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Introduction to Malaysian transfer pricing
Transfer pricing rules
- The local Malaysia transfer pricing ('TP') laws are contained in Section 140A of the Malaysia Income Tax Act 1967 and Malaysia TP Rules 2012.
- Malaysia also has a TP Guidelines 2012 that explains on the TP principles and documentation requirements. The Guidelines were revised with effect from 15 July 2017, incorporating the principles of BEPS Actions and OECD TPG Version 2017.
- The TP Rules are applicable to transactions between controlled entities for the supply and acquisition of goods or services. The TP Guidelines further mentioned that controlled transactions include both domestic and overseas transactions.
- A TP documentation is required to be furnished to the Malaysia tax authority ('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 revised Malaysia TP Guidelines refers to the OECD TPG version 2017 in line with the BEPS initiatives, but not completely. OECD guidelines are considered as a source of reference only.
Transfer pricing methods
- Malaysia applies the hierarchy method, whereby the 'transactional profit methods' are to be used only when traditional transactional methods cannot be reliably applied.
- With the revised Malaysia TP Guidelines 2012, 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 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.
Transfer pricing documentation
Preparation of transfer pricing documentation
- A TP document is to be prepared on a contemporaneous basis. It can be in Bahasa Malaysia (official language of Malaysia) or English.
- A simplified version of the TP document can be prepared if the taxpayer’s revenue or total related party transactions fall below the threshold.
- 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. 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.
Master and local file
- For an 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.
Some risk factors for challenge
- Loss making entities, in particular, a service company and manufacturer
- Consecutive losses for many years
- High percentage or amount of overseas transactions with related parties
- Transactions in relation to intangible properties, eg royalties.
- 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.
Economic analysis and how to demonstrate an arm’s length result
- The IRBM prefers local comparable with financial data from the same fiscal year. Overseas comparable is acceptable only if the financial data is available for the IRBM’s verification.
- The IRBM generally applies the median to the upper quartile as the arm’s length range.
- Minimum or no adjustment to the profit level indicators is preferred.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Unilateral, bilateral and multilateral APAs are available. Pre-filing meetings can be organized with the IRBM to discuss the case before a formal APA application is made.
- A non-refundable fee of RM5,000 per application.
- The IRBM prefers unilateral APAs.
- It is mentioned in the Malaysia TP Guidelines that if it can be proven that any adjustments made to both entities will not alter the total tax payable or suffered, they are only encouraged to prepare TP documentation. Based on our experience, this leeway has not been practiced by the IRBM.
- The IRBM had issued a flowchart which states that if a taxpayer falls below the threshold, only engages in domestic controlled transactions and if it can be proven that any adjustments made to both entities will not alter the total tax payable or suffered, the taxpayer is not required to prepare TP documentation. However, the TP Rules and TP Guidelines have yet to be revised to confirm this exemption.
Digital services tax
- Effective 1 January 2020, digital services provided by foreign service providers (“FSP”) may be subject to a 6% service tax.
- FSP who provides digital services to consumers in Malaysia where the value of the digital services for a period of twelve months 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
IRBM and taxpayer behaviour
- 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 recognise 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.