Transfer Pricing Malaysia
Transfer Pricing authority and tax law
Inland Revenue Board (IRB). General Anti-Avoidance Provision (§ 140 of the Malaysian Income Tax Act, 1967: Power to disregard certain
transactions if not deemed arm’s length) and Transactions by Non-Residents (§ 141 of the Malaysian Income Tax Act, 1967: Powers
regarding certain transactions by non-residents).
Transfer Pricing regulations and rulings
The IRB released the Malaysian Transfer Pricing Guidelines on 2 July 2003 which specify documentation requirements.
OECD guidelines of Transfer Pricing
The Malaysian Transfer Pricing Guidelines are largely based on the governing standard for transfer pricing, which is the arm’s length
principle as established in the OECD guidelines. The IRB respects the general principles of the OECD guidelines.
Transfer Pricing methods
The IRB accepts CUP, Resale Price, Cost Plus, Profit Split and TNMM. However, the Malaysian Transfer Pricing Guidelines state that the
traditional methods are preferred over the profit methods and advise that the profit methods should only be used when the traditional
methods cannot be reliably applied or cannot be applied at all.
Penalties in Transfer Pricing
There are no specific penalties for transfer pricing. However, the existing legislation and penalty structure under the Malaysian Income Tax
Act, 1967, are applied. Penalties for transfer pricing adjustments can range from 100% to 300% of the undercharged tax. There are no
transfer pricing specific documentation penalties.
Penalty relief in Transfer Pricing
A reduction in penalties can be negotiated based on quality of contemporaneous transfer pricing documentation.
Transfer Pricing Documentation requirements
Contemporaneous documents pertaining to transfer pricing need not be submitted with the tax return form, but should be made available
to the IRB upon request. Al relevant documentation must be in, or translated into, Bahasa Malaysia (the national language) or English.
There is no disclosure required on a tax return to indicate that transfer pricing documentation has been prepared.
The IRB has set out a list of information and documentation to be prepared for transfer pricing purposes. This list is neither intended to be
exhaustive nor meant to apply to al types of businesses. Instead, taxpayers are advised to maintain information and documentation that
are applicable to their circumstances. The list includes:
- Company details:
- Ownership structure showing linkages between all entities within the Multinational Enterprise (MNE)
- Company organization chart
- Operational aspects of the business including details of functions performed
- Transaction details:
- A summary of transactions with other entities in the same MNE, indicating the name and address of each entity in the MNE with
whom international transactions have been entered into, and the type of transactions, e.g., purchase of raw material or fixed assets,
sale of finished goods, borrowing of money, etc.
- A summary of transactions similar to the above that are conducted with independent parties or information derived from independent
enterprises engaged in similar transactions or businesses
- Economic conditions during the time of the transactions
- Terms of the transactions, including where applicable contractual agreements with overseas associated parties with regard to
technical assistance fees, management fees, marketing fees, recruitment fees or other services provided, royalties payable,
purchase or rental of equipment or other assets, handling charges, loans, al ocation of overhead expenses or any specific expenses
(e.g., promotional or advertising) borne by the foreign entity or other forms of payment to overseas associates
- Pricing policy over the past seven-year period
- Breakdown of product manufacturing costs
- Product price list
- Determination of arm’s length price:
- The pricing method adopted, showing how the arm’s length price is derived, and indicating why that method is chosen over other
- Functional analysis taking into consideration all risks assumed and assets employed
- If a comparability analysis results in a range of arm’s length outcomes, then the furnishing of documents relating to al of the
outcomes and the reasons for choosing that particular arm’s length price from the range of outcomes must be given
Documentation deadlines for Transfer Pricing
There is no documentation deadline. However, documentation should be prepared contemporaneously. As tax returns are due for filing
to the IRB within seven months after the close of a company’s financial year-end, it is advisable that transfer pricing documentation is
prepared before the submission date of the return.
Statute of limitations of transfer pricing assessments
There is a six-year statute of limitations for tax adjustments, and documentation must be kept for seven years. There is no statute of
limitations in instances of fraud, willful default or negligence.
Return disclosures/related-party disclosures
Disclosure of arm’s length values is required in the tax return for the following transactions:
- Sales to related companies
- Purchases from related companies
- Other payments to related companies
- Lending to and borrowing from related companies
- Receipts from related companies
Transfer Pricing Audit risk/transfer pricing scrutiny
The risk of transfer pricing scrutiny during an audit is high. Tax audits are carried out under a self-assessment regime. Every company is
expected to be subject to a desk or field audit at least once every five years. With the release of the Malaysian Transfer Pricing Guidelines,
greater scrutiny on transfer pricing has been observed in these field audits. Our experience is that every multinational corporation that
was audited over the last 12 months was scrutinized on its transfer pricing policy. Since the beginning of 2005, the number of transfer
pricing audits and investigation activity by the IRB increased significantly. There is a specific transfer pricing unit in the IRB to handle al
transfer pricing audits.
Advance Pricing Agreements of tansfer pricing
APAs are available upon request. However, at this stage, there are no formal guidelines on APAs, and the IRB has indicated that it wil
consider any terms and conditions which are the norm observed in the transfer pricing regimes in other jurisdictions. The IRB is wil ing to
accept requests for both unilateral and bilateral APAs. To date, we are not aware that any APA has been concluded.