Malaysia Continues to Aim for Transfer Pricing Transparency

Crowe’s Sylvia Song explains the significant changes in Malaysia’s most recent transfer pricing guidance and what they mean for multinational groups with operations in the country.

The compliance landscape for transfer pricing in Malaysia continues to evolve. The Inland Revenue Board of Malaysia has released the fourth version of the Malaysia Transfer Pricing Guidelines 2024 and the Transfer Pricing Tax Audit Framework.

The guidelines mark another milestone in transfer pricing development, enhancing transparency and reinforcing compliance for those taxpayers undertaking controlled transactions. The inland revenue continues to focus on ensuring strict compliance by multinational groups, while offering flexibility to smaller businesses and domestic entities.

The audit framework provides clarity by outlining penalty scales as guidance for businesses.

The transfer pricing guidelines are effective from the year of assessment 2023, aligning with the application of the Income Tax (Transfer Pricing) Rules 2023, and the transfer pricing audit framework came into effect on Dec. 24, 2024.

The latest guidelines and audit framework contain several significant changes.

Revised threshold and introduction of exemption for preparing transfer pricing documentation. In the transfer pricing guidelines 2024, the inland revenue board further relaxed requirements by revising the threshold for preparing full contemporaneous transfer pricing documentation, or CTPD, as follows:

• Business income and cross-border transactions—annual gross business income exceeding 30 million Malaysian ringgit ($7 million) and total cross-border controlled transactions exceeding 10 million Malaysian ringgit annually, or
• Financial transactions—receiving or providing controlled financial assistance of more than 50 million Malaysian ringgit annually.

Taxpayers that fall below the above thresholds are eligible to prepare a “minimum CTPD,” a less extensive form of documentation, while ensuring compliance with the arm’s length principle.

For transfer pricing documentation to be considered contemporaneous, the CTPD must be completed and dated before the due date for furnishing a tax return for a particular year of assessment (seven months after the financial year end or within the grace period granted by the inland revenue board).

To ease the compliance burden on smaller taxpayers, businesses engaging only in domestic transactions, and those that don’t pose high transfer pricing risks to the inland revenue board, the guidelines provide exemption from preparing a CTPD for taxpayers in those categories.

Taxpayers exempted from preparing CTPD must still adhere to the arm’s-length principle for all controlled transactions and substantiate their compliance with appropriate documentation. Failure to provide sufficient justification may lead to additional tax liabilities and a surcharge of up to 5% on transfer pricing adjustments imposed by the inland revenue board during a tax audit.

Safe harbor rules for low value adding intragroup services. The guidelines introduce a safe harbor rule for LVAS, which aligns with the Organization for Economic Cooperation and Development Transfer Pricing Guidelines. The inland revenue board now allows Malaysian taxpayers to adopt a simplified approach to determine the arm’s length service fees when the relevant conditions are met.

LVAS are defined as services that:

• Are supportive in nature and not part of the core business of the multinational enterprise group.
• Don’t require the use of, or lead to, the creation of unique and valuable intangibles.
• Don’t involve the assumption or control of significant risks by the service provider.

The simplified approach recommends a fixed mark-up rate of 5% on all relevant costs, including direct, indirect, and operating expenses related to LVAS, but “pass-through costs” are excluded. Pass-through costs refer to expenses incurred on behalf of group members when performing intermediary functions. Because the service provider neither adds value nor assumes risk, these expenses can be recovered without a markup.

A benchmarking study isn’t required, though taxpayers must continue to maintain supporting documentation to support the arm’s length position, including intragroup service agreements, pricing and cost calculation worksheets, and other relevant documents.

Penalty scale for failing to furnish contemporaneous transfer pricing documentation. The provisions under Section 113B of the Malaysia Income Tax Act 1967, introduced on Jan. 1, 2021, aim to strengthen enforcement for providing CTPD to the inland revenue on request. Failing to comply may result in a penalty ranging from 20,000 to 100,000 Malaysian ringgit. If convicted, the taxpayer may be fined, face imprisonment for up to six months, or both.

In practice, the inland revenue may invoke the provisions under Section 113B for failing to:

• Submit CTPD to the inland revenue within 14 days from the date of audit letter.
• Prepare CTPD according to the requirements of the inland revenue’s transfer pricing guidelines and transfer pricing rules.
• Prepare CTPD on or before the tax return filing deadline.

The transfer pricing tax audit framework provides a penalty scale based on the period of delay in submitting the documentation, ranging from seven days to 28 days.

These penalties will be imposed only on companies with a financial year ending on or after May 31, 2024.

Be Prepared

To stay ahead, multinational groups operating in Malaysia should proactively assess their transfer pricing strategies to align with the latest compliance requirements.

This includes preparing a good set of CTPD ahead of time, and no later than the due date of filing the annual tax return; conducting internal reviews; updating transfer pricing policies; and ensuring robust documentation practices to mitigate audit risks.

Staying informed about the latest regulations and seeking professional advice when necessary also can help taxpayers navigate the complexities of transfer pricing requirements effectively.

This article was first published by Bloomberg Tax.