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 methods
  • 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.