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This is a guide to understanding transfer pricing in Malaysia.
Transfer pricing refers to the price of transfers and transactions between related parties or subsidiaries, and there are rules and regulations that apply to transfer pricing in Malaysia.
Let’s find out more.
The arm’s length principle
Malaysia applies the arm’s length principle to determine the transfer price of transactions between related parties.
According to the Transfer Pricing Guidelines, a transfer price is acceptable if all transactions between associated parties are conducted at an arm’s length price.
The arm’s length principle is based on a comparison of prices, margins, division of profits or other indicators of controlled transactions with the prices, margin, division of profits or other indicated of uncontrolled transactions.
Controlled transactions vs uncontrolled transactions
A controlled transaction is a transaction between two or more parties that are associated with each other.
According to the Organisation for Economic Co-operation and Development (OECD), parties are related if:
- A party participates directly or indirectly in the management, control or capital of another party
- The same persons participate directly or indirectly in the management, control or capital of another party
An uncontrolled transaction is a transaction between two or more parties that are not related to each other.
Methods used to determine the arm’s length price
When preparing the transfer pricing documentation, the arm’s length transfer price must first be determined.
There are five methods used to determine the arm’s length price are:
- Comparable uncontrolled price method
- Resale price method
- Cost plus method
- Profit split method
- Transactional net margin method
The comparable uncontrolled price method, resale price method and the cost -lus method are known as the traditional transactional methods. The profit split method and transactional net margin method are transactional profit methods and is only used when traditional transactional methods cannot be applied.
Transfer pricing requirements
To whom does the transfer pricing guidelines apply?
Taxpayers are required to prepare transfer pricing documentation if the company has:
- Gross income exceeding RM 25 million and the total amount of related party transactions exceeding RM 15 million
- Provision of financial assistance exceeding RM 50 million (does not apply to transactions involving financial institutions)
Transfer pricing documentation/local file
Taxpayers must keep relevant records for at least seven years from the end of the year. These records include books of accounts, receipts, invoices and other necessary documents.
For transfer pricing purposes, taxpayers must also keep and prepare contemporaneous documents.
Contemporaneous documents are documents that have been prepared when a taxpayer is developing or implementing any transfer pricing policy or if there are any material changes when reviewing the policies when preparing the income tax return.
Material changes are changes to the economic and operational conditions that affect the controlled transactions. These changes include:
- Changes in operational conditions:
- Business structure and business activities
- Financial structure
- Transfer pricing policy
- Merger and acquisition
- Changes in economic conditions:
- Foreign exchange
- Economic downturn
- Natural disasters
Transfer pricing documentation or local files should consist of the following information and documents:
- The organisational structure, including an organisational chart
- Nature of the business or industry and market conditions
- Controlled transactions
- Pricing policies
- Assumption, strategies and information regarding factors that influence the setting of pricing policies
- Comparability, functional and risk analysis
- Selection of transfer pricing method
- Application of the transfer pricing method
- Financial information
Country-by-country reporting and master file
Taxpayers who are obliged to prepare the country-by-country (CbC) report must also prepare the master file and submit it with the transfer pricing documentation when requested.
The CbC reporting and master file apply to multinational enterprises with a total consolidated group revenue exceeding RM 3 billion in the previous year, has consolidated financial statements and has more than two related companies defined by ownership or control, which are residents of other tax residents.
Information that should be included in the master file are:
- Organisational structure
- Description of the multinational enterprise group’s business(es)
- The multinational enterprise’s intangibles
- The multinational enterprise’s financial and tax positions
Preparation and submission
Transfer pricing documentation must be made within 14 days after being requested by the Inland Revenue Board of Malaysia (IRB).
The CbC report must be prepared and submitted to the IRB within 12 months of the end of the financial year.
The transfer pricing documentation must be prepared in either Bahasa Malaysia or English. If supporting documents are in another language, the translation should be provided along with the transfer pricing documentation.
Penalties for non-compliance
If a company fails to provide contemporaneous transfer pricing documentation upon request, the taxpayer may be subject to a fine between RM 20,000 and RM 100,000 and/or imprisonment of up to six months.
Malaysia uses the arm’s length principle to determine the price of goods and services between related companies. Documents related to transfer pricing must be lodged with the IRB otherwise, the company will be liable to a fine of between RM 20,000 and RM 100,000 and/or imprisonment up to six months. For more information on transfer pricing, feel free to contact Acclime.
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