Is your firm is doing business in Malaysia? Then you need to understand the risks of transfer pricing in Malaysia.
After reading this article, you know exactly what transfer pricing rules there are in Malaysia, what risks exist for your firm, and how you can make sure you stay compliant with the law.
What you need to know about transfer pricing in Malaysia
Territorial taxation, relative ease of doing business and English proficiency make Malaysia a good location for multinational business. In addition, Malaysia has a very central location. Around 60% of the world’s population lives within a 5 hour radius.
However, the economy of Malaysia is mostly commodity-based. Palm oil, crude oil and rubber are the major exports. Next to that, agriculture and tourism are other big sources of income for Malaysia.
What this means is that compared to places like Hong Kong and Singapore, there are less advanced flows of capital. Therefore, the Malaysian Inland Revenue Board (IRB) has no specific focus areas. Instead, it generally targets one particular industry for a certain period of time. It is easier to focus on companies with similar issues.
Having said that, audit activity has increased in Malaysia. Even more so after the creation of the new Multinational Tax Department. Currently, most multinational tax audits in Malaysia include a look at your transfer pricing policy.
What are your obligations in Malaysia?
Malaysia has transfer pricing documentation requirements. And besides being well defined, they are extensive.
Transfer pricing documentation should include records and documents describing:
- Organizational structure, including an organization chart covering persons involved in a controlled transaction
- Nature of the business or industry and market conditions
- The controlled transaction
- Strategies, assumptions and information regarding factors that influenced the setting of any pricing policies
- Comparability, functional and risk analysis
- Selection of the transfer pricing method
- Application of the transfer pricing method
- Documents used in developing the transfer pricing analysis
- Index to documents
- Any other information, data or document considered relevant by the person to determine an arm’s-length price
It is important to note that all relevant documentation must be provided in Bahasa Malaysia or English.
You are not required to submit your transfer pricing documentation with your tax return. However, you are required to make such documentation available to the IRB within 30 days upon request. More over, you need to keep these records for 7 years.
The idea of a transfer pricing policy is that it is ongoing. What this means is that you have to calculate the correct prices at the time of transfer. This is called contemporaneous transfer pricing. In short, if you haven’t produced the documentation when asked, you are to late.
When are you at risk?
The way the IRD focuses on transfer pricing in Malaysia means that every multinational with controlled transactions is at risk for transfer pricing scrutiny. Transfer pricing guidelines are applicable when at least one party is liable to tax in Malaysia.
You are at extra risk of an audit when you firm has the following:
- Repeating low margins or losses
- A large number of high value transactions
- Large changes in profit and loss histories
- Reporting a low profit compared to the industry’s average
- Reporting a lower net profit then other similar enterprises.
However, if your company’s gross income is under RM25 million and the total amount of related party transactions is under RM15 million reduced requirements apply.
What penalties do you risk when not complying with the rules?
There are no specific penalties for transfer pricing. However, the following penalties expressed in rates of tax payable apply:
- If there is no contemporaneous transfer pricing documentation: 35%
- If transfer pricing documentation is prepared, but not according to the guidelines: 25%
- If you don’t fall under the scope of the guidelines, and have not prepared transfer pricing documentation: 25%
Different penalties apply when you obstruct or interfere with a transfer pricing audit or when you fail to comply with the arm’s length principle after previous transfer pricing audits. The penalty is then increased by 20% as compared to the last penalty rate imposed. But, the sum cannot exceed 100% of the amount of tax undercharged.
Do you want to be sure about your transfer pricing in Malaysia?
Do you want to be sure that your transfer pricing policy is compliant with regulations in Malaysia? Does your firm have inter-company transactions and do you want to be sure you charge the right prices?
We are Transfer Pricing Asia, a boutique transfer pricing firm based in Asia. And we can assist you with all matters relating to transfer pricing.
Relevant regulations transfer pricing Malaysia
The Malaysian Inland Revenue Board’s (IRB) Transfer Pricing Guidelines 2012 (link) were introduced in July 2012, replacing its 2003 guidelines.
The guidelines explain the administrative requirements of the application of Section 140A of the Income Tax Act, 1967 and the Income Tax (Transfer Pricing) Rules 2012. The Guidelines follow closely and leverage from the OECD Transfer Pricing Guidelines.
- Section 140A of the ITA: Power to substitute the price and disallowance of interest on certain transactions
- Section 138C of the ITA: Advance Pricing Arrangement
- Income Tax (Transfer Pricing) Rules 2012 (P.U. [A] 132)
- Income Tax (Advance Pricing Arrangement) Rules 2012 (P.U. [A] 133
- Income Tax country-by-country reporting (CbCR) Rules 2016 [P.U.(A) 357] (CbCR Rules); and
- Income Tax (Multilateral Competent Authority Agreement on the Exchange of country-by-country reporting (CbCR)) Order 2016 [P.U.(A) 358] (Malaysian MCAA)
General anti-avoidance provision
Section 140 of the ITA: Power to disregard certain transactions if not deemed arm’s-length
Transactions by non-resident
Section 141 of the ITA: Powers regarding certain transactions by non-residents
BEPS compatibility of transfer pricing in Malaysia
Malaysia is implementing many of the recommendation of the BEPS initiative, including the requirement of local and master files and country-by-country-reporting.