Transfer Pricing Malaysia (2023 Guideline) – What’s New?

On May 29, 2023, Malaysia’s Minister of Finance (MOF) gazetted the “Income Tax (Transfer Pricing) Rules 2023” (P.U.(A) 165/2023), i.e “new transfer pricing rules”. The new transfer pricing rules now replace the previous “Income Tax (Transfer Pricing) Rules 2012” (P.U.(A) 132/2012).

The 2023 revision presents significant modifications to the transfer pricing framework, notably in the areas of documentation submission protocols and the application of the arm’s length principle. We invite you to delve further into this article to gain a comprehensive understanding of these critical changes.

Important Updates from the Latest Transfer Pricing Guidelines

The new transfer pricing regulations go into effect in the year of assessment (YA) 2023. Although it must be said that the new rules will come into effect in YA 2023 but tax payers can adopt it from YA 2021 onwards as majority of it is the extraction of what has already available in the corporate tax return guidebook and the Transfer Pricing guidelines.

• With this latest update, the IRB demands that each company in the group with control transactions must prepare transfer pricing documentation.
• It is important to note that the contemporaneous transfer pricing documentation must be prepared and updated annually BEFORE the submission of the corporate tax return.
• Furthermore, the Inland Revenue Board of Malaysia (IRBM) now requires transfer pricing documents submitted within 14 days of a written request.
• Failing to provide Accurate and Complete transfer pricing documentation that fulfils the requirements of the latest transfer pricing guidelines may result in penalties of RM20,000 to RM100,000 for each YA for non compliance and failure to submit the requested TP Documentation within the stipulated period.

In this article, we aim to offer a concise yet comprehensive understanding of Malaysia’s latest transfer pricing update, focusing on the essential aspects that corporate groups engaged in intercompany transactions must be aware of.

With the new transfer pricing guidelines in place, it becomes crucial for large corporate to navigate these regulations effectively, ensuring compliance and mitigating potential risks associated with non-compliance.

Key Overview of the 2023 Transfer Pricing Malaysia Rules & Regulations

1. The transfer pricing documentation should be created and kept up to date on a yearly basis prior to the filing of the income tax return

Under the latest transfer pricing guidelines in Malaysia, there have been significant changes in the requirements for the transfer pricing documentation.

The new rules emphasise the importance of contemporaneous preparation, meaning that businesses are required to prepare their transfer pricing documentation in place before the due date for filing the relevant income tax return in the basis period for a Year of Assessment (YA) in which the taxpayer is involved in a controlled transaction.

Notably, the previous “ex-ante” rule, which necessitated documentation before the event occurred, has been removed. The updated definition now specifies that documentation should be developed and updated annually, ensuring that companies maintain accurate and up-to-date records to demonstrate compliance with the transfer pricing guidelines.

This revision provides clarity for businesses, highlighting the need for timely and comprehensive transfer pricing documentation that aligns with the new requirements in Malaysia.

2. The date of preparation must be specified in the transfer pricing documentation.

In accordance with the updated transfer pricing rules and regulations in Malaysia, businesses are required to specify the date of finalisation of their transfer pricing documentation.

This measure is essential to ensure that the documentation is completed contemporaneously before the income tax return is due.

The Inland Revenue Board (IRB) now accepts “contemporaneous” documentation if presented within 14 days following a written request.

This new criterion reinforces the urgency for companies to prepare their transfer pricing documentation in a timely manner, aligned with the filing of the tax return.

Failing to meet this requirement may result in penalties ranging from RM20,000 to RM100,000 for each Year of Assessment (YA).

3. Significant additional disclosure requirements apply to Malaysian taxpayers’ who enter into a controlled transaction

Previously, certain items were exclusively included in the master file, but now, these master file requirements apply to all large corporations, making it necessary for them to comply with the additional paperwork requirements.

This represents a major change for Malaysian taxpayers, as they now are required to prepare and adhere to the master file requirements, regardless of their consolidated revenues.

Additionally, the scope of master file requirements has been expanded, making it applicable to all taxpayers meeting the full TP documentation criteria.

As a result, businesses must now gather and document comprehensive information before filing their tax returns for the relevant basis period.

This expanded scope may necessitate the gathering of data that was not previously required, potentially posing challenges for companies in sourcing and documenting the necessary information.

4. Mandatory Disclosure of Non-Applicable Prescribed Information in Transfer Pricing Documentation

Under the latest transfer pricing guidelines in Malaysia, a ‘check-box’ method has been introduced to verify compliance with documentation requirements.

The Inland Revenue Board of Malaysia (IRBM) has prepared a Minimum Transfer Pricing Documentation template as a guide for taxpayers required to prepare a minimum contemporaneous transfer pricing documentation.

This method is designed to streamline the verification process, ensuring that businesses who opt to prepare their own Minimum TPD have met all the necessary documentation obligations.

However, while the ‘check-box’ approach simplifies the verification process, the specific level of penalty protection for the taxpayer who meets all the requirements remains to be determined.

