Transfer Pricing Requirements in Malaysia

Transfer Pricing Documentation 

In Malaysia, Transfer Pricing is primarily based on the arm’s length principle. In this regard, a Transfer Pricing Documentation is crucial as a defense documentation to justify that the controlled transactions are conducted at arm’s length.

A company is required to prepare Transfer Pricing Documentation if it has controlled transaction for the year. The Transfer Pricing Documentation needs to be prepared on a yearly basis and to be completed prior to the due date of submission of the annual Corporate Income Tax Return (i.e., Form e-C). 

The Transfer Pricing Documention needs to be prepared on a contemporaneous basis, that is:

• Prepared and completed prior to the due date for furnishing the Form e-C 
• Date of completion is required to be stated in the Transfer Pricing Documention 
• Contains all information in Subrule 4(2) and Schedule 2 of Transfer Pricing Rules 2023
• Must be furnished to the Inland Revenue Board of Malaysia (“IRBM”) within 14 days upon its request

A non-contemporaneous Transfer Pricing Documention will result in the following penalties:

• Penalty between RM20,000 to RM100,000; or 
• Imprisonment of up to 6 months; or 
• The above penalty and imprisonment

In addition to the above, the IRBM will also impose a surcharge of up to 5% on the Transfer Pricing adjustments made during a Transfer Pricing audit.

In this regard, a company needs to have in-depth understanding and application of its pricing policies for both controlled and independent transactions, Transfer Pricing compliance requirements and more importantly, how to respond to the IRBM during a Transfer Pricing audit.   

Transfer Pricing Audit 

A Transfer Pricing audit is an examination conducted by the IRBM on a taxpayer's business records and financial affairs to ensure that the arm’s length principle on controlled transactions is adhered to. This examination also ensures that the income declared by a taxpayer is in order, and the tax that should be imposed is computed and paid in accordance with the methods outlined in the Transfer Pricing Rules, Transfer Pricing Guidelines and Transfer Pricing Audit Framework.

Generally, a Transfer Pricing audit is more likely to be directed to companies with the following situations:

• An entity of a Multinational Enterprise (“MNE”) Group with large amounts of cross border controlled transactions
• Controlled transactions with related entities in low tax jurisdiction
• Controlled transactions involving intangible assets (e.g. payment of royalty, commission, etc.) 
• Enjoy some form of tax incentives (e.g. Pioner Status) and with significant amounts of controlled transactions  
• Financial Assistance transactions with related parties, in particular when the transactions are interest-free
• Business losses for a number of years / fluctuations in business profits 

A Transfer Pricing audit generally focus on the following:

• Does the company fall under the obligation to prepare contemporaneous Full Transfer Pricing Documentation or Minimum Transfer Pricing Documention?
• Has the company prepared the Transfer Pricing Documention in accordance with the requirements of the Transfer Pricing Rules 2023 and Transfer Pricing Guidelines 2024? 
• For Full Transfer Pricing Documention, has a comprehensive Function, Asset and Risk (FAR) analysis been prepared?
• The pricing policy for key controlled transaction(s) 
• Intercompany agreements, in particular for intragroup services and Financial Assistance transactions 
• Inconsistent Transfer Pricing Documention vs the actual transaction 
• For comparability analysis, the comparability criteria, accuracy and updated financial data, Transfer Pricing adjustments, etc.   

Potential transactions that are highly likely to be examined by the IRBM are:

• Sales and purchases of goods and services
• Provision / receipt of intra group services
• Payment / charges for intra group intangibles (e.g. patents, know-how, designs, trademarks, etc.)
• Intercompany Financial Assistance (e.g. loans, advances or debts, amounts due from related parties, etc.) 

Some of the best practices to handle a Transfer Pricing audit are as follows:

• Comprehensive and up-to-date Transfer Pricing documentation
• Pricing policy with detailed information on the assumptions, strategies and factors that influence the setting of the policy, supported with calculations on the costs, etc.
• Maintain proper and comprehensive evidence for each controlled transaction
• For comparability analysis, detailed comments on the acceptance / rejection of comparable companies, together with updates to the comparable financial data for each year  

How we can assist

A Transfer Pricing audit does not have to be a nightmare. With right planning and documentation, the risk of huge Transfer Pricing adjustments by the IRBM can be minimised. 

Grant Thornton can assist in providing solutions, mainly through:

• Prepare of comprehensive and up-to-date Transfer Pricing documentation
• Develop inter-company Transfer Pricing policy
• Resolve Transfer Pricing disputes with the IRBM
• Reduce Tranfer Pricing exposure in the future

Learn more about Grant Thornton Malaysia’s Transfer Pricing capabilities