not fulfilled even it does not result in additional tax payable.
Contemporaneous transfer pricing documentation
Contemporaneous transfer pricing documentation means transfer pricing documentation which is brought into existence:-
a) when a person is developing or implementing any controlled transaction; and
b) where in a basis period for a year of assessment, the controlled transaction is reviewed and there are material changes, the documentation shall be updated prior to the due date for furnishing a return for that basis period for that year of assessment.
Threshold
To ease the compliance burden, the following categories of taxpayers are not required to prepare a contemporaneous TP documentation:
a. Individuals not carrying on a business;
b. Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions;
c. Person who entered into controlled transactions with a total amounting to not more than RM1 million; or
d. Person who entered solely into domestic controlled transactions with another person where both parties:
- Do not enjoy tax incentives;
- Are taxed at the same headline tax rate; and
- Do not suffer losses for two consecutive years prior to the controlled transactions.
However, under Paragraph 1.6 of the Malaysian TP Guidelines, all taxpayers, even those exempted, must still comply with the arm’s length principle and maintain relevant supporting documents to justify the pricing of their controlled transactions. In the absence of a clear pricing policy, even exempted taxpayers may be required to prepare transfer pricing documentation to demonstrate compliance.
A person is required to prepare full CTPD if they:
- generates gross business income of more than RM30 million in total and engages in cross border controlled transactions totalling RM10 million or more annually; or
- receives or provides controlled financial assistance of more than RM50 million annually.
Taxpayers who do not fall within the exemption criteria or the threshold for full documentation may opt to prepare a minimum CTPD.
Minimum CTPD involves fewer requirements but must still be completed and dated before the tax return submission due date. It must also demonstrate compliance with the arm’s length principle using any acceptable method outlined by the Director General. Further guidance on minimum CTPD can be found in Chapter 11 of the Guidelines.
Definition of Controlled Transaction
Controlled transaction refers to a transaction between:
a) persons one of whom has control over the other;
b) individuals who are relatives of each other; or
c) persons both of whom are controlled by some other person.
Examples of controlled transactions may involve sales or purchases of raw materials, stock in trade or other tangible assets, royalties, license fees, management fees, research and development, rents, interests or guarantee fees.
Taxpayers who are involved in controlled transactions are generally required to maintain a contemporaneous transfer pricing documentation. This includes taxpayers involved in domestic controlled transactions where at least one party enjoys tax incentives or suffers from continual losses, or is taxed at a different rate, such that the effect of that transaction would result in adjustments that alter the total tax payable.
“Control” refers to persons one of whom owns shares of the other person, or a third person who owns shares of both persons, where the percentage of the share capital held in either situation is 20% or more and―
a) the business operations of that person depends on the proprietary rights, such as patents, non-patented technological know-how, trademarks, or copyrights, provided by the other person or a third person;
b) the business activities, such as purchases, sales, receipt of services, provision of services, of that person are specified by the other person, and the prices and other conditions relating to the supply are influenced by such other person or a third person;or
c) where one or more of the directors or members of the board of directors of a person are appointed by the other person or a third person.
Country-by-country Reporting (CbCR)
With the introduction of the country-by-country reporting system, the Ultimate Holding entity of the multinational company group headquartered here (having total group revenue of more than RM3 billion) is responsible to prepare and file the CbCR to IRB within one year from the end of their financial year.
Malaysian taxpayer who is part of the multinational company group that is subject to prepare CbCR in another country, will need to notify IRB of their reporting entity and its residency, before the end of their financial year.
To avoid the risks that come with failing to comply with the Transfer Pricing Guidelines in Malaysia, it is imperative to enlist the services of an experienced professional agency who will be able to guide you through all the regulatory requirements efficiently.
For enquiries or further details, please email us at [email protected]
