article banner
Global transfer pricing guide

Transfer pricing - Malaysia

30 Jul 2023

Please click on each section to expand further:

Introduction to Malaysian transfer pricing
Transfer pricing rules
  • The local Malaysia transfer pricing (“TP”) laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia TP Rules 2023. 
  • The TP Rules 2023 are applicable to both domestic and overseas transactions between controlled entities for the supply and acquisition of property or services. For a Malaysian entity which is part of a MNE group, part of the OECD’s Master File documentation requirements  need to be documented in the local TP documentation.
  • There shall be a revision to the existing TP Guidelines 2012 to incorporate the changes to the TP Rules 2023. However, it is not known when the revised TP Guidelines will be released. 
  • A contemporaneous TP documentation is required to be furnished to the Malaysian tax authority (“IRBM”) within 14 days upon its request. A request of TP documentation shall be only applicable in a tax or TP audit.
  • Malaysia has implemented CbCR (Country by Country Reporting) since 2017 for larger groups with consolidated revenue of more than RM3 billion. 
OECD guidance
  • The Malaysia TP Guidelines refers to the OECD TPG in line with the BEPS initiatives, but not completely. OECD guidelines are considered as a source of reference only.
Transfer pricing methods
  • Malaysia applies the best method as per the OECD TPG.
  • TP analysis and the selection of TP methodology should be on a transaction-by-transaction basis. 
  • Other methodologies can be used, but with strong justifications.
Self-assessment
  • Malaysia applies the self-assessment regime. In the corporate tax return form, i.e., Form C, a tax payer is required to disclose the details of his related party transaction and ‘tick box’ to indicate its conformation to the TP and CbCR requirements. 
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Malaysia generally accepts OECD TP documentation.
  • A TP documentation is required to be prepared on a contemporaneous basis; i.e. prior to the due date for furnishing a tax return form. The TP documentation also needs to be dated. It can be in Bahasa Malaysia (official language of Malaysia) or English.
  • In the selection of tested party, the IRBM gives priority to the availability of sufficient and verifiable information of both the tested party and comparable. Therefore, the tested party preferably should be a Malaysian entity. Should the foreign entity be used as the tested party, its financial data must be verifiable. 
  • Comparable data shall be from the same fiscal year. Multiple year data is only to assess whether the outcome of a particular year is influenced by abnormal factors, and not to be used as multiple year average.
  • A TP documentation together with the comparability study should be prepared or updated on an annual basis.  
Master and local file
  • For a MNE Group, the IRBM accepts the Master File prepared by the ultimate holding company or Reporting Entity.
  • The Master File is only applicable to the taxpayer based on the CbCR requirement. It is only required to be submitted to the IRBM upon its request. Generally, the Master File is requested together with the Local File.
Some risk factors for challenge
  • Loss making entities, in particular a service company and manufacturer
  • Consecutive losses for many years 
  • High percentage or amount of overseas transactions with related parties
  • Transactions in relation to intangible properties, e.g. royalties, commission.
Penalties
  • A surcharge of up to 5%  based on the amount of TP adjustment regardless of the tax position of the company (i.e., accumulated business loss, tax incentive, etc.).
  • Corresponding adjustment is no longer mentioned under the TP Rules 2023. Application has to be made to the IRBM if applicable.
Economic analysis and how to demonstrate an arm’s length result
  • The IRBM prefers local comparable with financial data from the same fiscal year. Overseas comparable is acceptable only if the financial data is available for the IRBM’s verification. 
  • The arm’s length range is defined under the TP Rules 2023, i.e., between the value of 37.5 percentile to 62.5 percentile. The TP Rules 2023 also provide the IRBM with the discretionary power to make adjustment to the price of the controlled transaction if the comparable data is of a lesser degree of comparability or the comparability defects cannot be qualified, identified or adjusted, as follows:
    • Within arm’s length range – Adjustment to the median or up to the 62.5 percentile
    • Outside the arm’s length range – Adjustment to the median
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • An APA covers a minimum of 3 years of assessment up to a maximum of 5 years of assessment.
  • Unilateral, bilateral and multilateral APAs are available. Bilateral and Multilateral APAs are only applicable to transactions with related parties from countries which have DTA with Malaysia.  Unilateral APA shall be only applicable when the counterparty does not have DTA with Malaysia.
  • A pre-filing meeting can be organized with the IRBM to discuss the case before any formal APA application is made.
  • Rollback is allowed for up to a maximum of 3 years of assessment.
  • APA application fee is non-refundable and is chargeable as follows:
    • For new application, RM5,000 if submitted within 2 months after approval from the pre-filling meeting; and RM10,000 if submitted after 2 months but within 6 months after approval from the pre-filling meeting;
    • RM5,000 for renewal application.
Exemptions
  • There is no exemption to the TP documentation requirement. 
Related developments
Digital services tax
  • Effective 1 January 2020, digital services provided by foreign service providers (“FSP”) are also subject to a 6% service tax
  • FSP who provides digital services to consumers in Malaysia and the value of digital service for a period of twelve months or less exceeds the threshold of RM500,000 is required to be registered.
    • The list of digital services (not exhaustive) is as follows:  
    • Software, application & video games
    • Music, e-book and film
    • Advertisement and online platform
    • Search engines and social networks
    • Database and hosting
    • Internet Based Telecommunication
    • Online training
IRBM and taxpayer behaviour
  • The IRBM has their own TP risk assessment to plan for its audit works. Audit cases mainly focus on taxpayers with significant related party transactions and/or consecutive years of losses, or low/declining profits
  • Taxpayers have started to recognize the need to prepare TP documentation as part of tax compliance. However, for other TP services, e.g., preparation of pricing policy, it is still at the acceptance stage.
COVID-19
  • The IRBM has reiterate the importance of preparing TP documentation to justify on the impact of Covid-19 to the taxpayer’s business and changes to its related party transactions.

For further information on transfer pricing in Malaysia please contact:

Chan Tuck Keong.png

Chan Tuck Keong
T +60 3 2692 4022
E tuckkeong.chan@my.gt.com

Quang Phan.png

Quang Phan
T +60 3 2692 4022
E phan.quang@my.gt.com

 

Also appears under...