If your firm is doing business in Malaysia, it is important to understand the local transfer pricing rules and practices. In this article we briefly discuss these matters.
What you need to know about transfer pricing in Malaysia
The territorial taxation system, the ease of doing business, and a large pool of bilingual talent make Malaysia an attractive location for MNEs. In addition, Malaysia has a central location: Around 60% of the world’s population lives within a 5-hour radius.
Yet, unlike other regional hubs, such as Hong Kong and Singapore, the Malaysian economy is still very “local.” Agriculture and tourism are huge contributors to the Malaysian economy; but the main driver of the economy is the export of commodities such as palm oil, crude oil and rubber. This, in combination with the fact that Malaysia has different tax jurisdictions within its territory, results not only in international, but also in domestic transfer pricing rules.
The Malaysian Inland Revenue Board (IRB) has no specific focus areas when it comes to transfer pricing. Instead, the IRD generally targets a specific industry for a certain period – it is easier to focus on companies with similar issues. Having said that, tax audit activity has certainly increased in Malaysia. Even more so after the creation of the new Multinational Tax Department. And most multinational tax audits in Malaysia include a look at your transfer pricing policy.
What are your transfer obligations in Malaysia?
General Documentation requirements
Malaysia has well-defined and extensive transfer pricing documentation requirements. Transfer pricing documentation should include records and documents describing:
- The organizational structure, including an organization chart covering persons involved in a controlled transaction.
- The 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.
All relevant documentation must be provided in Bahasa Malaysia or English.
It is not required to submit transfer pricing documentation when filing a tax return. However, the documentation must be made available to the IRB within 30 days upon request. It is required to keep the documentation in the administration for a period of 7 years.
Master File / Local File
Malaysia has introduced the OECD three-tiered approach on transfer pricing documentation. Taxpayers that are to prepare the Country-by-Country Report (see below) have to also prepare a Master File and submit it together with regular transfer pricing documentation upon request by the IRB. The requirements to the Master File are very similar to those prescribed by the OECD in Action 13. There is no requirement to prepare a Local File in addition to the general transfer pricing documentation requirements.
Malaysia introduced Country-by-Country Reporting (CbCR) with effect as of 1 January 2017. CbCR applies to MNEs that meet the following requirements:
- Any of the constituent entities of the MNE group have cross-border operations with its other constituent entities.
- The consolidated revenue of the MNE group is at least RM3 billion in the financial year (FY) preceding the reporting FY.
- The ultimate holding company of the MNE group is incorporated under the Malaysian Companies Act 1965 or under any written law, and it is resident in Malaysia.
- Its constituent entities are incorporated or registered under the Companies Act 1965 or under any written law or under the laws of a territory outside Malaysia, and resident in Malaysia, including Labuan
Any constituent entity of an MNE group that is resident in Malaysia must notify the IRB in writing if it is the ultimate holding entity or the surrogate holding entity, on or before the last day of the reporting financial year. Where a constituent entity is not the reporting entity, it must notify the IRB of the identity and tax residence of the reporting entity, also on or before the last day of the reporting financial year.
The requirements to the content of the CBCR report are largely in line with OECD Action 13.
What penalties do you risk when not complying with the rules?
There are no specific penalties for transfer pricing but 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%
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.
When are you at risk?
The way the IRD focuses on transfer pricing in Malaysia means that every MNE with controlled transactions is at risk of transfer pricing scrutiny. Transfer pricing guidelines are applicable when at least one party is liable to tax in Malaysia.
A MNE runs extra risk of an audit if one of the following situations applies:
- Repeating low margins or losses
- Many high value transactions
- Large deviations in profit and loss histories
- Reporting a low EBIT compared to the industry’s average
- Reporting a low EBIT compared to comparable enterprises
However, if your company’s gross income is under RM25 million and the total amount of controlled transactions is under RM15 million reduced requirements apply.
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 has controlled 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.
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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 Guidelines.
- Section 140A of the ITA: Power to substitute the price and dis-allowance 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 recommendations of the BEPS initiative, including the requirement of local and master files and country-by-country-reporting.