Revolutionise Transfer Pricing in Malaysia: Key Strategies for Multinational Excellence

Key Highlights

• Severe Penalties: Non-compliance with Country-by-Country Reporting (CbCR) and transfer pricing in Malaysia rules can lead to hefty fines, daily penalties, and potential imprisonment, underscoring the need for strict adherence.
• Essential Documentation: Proper documentation and regular policy reviews are vital for demonstrating compliance, adapting to regulatory updates, and minimising risk.
• Seek Professional Advice: Consulting tax experts can help you navigate complex regulations and ensure alignment with global standards and current compliance requirements.

In today’s interconnected world, multinational companies (MNCs) face numerous complexities, especially when dealing with tax regulations across various jurisdictions.

One key aspect is transfer pricing, which involves pricing goods, services, and intangibles between related entities within a multinational enterprise. Effectively managing transfer pricing ensures compliance with local laws and optimises tax liabilities.

If you’re a tax professional, financial advisor, or business owner dealing with transfer pricing in Malaysia, it’s crucial to understand the specific regulations and strategies in this context.

This guide will offer valuable insights, practical tips, and best practices for navigating transfer pricing challenges, enabling you to make informed decisions and maintain compliance.

What is Transfer Pricing in Malaysia?

What exactly is transfer pricing in Malaysia? Transfer pricing pertains to the pricing of transactions between affiliated entities within multinational corporations (MNCs). This encompasses a variety of exchanges, including goods, services, intellectual property, and financing.

Transfer pricing regulations are designed to ensure that these transactions occur at arm’s length, meaning that the prices set are equivalent to those charged in transactions between unrelated parties.

Transfer Pricing Documentation Requirements in Malaysia

In Malaysia, companies with gross income exceeding RM25 million and related party transactions surpassing RM15 million are required to maintain transfer pricing documentation. This requirement encompasses both tangible and intangible goods and services.

Malaysian Transfer Pricing Guidelines

The Transfer Pricing Guidelines, established by the IRBM, provide a framework of rules and recommendations to ensure that transactions between related parties—such as those within a multinational corporation—are conducted at arm’s length.

This arm’s length principle stipulates that the terms and conditions of these transactions should mirror those that independent entities would negotiate in comparable situations.

Key Aspects of the Malaysian Transfer Pricing Guidelines:

1. Scope: These guidelines govern both domestic and cross-border transactions between related parties. They encompass the sale and purchase of goods, provision of services, licensing of intangibles, and various financial arrangements.
2. Arm’s Length Principle: A fundamental aspect of these guidelines is that the arm’s length principle mandates that the prices charged in related-party transactions must reflect those that would prevail in transactions between independent entities.
3. Documentation Requirements: Companies are obligated to maintain thorough transfer pricing documentation to substantiate the pricing of related-party transactions. This documentation should clearly outline the methodology used to determine transfer prices and must be available for review by the IRBM upon request.
4. Methods for Determining Arm’s Length Price: The guidelines present several methodologies for establishing an arm’s length price, including:
   • Comparable Uncontrolled Price (CUP) Method
   • Resale Price Method
   • Cost Plus Method
   • Transactional Net Margin Method (TNMM)
   • Profit Split Method
5. Penalties for Non-Compliance: Non-compliance with transfer pricing regulations or failure to provide the necessary documentation may lead to penalties, including fines and adjustments to taxable income imposed by the IRBM.
6. OECD Alignment: The Malaysian guidelines are consistent with the OECD’s Transfer Pricing Guidelines, particularly in relation to the Base Erosion and Profit Shifting (BEPS) actions. This alignment fosters coherence with international standards.
7. Advanced Pricing Arrangements (APAs): Companies may enter into Advanced Pricing Arrangements with the IRBM to establish an agreed-upon transfer pricing methodology for future transactions, thereby ensuring certainty and minimising the risk of disputes.
8. Yearly Updates: These guidelines are periodically revised to reflect evolving international practices and local tax legislation.

Importance of Transfer Pricing Rules

Transfer pricing regulations are essential to international tax governance, ensuring that multinational corporations contribute their fair share of taxes in every country where they operate.

• Preventing Tax Avoidance: Transfer pricing rules ensure that related-party transactions are conducted at arm’s length, effectively curbing profit shifting and tax avoidance by MNCs.
• Equitable Tax Revenue: These regulations guarantee that profits are taxed in the jurisdictions where the economic activities that generate them take place, promoting a fair distribution of tax revenue.
• Compliance and Risk Management: By adhering to transfer pricing rules, companies can better manage tax risks and avoid expensive disputes with tax authorities.

