The concept of transfer pricing was first introduced into the Malaysian tax legislation effective from 1 January 2009 with the enactment of the Section 140A of the Income Tax Act, 1967 as well as the gazettement of the Income Tax (Transfer Pricing) Rules 2012 (“Malaysian Transfer Pricing Rules”).
However, many Malaysian business especially Small Medium Enterprises (“SMEs”) have the wrong perception that the Malaysian transfer pricing compliance requirements is only applicable to transactions between multinational enterprises (“MNEs”) with cross border transactions.
Transfer Pricing refers to the pricing of goods, services and intangibles between associated parties.
Associated parties are parties who control one another, or who are under the common control of another party, whether directly or indirectly. They include branches and head offices.
All related party transactions (“controlled transactions”) are required to be conducted at arm’s length prices, e.g. the prices between associated persons should be approximately the prices between independent parties undertaking transactions under similar terms and conditions.
It is a statutory requirement for the taxpayers to prepare a contemporaneous comprehensive set of transfer pricing documentation (“TPD”) (e.g. Full TPD) annually under the Malaysian Transfer Pricing Guidelines 2012, provided that:
Annual gross income exceeding RM25 million and total related party transactions exceeding RM15 million per annum; or
Provision of financial assistance exceeding RM50 million.
There is no de minimis rule in Malaysian Transfer Pricing legislation. However, taxpayers are allowed to prepare documentation that is less extensive, i.e. Limited TPD, if the taxpayers does not exceed the above financial threshold. The obligation to prepare a contemporaneous TPD is based on each year of assessment to demonstrate that its controlled transactions are transacted according to the arm’s length principles.
The Budget 2021 announcements which have gazetted the law under Finance Act 2020 which have tightened the Transfer Pricing compliance requirements in Malaysia with effective from 1 January 2021 with the introduction of the following provisions:
Section 113B: Failure to furnish contemporaneous TPD
A penalty of between RM20,000 and RM100,000 for failure to submit the TPD.
Section 140A(3C): Surcharge on the transfer pricing adjustment
A surcharge of up to 5% of the total transfer pricing adjustment is imposed whether or not the adjustment results in additional tax payable
Section 140A(3A) & (3B): Power to disregard structure in a controlled transaction
To grant the power to the IRB for making transfer pricing adjustments to reflect arm’s length economic and commercial reality
Paragraph 11.2.3 of the Malaysian Transfer Pricing Guidelines: Period to submit TPD (updated on 2 Feb 2021)
The period to submit the TPD has been shortened from 30 days to 14 days upon request by the IRB during tax audit
With the introduction of penalty for non-compliance of TPD, the requirement to prepare TPD is absolute and mandatory and there is no discrimination between large and small medium sized companies.
The non-compliance for TPD penalty is hefty as it provides the IRB with the absolute power to penalise a taxpayer prior to the commencement of the audit process for not being able to furnish the TPD for the relevant year of assessment on time. Further, a 5% surcharge would be imposed on any taxpayer on transfer pricing adjustment regardless of whether the taxpayer is a loss or a tax-exempt company for non-compliance of the arm’s length principle.
The following practices with associated persons are not likely to be viewed favourably by the IRB:
Early identification of existing issues and compliance with local regulatory requirements is important in managing transfer pricing risks.
Our esteemed tax advisory team of transfer pricing specialists are able to provide strategic advice and assistance in respect of transfer pricing planning, preparation and tax audit support.
Tax Practice Leader
Chew Wai Hoor
Head of Tax
Jeremy Tan Lai Fu Associate Director of Tax Advisory
Feel free to contact us to find out more.