It is anticipated that compliant taxpayers may receive a reduction or waiver of the surcharge applicable to the transfer pricing adjustments.

This potential penalty protection incentive serves as an encouragement for businesses to diligently fulfill their documentation obligations and maintain accurate and comprehensive transfer pricing records.

By adopting this approach, companies can strengthen their transfer pricing compliance efforts, mitigate the risk of penalties, and demonstrate their commitment to adhering to the transfer pricing guidelines in Malaysia.

5. Current Year Assessment Using Three-Year Weighted Averages

In the context of transfer pricing in Malaysia, businesses often encounter challenges in accessing comparable data at the time of preparing their documentation. To address this issue, the guidelines allow for the use of three-year weighted averages or the latest available data to assess current-year results.

However, it is crucial to conduct finalisation procedures to update the documentation with the most recent and accurate data before submitting it to the tax authorities. This approach ensures that the transfer pricing calculations are based on the best information available, enhancing the accuracy and reliability of the arm’s length price determination.

Malaysian taxpayers are required to calculate the arm’s length price using the most recent information that is reasonably accessible at the time of preparing or calculating the arm’s length price.

6. Comparability Analysis Using Multi-Year Averages

The TP Rules 2023 offer businesses the flexibility to reference past year data for analysing the impact of business cycles or life cycles when selecting comparables. This allows companies to consider historical performance trends and fluctuations that may have affected their industry during specific periods.

However, it is important to note that the guidelines still mandate a comparison of the taxpayers’ results against the outcomes of the chosen comparables for the same basis year.

This requirement ensures that the transfer pricing analysis remains relevant and reflective of the current market conditions and economic landscape.

By leveraging past year data while adhering to the basis year comparison, businesses can develop more accurate and meaningful transfer pricing methodologies, aligning their pricing strategies with the latest transfer pricing guidelines in Malaysia.

7. The Arm’s Length Principle Applied Must Be Justified by The Taxpayer

The TP Rules 2023 replace the traditional method hierarchy with a best method approach in line with the OECD Guidelines. This means that Malaysian taxpayers must now determine the transfer pricing method for each specific transaction based on a thorough assessment of their unique circumstances.

Moreover, under the new guidelines, the taxpayer is required to prepare a clear and well-justified explanation for selecting a particular method, including the profit level indicator if the TNMM (Transactional Net Margin Method) is utilised.

This mandate ensures transparency and accountability in the transfer pricing method, reinforcing the need for businesses to demonstrate that their chosen approach provides the best approximation of the arm’s length price.

Additionally, the TP Rules 2023 grant the Director General (“DG”) of Inland Revenue Board the authority to intervene and replace a selected method if there are grounds to suspect that it is not the most appropriate approach for a particular transaction.

This emphasises the importance of ensuring that transfer pricing analyses are meticulous and reinforces the businesses’ requirements to comply with the new guidelines.

8. Implementation of the arm’s length principle and use of the median to adjust transfer pricing

Under the TP Rules 2023 in Malaysia, there is a defining concept of the “arm’s length range,” which holds significant implications for businesses engaging in transfer pricing.

Unlike the broader interquartile range used in many other jurisdictions, the arm’s length range in Malaysia is narrower, spanning from the 37.5 percentile to the 62.5 percentile of the data set.

This specification demands that the taxpayer thoroughly assess their existing transfer pricing strategies to ensure that their transfer prices align with the arm’s length range from a Malaysian perspective.

If a transfer price falls within this range, it is deemed to be at arm’s length, signifying compliance with the guidelines. However, any transfer price outside of this range will warrant an adjustment to the median value.

This underscores the need for meticulous transfer pricing analyses to accurately determine whether a company’s intercompany transactions fall within the acceptable arm’s length parameters.

Implementation of the New Guidelines

How to incorporate the new policies into daily operations

1. Ensure that all necessary documentation is prepared each year before filing the tax return.
2. Keep records, documentation, and intercompany transaction workings to show that related party transactions are commercially sensible and economically relevant.
3. Review and update the arm’s length pricing in controlled transactions on a regular basis, while keeping in mind that the Director General (DG) has the authority to make changes.

Potential implementation issues, including the large amount of information needed

1. The updated transfer pricing guidelines in Malaysia may present challenges for Malaysian taxpayers, especially Multinational Enterprise Groups (MNEs), due to the substantial increase in documentation requirements.
2. This surge in paperwork may be perceived as burdensome and time-consuming for businesses, necessitating the requirement of a professional with experience and knowledge to complete the TP documentation.
3. Another area of concern is the lack of specificity in the TP Rules regarding what constitutes a comparability problem and how it should be resolved. This ambiguity may create uncertainties for taxpayers when conducting their comparability analysis, potentially leading to varying interpretations and outcomes.
4. Furthermore, the revised TP Rules do not mention the utilisation of non-Malaysian benchmarking studies for comparability analysis, which could limit the availability of relevant data for businesses with global operations.
5. As businesses navigate these challenges, seeking expert advice and adopting a proactive approach can help them address documentation requirements, resolve comparability issues effectively, and optimise transfer pricing strategies in line with the transfer pricing guidelines in Malaysia.