Penalties for Non-Compliance

In Malaysia, the Inland Revenue Board of Malaysia imposes strict penalties for non-compliance with transfer pricing regulations. These penalties enforce adherence to the arm’s length principle and ensure that related-party transactions are properly documented and reported.

Below are the key penalties associated with transfer pricing non-compliance in Malaysia:

1. Transfer Pricing Adjustment Penalty

• 25% Penalty: If the IRBM adjusts a company’s taxable income due to non-compliance with transfer pricing regulations, a penalty of 25% of the additional tax payable on the adjusted amount is imposed.
• 50% Penalty: If a company fails to submit transfer pricing documentation when required or if the documentation provided is deemed insufficient or misleading, the penalty may increase to 50% of the additional tax payable on the adjusted amount.

2. Failure to Furnish Transfer Pricing Documentation

Companies must prepare and maintain transfer pricing documentation contemporaneously, meaning it should be available when filing the tax return. Failure to furnish this documentation upon request by the IRBM can lead to:

• Fine or Imprisonment: Under Section 113B of the Malaysian Income Tax Act 1967 (ITA), failure to comply with the requirement to furnish documentation can result in a fine of up to RM 20,000 or imprisonment for a term not exceeding six months, or both.

3. Risk of Audit and Increased Scrutiny

• Non-compliance with transfer pricing rules increases the likelihood of a tax audit by the IRBM. Audits can be time-consuming and costly, leading to further penalties if additional non-compliance is discovered.

4. Other Penalties

• General Penalties: Non-compliance with other transfer pricing requirements, such as failure to maintain appropriate records or comply with specific IRBM requests, can result in general penalties as prescribed under Malaysian tax laws.

2023 Important Transfer Pricing Update

A. Arm’s Length Principle

Under the 2023 Transfer Pricing Rules, taxpayers are required to use single-year data for comparables rather than weighted average data. The outcomes of controlled transactions must be compared with those of uncontrolled transactions for the same basis year, within a comparable market or economic environment, for the relevant Year of Assessment (YA)

B. Transfer Pricing Documentation (TPD)

According to the 2023 Transfer Pricing Rules, the IRBM mandates that contemporaneous Transfer Pricing Documentation (TPD) be prepared before the Corporate Income Tax (CIT) return filing deadline.

This deadline is typically seven months after the company’s financial year-end or within any extended filing period granted for the relevant Year of Assessment (YA).

The TPD must include a clearly stated completion date and be submitted within 14 days if requested during a tax audit. Failure to comply with this requirement can result in penalties ranging from RM20,000 to RM100,000 for each YA.

Best Practices for Transfer Pricing

Documentation

Maintaining thorough and comprehensive documentation is crucial to support transfer pricing practices and ensure they align with the arm’s length principle. This means documenting every transaction.

It includes the rationale behind pricing decisions and the methods used for determining prices. Proper documentation can serve as vital evidence during audits and significantly bolsters the company’s position in defending its pricing strategies.

It should also be regularly updated to reflect any business or regulatory environment changes.

Regular Reviews

Periodically reviewing transfer pricing policies and practices is essential to ensure they comply with current regulations and industry standards. This proactive approach not only helps in identifying potential compliance issues but also assists in mitigating risks before they escalate into serious problems.

Regular audits and assessments of transfer pricing strategies can uncover areas for improvement and adaptation, ensuring that the company remains agile in a constantly evolving market landscape.

Consultation

Seeking advice from tax professionals or consultants is often necessary to effectively navigate the complex world of transfer pricing regulations. Given the intricacies, expert guidance can clarify and ensure that the company’s practices align with global standards.

Engaging with experienced consultants can also facilitate the development of robust transfer pricing strategies and help the business stay informed about the latest regulatory changes and compliance requirements, ultimately leading to more informed decision-making.

Conclusion

Navigating transfer pricing in Malaysia is a complex yet essential task for multinational companies. Businesses can manage their tax risks by understanding the regulations, maintaining compliance, and adopting best practices. Remember, proper transfer pricing ensures compliance and supports fair business practices and economic development.

Consider consulting with our experienced tax professionals for more insights and personalised assistance. They can help you refine your transfer pricing strategies and ensure compliance with the latest regulations.

Explore more about transfer pricing in Malaysia and take the first step towards optimising your business operations today.