Transfer pricing has always been one of the key tax focus areas in Malaysia, notably from the following key developments over the years:
- 2021 – Introduction of 5% surcharge on transfer pricing related adjustments.
- 2021 – Introduction of penalty ranging from RM20,000 to RM100,000 for failure to furnish transfer pricing documentation to the Inland Revenue Board (“IRB”).
- 2023 – Issuance of Income Tax (Transfer Pricing) Rules 2023 (“TP Rules 2023”)
- 2024 – Issuance of the Malaysia Transfer Pricing Guidelines (“Malaysia TP Guidelines 2024”) and Transfer Pricing Tax Audit Framework (“TP Audit Framework 2024”)
The key updates from the Malaysia TP Guidelines 2024 and TP Audit Framework 2024 are summarised below.
Who should prepare contemporaneous transfer pricing documentation?
A transfer pricing documentation (“TPD”) is considered contemporaneous when it is completed prior to the due date of furnishing the tax return and shall contain information as required under the TP Rules 2023. Each TPD is required to be dated when completed.
A person shall prepare full contemporaneous TPD if the person fulfils the following:-
(a) 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
(b) receives or provides controlled financial assistance of more than RM50 million annually.
The following table provides an overview of the preparation requirements (provided not subject to exemption) :
| Scenario | Gross business income (RM’million) | Total cross-border controlled transactions (RM’million) | Total domestic controlled transactions (RM’million) | Controlled financial assistance received / provided (RM’million) | Preparation of full scope TPD | Can opt to prepare full scope or limited scope |
| A | 40 | 15 | Nil | Nil | Yes | – |
| B | 40 | 12 | 10 | Nil | Yes | – |
| C | 40 | 9 | 10 | Nil | No | Yes |
| D | 40 | 8 | 15 | 51 | Yes | – |
| E | 5 | 9 | Nil | 51 | Yes | – |
| F | 20 | 20 | Nil | 40 | No | Yes |
| G | 20 | Nil | 15 | 60 | Yes | – |
A permanent establishment having controlled transaction is also required to prepare full contemporaneous TPD regardless of the threshold amount.
Who is exempted from preparing contemporaneous TPD?
The following persons are not required to prepare contemporaneous TPD:-
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; or
- do not suffer losses for two consecutive years prior to the controlled transactions.
It is important to note that persons exempted as above must still comply with the arm’s length principle for all controlled transactions entered into. All relevant documents relating to the controlled transactions including analysis / documentation to support and prove the determination of the arm’s length price should be prepared and kept.
Two-step approach in determining arm’s length range and price
An arm’s length range refers to a range of figures that are acceptable in establishing an arm’s length price of a controlled transaction. It also refers to a range of figures falling between the value of 37.5% (lower quartile) to 62.5% (upper quartile) of the benchmarking data set.
The two-step approach is explained below:
Step 1: Calculating the arm’s length range.
The tested pricing can be considered to be arm’s length price if it falls within the arm’s length range. If it does not fall within the range, then proceed to step 2.
Step 2: Calculating the median
The median can be determined, based on the midpoint of both lower and upper quartile.
It is important to note that transfer pricing adjustment can be made by the IRB to the median, if the tested pricing falls below the lower quartile (37.5%).
Further, if the IRB has reasons to believe that the comparables have a lesser degree of comparability or there are any comparability defects that cannot be identified, quantified or adjusted accordingly, the IRB may make adjustment to the median or any point above the median within the arm’s length range.
The following are example scenarios whereby the IRB may make adjustment to the median and above on the basis that the comparables have a lesser degree of comparability:
- Tested party has additional functions or bears more risks than the selected comparables.
- Comparable companies with turnover of less than 10% of the tested party’s revenue.
- Comparable companies include start-up companies, bankrupted companies etc.
- Substantial deviation among points / between the data in the benchmarking range.
Determination of profit level indicator
The determination of appropriate profit level indicator (“PLI”) is important to assess the arm’s length nature of the controlled transaction. PLI includes ratios such as cost-plus margin, gross / operating margin, return on operating assets etc.
