Transfer pricing in Malaysia

The Inland Revenue Board (IRB) has introduced transfer pricing (TP) legislation under Section 140A of the Income Tax Act, 1967 (the Act) in 2009 and subsequently issued the Income Tax (Transfer Pricing) Rules 2012 (the TP Rules) and the Transfer Pricing Guidelines 2012 (the TP Guidelines) in 2012 with a retrospective effect from 1 January 2009. 

Based on the said legislations, effective 1 January 2009, taxpayers with related party transactions are required to determine and apply the arm’s length price for the acquisition or supply of goods or services. Therefore, it is mandatory for all taxpayers with related party transactions to prepare transfer pricing documentation for the purpose of determining the transfer price based on arm’s length principle. 

Since 2012, the IRB has been more active in monitoring taxpayers’ compliance with the applicable transfer pricing legislation. With effect from year of assessment 2014, companies are required to confirm the availability of transfer pricing documentation to substantiate their related party transactions in the income tax return (Form C). Besides that, companies are also required to disclose the quantum of transactions with related companies in the Form C. As such, transfer pricing documentation has become more important in line with the IRB’s footsteps. 

Generally, companies are considered to be related if there is a shareholding relationship of more than 50 percent. However, the TP Guidelines also consider a relationship to exist if one party participates directly or indirectly in the management, control, or capital of the other party or the same person participates directly or indirectly in the management, control and capital of both companies.

Basically, transfer pricing applies wholly to all taxpayers meeting the following conditions: 

• Taxpayers carrying out business with a gross income of more than RM25 million, and a total amount of related party transactions of more than RM15 million; and 

• For taxpayers providing financial assistance and such financial assistance is more than RM50 million. Transactions involving financial institutions are excluded. 

Types of related party transactions may involve: 

• Sales or purchases of raw materials, stock in trade or other tangible assets; 

• Royalties / license fees / other types of considerations in connection with use of intangible assets; 

• Management fees including charges for financial, administrative, marketing and training services; 

• Research and development; 

• Any other services not previously mentioned; 

• Rents / lease of assets; 

• Interests; or 

• Guarantee fees. 

The TP Rules provide that persons entering into a related party transaction must prepare documentation when developing or implementing the related party transaction. The documentation must include specific information and be updated for any material changes prior to the due date for filing a tax return that includes the affected transaction. 

The following methodologies can be used in determining arm’s length price: 

• Comparable uncontrolled price method; 

• Resale price method; 

• Cost plus method; 

• Profit split method; and 

• Transactional net margin method. 

Taxpayers are required to select and apply the most appropriate transfer pricing methods to the related party transaction in determining the arm’s length nature of such transaction. 

Transfer pricing documentation does not have to be submitted with the tax returns. However, it should be made available to tax authorities within 30 days upon request. 

The TP Guidelines specify the following penalty rates:

The Guidelines also mention that the penalty rate shall be increased by 20% as compared to the last penalty rate imposed for the previous offence but limited to a sum not exceeding 100% of the amount of tax undercharged, where: 

• The taxpayer obstructs or interferes with a transfer pricing audit; or 

• The taxpayer fails to comply with the arm’s length principle after previous transfer pricing audits.

Transfer pricing audits have gradually increased in recent years, hence taxpayers shall prepare transfer pricing documentation ready for the Inland Revenue Board.

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