Transfer pricing - Malaysia

• The local Malaysia transfer pricing (“TP”) laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia TP Rules 2023.
• Malaysia also has a TP Guidelines 2024 that explains on the TP principles and documentation requirements. The Guidelines were issued with effect from 24 December 2024 and applicable for 2023 onward, incorporating the principles of BEPS Actions and OECD TPG Version 2022. 
• The TP Rules are applicable to transactions between controlled entities for the supply and acquisition of goods or services include financial aspect.  The TP Guidelines further mentioned that controlled transactions include both domestic and overseas transactions.
• A contemporaneous TP documentation is required to state the completion date prior or on the due date of the annual Corporate Income Tax return. It shall be furnished to the Inland Revenue Board of Malaysia (“IRBM”) within 14 days upon its request.
• Malaysia has implemented CbCR (Country by Country Reporting) since 2017 for larger groups with consolidated revenue of more than RM3 billion. The OECD’s Master File concept is applied accordingly for groups subject to CbCR requirements.

• The Malaysia TP Guidelines 2024 refers to the OECD TPG version 2022 in line with the BEPS initiatives, but not completely. OECD guidelines are considered as a source of reference only.

• Malaysia applies the best method as same OECD TPG.
• With the Malaysia TP Guidelines 2024, TP analysis and the selection of TP methodology should be on a transaction-by-transaction basis.
• Other methodologies can be used, but with strong justifications.

• Malaysia applies the self-assessment regime. In the annual Corporate Tax Return form, a tax payer is required to disclose the details of its related party transaction and ‘tick box’ to indicate its conformation to the TP and CbCR requirements. 

• A TP document is to be prepared on a contemporaneous basis:
  • (i) state the completion date prior or on the due date of the annual Corporate Income Tax return;
  • (ii) disclose all required information as per Malaysia TP Rules 2023 and Malaysia TP Guidelines 2024.

It can be in Bahasa Malaysia (official language of Malaysia) or English.

• A full version of contemporaneous TP document is required if
  • (i) generates gross business income of more than RM30 million in total and engages in cross-border controlled transactions totalling RM10 million or more annually; or
  • (ii)  receives or provides controlled financial assistance of more than RM50 million annually.
• A simplified version of the contemporaneous TP document can be prepared if the taxpayer’s revenue or total related party transactions fall below the above threshold.
• A full contemporaneous TP document shall contain the information of the Group (as per Schedule 1 of Malaysia TP Rules 2023) in which similar to Master File information under CbCR. Master File can be considered as a replacement for Schedule 1.
• A full contemporaneous TP document shall contain the information and documents regarding a cost contribution arrangement (as per Schedule 3 of Malaysia TP Rules 2023) if any and applicable.
• Intangible property is required to disclose with DEMPE analysis (Development, Enhancement, Maintenance, Protection, and Exploitation) as per OECD TP Guidelines if any and applicable.
• In the selection of tested party, the IRBM gives priority to the availability of sufficient and verifiable information on both tested party and comparables. Therefore, the tested party preferably should be a Malaysian entity. Should the foreign entity be used as the tested party, its financial data must be verifiable.
• Comparable data shall be from the same fiscal year. Latest available data is acceptable for complying with the contemporaneous requirement. However, the same fiscal year data is strictly required at the time of audit. Multiple year data is only to assess whether the outcome of a particular year is influenced by abnormal factors,  however the use of multiple year data does not imply the use of multiple year average.
• The comparable search in the databases supporting part of the TP documentation should be updated every three years provided that there is no significant change in the taxpayer’s business operation, functions and risks. However, financial data and suitability of the comparable should be reviewed and updated every year in order to apply the arm's length principle reliably.
• Malaysia TP Rules 2023 defines the arm’s length range is a range of figures or a single figure falling between the value of 37.5 percentile to 62.5 percentile.   

• For a MNE Group, Malaysia accepts the Master File prepared by the ultimate holding company or Reporting Entity.
• The Master File is only applicable to the taxpayer based on the CbCR requirement. It is only required to be submitted to the IRBM upon its request. Generally, the Master File is requested together with the Local File.

• Loss making entities, in particular a service company and toll manufacturer
• Consecutive losses for many years;
• Fluctuated profit margins;
• High percentage or amount of overseas transactions with related parties
• Transactions in relation to intangible properties, e.g. royalties; financial assistance (loan, guarantee, debt, advance, amount due, etc.)s.

• Failure to submit the TP documentation to IRBM within 14 days upon request can result in  penalty of between RM20,000 to RM100,000, or jail term of up to 6 month for each year of requested TP documentations.
• A surcharge of not more than 5% may be imposed on the TP adjustment made by the IRBM that results in increase in income or reduction in expense or loss.
• Correspondent adjustment is not automatic. Application has to be made to the IRBM.

• Effective 1 January 2020, digital services provided by foreign service providers (“FSP”) are also subject to a 6% service tax
• FSP who provides digital services to consumers in Malaysia and the value of digital service for a period of twelve months or less exceeds the threshold of RM500,000 is required to be registered.
• The list of digital services (not exhaustive) is as follows:  
  • Software, application & video games
  • Music, e-book and film
  • Advertisement and online platform
  • Search engines and social networks
  • Database and hosting
  • Internet Based Telecommunication
  • Online training

• The IRBM has their own TP risk assessment to plan for its audit works. Audit cases mainly focus on taxpayers with significant related party transactions and/or consecutive years of losses, or low/declining profits
• Taxpayers have started to recognize the need to prepare TP documentation as part of tax compliance. However, for other TP services, e.g., preparation of pricing policy, it is still at the acceptance stage.

• The IRBM has reiterate the importance of preparing TP documentation to justify on the impact of Covid-19 to the taxpayer’s business and changes to its related party transactions.