The calculation of PLI shall take into consideration items that are directly or indirectly related to the controlled transaction and are of operational in nature. In other words, non-operating items such as interest income, interest expense, income taxes should be excluded. Furthermore, recurring items such as foreign exchange gains or losses, property, plant and equipment disposal shall not be adjusted, regardless of their amount.
The denominator of the PLI shall align to the functions performed, risks assumed and assets used by the tested party. For example, an asset based denominator is appropriate for capital intensive activities, a sales based denominator is appropriate for distribution activities, a cost based denominator is appropriate for service or manufacturing activities.
Determination of comparable period
The arm’s length price should be determined by comparing the results of controlled transactions with the results of uncontrolled transactions that were undertaken or carried out during the same basis year. The arm’s length principle must be complied contemporaneously on a year-by-year basis.
The comparison of the tested party financial year can be made in the following manner:
| Option | Tested party’s financial year end | Comparable company year end from | Comparable company year end to |
| 1 | December 2024 | 6 months before i.e. July 2024 | 6 months after i.e. June 2025 |
| 2 | December 2024 | 7 months before i.e. June 2024 | 5 months after i.e. May 2025 |
Taxpayers should use the most current reliable data of comparable companies that are readily available during the preparation of TPD and not rely on multiple year averages unless for specific reasons e.g. to examine loss situation.
Losses
Taxpayers may incur losses due to commercial, economic and business factors that include heavy start-up costs, ineffective strategic decisions, research and development failures and other exceptional and extraordinary circumstances.
The fact that an associated person continuously suffers losses while other members with whom it transacts with are making profit, may suggest the need for further scrutiny by the IRB.
Transfer pricing adjustment and surcharge
The IRB may make transfer pricing adjustment to reflect the arm’s length price or arm’s length interest rate by substituting or imputing the price / interest. There will be no downward adjustment for transfer pricing purposes.
For related companies in Malaysia, there is not automatic offsetting adjustment provided and is subject to separate application. For example, if the IRB had proposed a transfer pricing adjustment to Company A for not charging appropriate mark-up in providing services to Company B, there will be no automative adjustment provided to Company B for tax purposes.
A surcharge of not more than 5% can be imposed on the transfer pricing adjustment made by the IRB.
Business restructuring
Business restructuring can be described as the cross-border reallocation of functions, assets and risks, each potentially linked with profit or losses. It is important to ensure that business restructuring aligns with the arm’s length principle.
The common types of business restructuring are listed (not exhaustive) below:
- For manufacturing activities, conversion of fully-fledged manufacturers into contract or toll manufacturers, or vice versa;
- For distribution activities, conversion of fully-fledged distributors into limited-risk distributors, sales agents, or commissionaires, or vice versa; and
- with regards to management of valuable, unique intellectual property rights, the transfer of either trade or marketing intangibles to foreign intellectual property holding companies.
Intra group services
Intra group services must be rendered and must satisfy the following benefit test:
- The service will provide the service recipient with economic benefits or commercial value to the business; and
- An independent person in comparable circumstances is willing to pay for the service or perform that service in-house for itself.
Introduction of simplified approach for low value adding services
The Malaysia TP Guidelines 2024 had introduced a safe harbour rule for low value adding intra-group services (“LVAS”), with a mark-up of 5%. Under the simplified approach, a benchmarking study is not required to substantiate the mark-up.
In order to qualify as LVAS, the services should be:
- supportive in nature;
- not part of the core business of the MNE Group;
- do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles;
- do not involve the assumption or control of substantial or significant risk by the service provider; and
- do not give rise to the creation of significant risk for the service provider.
LVAS includes maintenance of accounting records, employee training, staff recruitment, information system support, legal support, preparation of tax returns, administrative support etc.
