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.
In Malaysia, the transfer pricing guidelines are largely based on the governing standard for transfer pricing which is arm’s length principle as set out under the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines. In 2017, the IRB has updated the guideline to take into account the OECD Base Erosion and Profit Shifting (BEPS) Action 8-10 and BEPS Action 13 (Transfer pricing documentation and country-by-country reporting).
Transfer Pricing Compliance
The Malaysian tax authority is increasingly vigilant in scrutinising inter-company transactions of multinational as well as domestic groups of companies. Taxpayers would need to ensure that the related party transactions are at an arm’s length basis. In a tax audit, the tax authority may make tax adjustments if they are of the opinion that the related party transactions are not conducted at arm’s length and this could lead to tax liability and penalty.
To ensure compliance, the tax authority has included a checkbox in the corporate tax return to declare whether transfer pricing documentation has been prepared. Arising from this requirement, taxpayers who had any related party transactions are advised to ensure that transfer pricing documentation is prepared contemporaneously to demonstrate the arm’s length nature of their intercompany transactions.
To ease the compliance burden, the TP Guidelines clarify that the requirement to maintain contemporaneous transfer pricing documentation will only apply to the following:-
- For a person carrying on a business, where the gross income exceeds RM25 million, and total controlled transactions exceeding RM15 million.
- For persons providing financial assistance, it is only applicable if the financial assistance exceeds RM50 million.
Taxpayers who fall outside the above threshold may opt to prepare an abbreviated set of transfer pricing documentation covering only the organizational structure, description of the controlled transactions and relevant pricing policies, rather than full documentation requirements.
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.
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