Understanding transfer pricing in Malaysia.

Transfer pricing (TP) has become an increasingly important issue in international taxation, particularly for multinational enterprises (MNEs) operating across borders. As global trade and cross-border transactions continue to grow, tax authorities worldwide are focusing more attention on transfer pricing practices to ensure fair taxation and prevent profit shifting.

This article provides an overview of transfer pricing in Malaysia, covering the regulatory framework, documentation requirements and recent developments.

Latest transfer pricing development in Malaysia

TP generally refers to arrangements for intercompany pricing with regards to the transfer of goods, services and intangibles between associated persons. Optimally, the transfer price should not be different from the prevailing market price which would be reflected in a transaction between independent persons.

Recent TP developments in Malaysia include:

• The Inland Revenue Board of Malaysia (IRBM) has published a new guideline namely Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024) on 24 December 2024 which comes into effect from year of assessment (YA) 2023.
• The Income Tax Act 1967 (ITA 1967) and the Income Tax (Transfer Pricing) Rules 2023 (TP Rules) shall read alongside with the MTPG 2024 which provides some new guidance on taxpayer’s requirements to prepare contemporaneous transfer pricing documentation (CTPD) in Malaysia.

The regulatory framework

Section 140A in the Income Tax Act (ITA) 1967 and TP Rules are being explained in the MTPG. It governs the standard and rules based on the arm’s length principle to be applied to transactions between associated persons. The Income Tax (Transfer Pricing) Rules 2023 (TP Rules 2023) was gazetted on 29 May 2023. The TP Rules 2023 have effect for the Y/A 2023 and subsequent Y/As.

Type of controlled transactions

A controlled transaction is a transaction between two or more parties that are associated with each other. This includes:

• Sales or purchases of stock in trade or other tangible assets
• Royalties, license payments or other types of considerations for the use of intangible assets
• Management fees covering charges related to financial, administrative, marketing and training services
• Research and development
• Any other services not previously mentioned
• Rents/lease of assets
• Interests
• Guarantee fees

Lodgement requirements

The MTPG 2024 has updated the thresholds for taxpayers who are required to prepare full CTPD as follows:

• Generate gross business income of more than RM 30 million in total and engages in cross-border controlled transactions totalling RM 10 million or more annually
• Receives or provides controlled financial assistance of more than RM 50 million annually

Taxpayers falling below the above threshold are eligible to prepare a minimum CTPD.

To reduce the compliance burden for taxpayers, the MTPG 2024 has exempted the following persons from the requirement to prepare CTPD:

• Individuals not carrying on a business
• Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions
• Persons who entered into controlled transactions with a total amounting to not more than RM1million
• Persons 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
  • Do not suffer losses for two consecutive years prior to the controlled transactions

Notwithstanding the concession, taxpayers are still required to adhere to the arm’s length principle for all controlled transactions and maintain the necessary documentation to support and verify the determination of the arm’s length price.

It is important to note that taxpayers with controlled transactions could be subject to a TP tax audit and a surcharge could be applied where a TP adjustment is made on non-arm’s length-controlled transactions.

Preparation and submission

All CPTD (be it a full or minimum CTPD) would need to be prepared before the due date for submitting the tax return for the relevant YA in which a controlled transaction is entered into.

Failure to prepare or submit documentation

Effective from YA 2023, a taxpayer who fails to submit a CTPD within 14 days from the date of service of a written notice has committed a criminal offence under

Subsection 113B (1) of the ITA, for which, if convicted, the taxpayer may be fined not less than RM 20,000 and not more than RM 100,000 or imprisonment for not more than six months or both.

If no prosecution action is taken, a penalty of not less than RM 20,000 and not more than RM 100,000 can be imposed for each year of assessment in which the taxpayer fails to produce and submit CTPD.

Conclusion

Transfer pricing remains a critical area of focus for both multinational enterprises operating in Malaysia and the Malaysian tax authorities. The country’s transfer pricing regime, while based on international standards, has its own nuances that require careful consideration.

By proactively managing transfer pricing risks and maintaining open communication with tax authorities, companies can minimise disputes and ensure compliance with Malaysian regulations. As the global tax landscape continues to evolve, staying abreast of developments in Malaysian transfer pricing will be crucial for multinational enterprises operating in the region.

How Acclime can help with transfer pricing

While transfer pricing in Malaysia can be complex, Acclime can support businesses by connecting them with experienced professionals and providing guidance on compliance requirements. Acclime helps companies navigate the broader tax landscape, ensuring adherence to Malaysia’s regulatory framework and assisting in coordinating with the right experts for transfer pricing documentation, audits and dispute management. Contact us to learn more about how we can support your specific needs for documentation, audits and dispute resolution.