Development and enhancement of marketing intangibles via marketing functions
It is common for a local entity here in Malaysia to perform advertising, marketing and promotional (“AMP”) functions that would benefit the legal owner of an intangible asset. Where taxpayers perform AMP activities and simultaneously develop local marketing intangibles (e.g. distribution networks and customer relationships) or enhance the value of trademarks or other intangibles, they should be compensated accordingly.
Research and development
The determination of an arm’s length compensation for research services depends on factors such as the unique skill and experience of the research team, the risks assumed, the assets and intangibles used and the party controlling the research.
It is common for taxpayers to be remunerated on a cost plus mark-up basis. However, compensation should be based on the anticipated value of the intangibles created or the research team’s contribution. For example, if the taxpayer perform core R&D activities, exercise substantial control over the operational risk in the R&D project and make day to day operational decisions, a low-cost plus return will not reflect the true arm’s length price of the transaction.
There are circumstances whereby compensation should be considered, at least in part, on a share of profits basis from future exploitation of successfully developed intangibles.
Intangibles exploit by local manufacturing companies
Generally, during the initial stage of setting up a manufacturing business operation in Malaysia, the local company would receive intangibles in the form of technical know-how, secret formulas, manufacturing process etc. However, some taxpayers continue to pay royalties even though they have gained necessary experience and are now well established.
Taxpayers will need to consider whether they should continue to pay royalty to the parent company and if yes, to provide evidence that the original intangibles continue to generate value over time. Taxpayers should also consider their entitlement to a return on the intangibles of the improved manufacturing process, especially when the locally created or enhanced intangibles are used by other related companies.
The IRB may disallow royalty payments if royalty payments are not for newly developed or enhanced intangibles.
Benchmarking update during transfer pricing audit
Due to practical considerations, there will be limited financial information for the purposes of benchmarking analysis due to the time lag of submission of audited financial statements by companies in Malaysia to the Companies Commission of Malaysia.
Taxpayers are allowed to update the benchmarking analysis by using the latest comparable financial information available during a transfer pricing audit. This practice will not make the original transfer pricing documentation non-contemporaneous.
However, if the updated benchmarking results in a transfer pricing adjustment, a surcharge may be imposed on that adjustment.
New category of “key controlled transactions” for minimum TPD
When preparing a minimum contemporaneous TPD, controlled transactions can be segregated into two broad categories i.e. key controlled transactions and other transactions.
The following transactions are referred to as key controlled transactions:
- Controlled transactions that are related to the taxpayer’s principal activity, such as the acquisition or supply of raw materials for manufacturing activity.
- Other controlled transactions that constitute 20% or more of the operating revenue in each year of assessment.
When preparing a minimum contemporaneous TPD, a comprehensive explanation of the key controlled transactions, including details of associated persons, nature and terms, pricing basis etc are required to be documented. The remaining controlled transactions are still required to be listed in the TPD for completeness purposes.
Transfer pricing tax audit framework
A comprehensive transfer pricing audit can cover a period of up to 6 years of assessment. This may be extended to 7 years of assessment when the IRB raises transfer pricing adjustments.
The transfer pricing tax audit shall be completed within 450 calendar days from the audit commencement date.
From the year of assessment 2023 onwards, a taxpayer who fails to submit a TPD within 14 days from the date of service of a written notice will be subjected to the following penalty:
| No. | Period of delay* | Penalty amount |
| 1 | Up to 7 days | RM20,000 |
| 2 | 8 to 14 days | RM40,000 |
| 3 | 15 to 21 days | RM60,000 |
| 4 | 22 to 28 days | RM80,000 |
| 5 | More than 28 days | RM100,000 |
Note*: The period of delay is calculated from the expiration of a 14-day period from the date of service of the written notice until a complete TPD is submitted to the IRB.
With the new Malaysia TP Guidelines 2024 as well as the TP Audit Framework 2024, all taxpayers should immediately reevaluate their current compliance status to ensure that all the transfer pricing requirements are complied with. Transfer pricing planning and strategies can also be considered, including preparation of a simplified TPD or comparability analysis to substantiate that controlled transactions are at arm’s length.
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