Understanding Transfer Pricing Guidelines in Malaysia
Understanding Transfer Pricing Guidelines in Malaysia
What is Transfer Pricing?
Transfer pricing generally refers to the pricing of transactions between associated persons or related parties within a group of companies. These transactions, commonly referred to as controlled transactions, include the acquisition or supply of property or services between associated persons.
In Malaysia, transfer pricing is governed primarily under Section 140A of the Income Tax Act 1967, Income Tax (Transfer Pricing) Rules 2023 (TP Rules 2023) and the Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024) issued by the Inland Revenue Board of Malaysia (IRBM).
The fundamental principle applied is the arm’s length principle, which requires that the pricing of controlled transactions be consistent with the price that would have been charged between independent parties under comparable circumstances. This principle applies to both domestic and cross-border transactions where tax implications arise.
The objective of Malaysia’s transfer pricing framework is to ensure that profits are appropriately attributed to Malaysian operations in accordance with economic substance and value creation, thereby preventing profit shifting and base erosion.
Importance of Transfer Pricing
Transfer pricing is a key component of Malaysia’s international tax regime, designed to ensure that income is correctly reported and taxed in the appropriate jurisdiction. It plays an important role in mitigating risks of profit shifting and base erosion, particularly in cross-border controlled transactions.By enforcing the arm’s length principle, the IRBM ensures that controlled transactions are not used to manipulate taxable profits through non-market pricing arrangements. This also helps to reduce the risk of double taxation, which may arise when different tax authorities make conflicting adjustments to intercompany pricing.
From a compliance perspective, transfer pricing requirements in Malaysia support greater transparency through contemporaneous transfer pricing documentation (TPD) requirements, which substantiate the arm’s length nature of controlled transactions and support the taxpayer’s positions during tax audits or dispute resolution processes.
Overall, transfer pricing promotes consistency, audit defensibility, and alignment with Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines, while ensuring compliance with Malaysian tax legislation.
Understanding How Transfer Pricing Works in Malaysia
The transfer pricing framework in Malaysia, issued by the IRBM, is broadly aligned with the OECD Transfer Pricing Guidelines and is based on the arm’s length principle. It requires that prices in accurately delineated controlled transactions between associated persons be determined on an arm’s length basis, reflecting conditions that would have prevailed between independent enterprises under comparable circumstances.
Understanding Transfer Pricing Documentation (TPD)
TPD refers to a set of contemporaneous documents prepared and maintained by taxpayers to demonstrate that controlled transactions with associated persons are conducted in accordance with the arm’s length principle. Unless exempted, such documentation must be made available to the IRBM upon request to support the taxpayer’s transfer pricing positions.
TPD should be prepared on a contemporaneous basis, meaning it must be completed before the due date for filing the income tax return for the relevant year of assessment. The preparation of contemporaneous documentation strengthens the taxpayer's defence during a transfer pricing audit and may help mitigate potential penalties.
Typically, TPD includes the taxpayer's organisational structure, details of controlled transactions, relevant financial information, and the transfer pricing analysis supporting the arm’s length pricing.
Types of TPD
Under the Malaysian transfer pricing framework, TPD generally consists of the following:1. Master File
The Master File is applicable to qualifying multinational enterprise (MNE) groups. It provides a high-level overview of the group’s global business operations, organisational structure, overall transfer pricing policies, and consolidated financial information.
2. Country-by-Country Report (CbCR)
The CbCR is also applicable to qualifying MNE groups with consolidated group revenue exceeding RM3 billion. It presents a breakdown of key financial information such as revenue, profit, taxes paid and economic activity, on a jurisdiction-by-jurisdiction basis across the jurisdictions in which the MNE group operates.
3. Local File
The Local File forms the core Malaysian requirement under Malaysian TP rules and guidelines. It contains detailed information on the Malaysian entity, its controlled transactions, financial results, and a comprehensive functional and economic analysis, including the selection and application of the most appropriate transfer pricing method.
The Regulatory Requirements for TPD in Malaysia
The TP Rules 2023, together with the MTPG 2024 issued by the IRBM on 24 December 2024, clarify the requirements for TP documentation effective from Year of Assessment (YA) 2023.
Taxpayers are generally required to prepare Full TPD in accordance with the TP Rules 2023 if they meet either of the following thresholds:
- Annual turnover exceeding RM30 million and cross-border controlled transactions totalling RM10 million or more annually; or
- Financial assistance provided to or received from associated persons exceeding RM50 million annually.
Note that the MTPG 2024 are largely based on the OECD TP Guidelines 2022. Where the MTPG 2024 are silent, reference is made to the OECD TP Guidelines. This means the OECD TP Guidelines remain the point of reference for TP matters in Malaysia and cannot be ignored in TP audits.
Penalties for Non-Compliance
Taxpayers who fail to furnish contemporaneous TPD within 14 days of a request by the IRBM will face penalties ranging from RM20,000 to RM100,000 for each year of assessment in which the failure occurs, or imprisonment for a term not exceeding 6 months, or both. Further, a surcharge of up to 5% of the Transfer Pricing adjustment will apply irrespective of whether the adjustment results in additional tax payable.
Failure to keep and maintain sufficient records, including the contemporaneous TPD, for a period of 7 years will be liable to a fine of between RM300 to RM10,000, or imprisonment for a term not more than 1 year, or both.
Current Audit Environment
In recent years, the IRBM has intensified its focus on transfer pricing audits, particularly involving cross-border controlled transactions, financing arrangements, intragroup services, intangible property and business restructuring. Businesses are therefore encouraged to regularly review their transfer pricing policies and documentation to ensure continued compliance.Conclusion
As Malaysia continues to strengthen its transfer pricing framework in line with international standards, businesses should proactively review their controlled transactions (existing and new) and assess whether their transfer pricing policies and documentation remain compliant with the latest regulatory requirements. Maintaining robust contemporaneous TPD not only supports compliance with Malaysian tax laws but also helps reduce audit risks, transfer pricing adjustments and surcharges.Whether your company is preparing TPD for the first time, reviewing existing documentation or responding to an IRBM audit, obtaining professional advice can help ensure that your transfer pricing positions are well supported and aligned with the arm's length principle. The supporting jurisprudence from Watsons (Ketua Pengarah Hasil Dalam Negeri v Watsons Personal Care Stores (M) Holdings Limited) further vindicated the fact that obtaining independent professional advice could demonstrate that a taxpayer does not deliberately or recklessly submit an incorrect return.
At BDO Malaysia, our dedicated transfer pricing specialists assist businesses with a lifecycle approach beginning from transfer pricing planning and implementation, documentation, benchmarking studies, all the way to audit support and dispute resolution. With extensive experience across a wide range of industries, we provide practical and tailored solutions to help businesses navigate Malaysia's evolving transfer pricing landscape with confidence.
If you require further assistance and information about transfer pricing documentation requirements, consult us today for our transfer pricing services in Malaysia!