Solutions and methods for addressing these difficulties

1. Create a solid system for gathering and keeping the necessary data.
2. Seek expert help to understand and address issues with comparability.
3. Consider understanding the basis of the control transaction to complete a LHDN friendly benchmarking studies.
4. Establishing a proper Inter company policy and agreement for all controlled transactions.

Actions the taxpayer should take in response to the new standards

1. To guarantee compliance with the new TP Rules, companies should review and amend their transfer pricing policies.
2. Prepare for the Director General (DG)’s revisions, even if the regulated transaction price is within the arm’s length range.
3. Examine current operational conditions to see if there have been any major changes, and generate contemporaneous transfer pricing documentation before the tax return is due.

How Can We Help You?

Comprehensive Transfer Pricing Services for Compliance

With a deep understanding of the new TP Rules and updated TP Guidelines, we offer specialised services to ensure your business remains compliant and well-prepared. Contact us today for timely assistance in developing robust and contemporaneous transfer pricing documentation that adheres to the latest regulations.

Analyse and Enhance Existing Transfer Pricing Documentation

Our experienced professionals can also help enhance your existing transfer pricing documentation and analysis by incorporating the concepts outlined in the new TP Rules, ensuring greater accuracy, completeness and effectiveness.

Guidance on Formulating Optimal Transfer Pricing Methodologies

When it comes to formulating the best TP policies and pricing systems, we are here to guide you. Our team can meticulously review your current contracts, identifying potential TP consequences and concerns in light of the new guidelines. By leveraging our expertise in transfer pricing in Malaysia, you can proactively address any TP challenges and optimise your transfer pricing strategies.

Dedicated Support for TP Audit Defence

In addition to our advisory services, we offer dedicated support for TP audit defence. Our seasoned specialist are well-equipped to represent your interests and address any technical TP difficulties in response to IRB inquiries. We prioritise your peace of mind and work diligently to resolve any TP-related issues that may arise, allowing you to focus on your core business operations.

HernanCres: Your Ideal Partner in Navigating Transfer Pricing Complexities

With our in-depth knowledge of transfer pricing in Malaysia and a proven track record of assisting businesses in diverse industries, HernanCres is your ideal partner for all your transfer pricing needs. Let us help you navigate the complexities of the new TP Rules and achieve transfer pricing compliance with confidence and efficiency.

Over 15 Years of Demonstrated Expertise in Meeting LHDN’s Transfer Pricing Requirements

When it comes to transfer pricing in Malaysia, our template is LHDN (Inland Revenue Board of Malaysia) trial and tested, ensuring compliance with the latest transfer pricing guidelines in Malaysia. With 15 years of experience in this field, we have honed our expertise to assist companies in navigating the complexities of transfer pricing regulations effectively.

Ensuring Pricing Accuracy with LHDN-Aligned Practices

One of the key reasons to opt for HernanCres is the fact that we utilise the same company data and conduct industrial research just like LHDN, ensuring that our transfer pricing documentation is thorough and precise. This alignment with LHDN practices guarantees that our clients’ transfer pricing strategies are in line with the regulations, minimising the risk of penalties and non-compliance.

Ensuring Reliability and Robustness in Transfer Pricing Documentation

With HernanCres as your transfer pricing partner, you can be confident in the reliability and robustness of our services. Our team of experts is well-versed in the intricacies of the Malaysian transfer pricing landscape, and we are dedicated to providing comprehensive and tailored solutions to suit your business needs. Trust HernanCres for all your transfer pricing requirements in Malaysia, and rest assured that you are in capable hands. Contact us today to explore how our tailored solutions can benefit your organisation.

References

3.1 Methodologies used in determining arm’s length price. (2022). Lembaga Hasil Dalam Negeri Malaysia. https://www.hasil.gov.my/en/international/transfer-pricing/chapter-iii-transfer-pricing-methodologies/31-methodologies-used-in-determining-arms-length-price/

11.3 Penalty. (2022). Lembaga Hasil Dalam Negeri Malaysia. https://www.hasil.gov.my/en/international/transfer-pricing/chapter-xi-documentation/113-penalty/

Income Tax (Transfer Pricing) Rules 2012 P.U.(A) 132 (2012). Malaysia Federal Legislation. https://lom.agc.gov.my/ilims/upload/portal/akta/outputp/pua_20120511_P.U.%20(A)%20132-Transfer%20Pricing%20Rules%20BM%20%20BI%20(11%205%202012)(FINAL%20E-WARTA).pdf

Income Tax (Transfer Pricing) Rules 2023 P.U.(A) 165 (2023). Malaysia Federal Legislation. https://lom.agc.gov.my/ilims/upload/portal/akta/outputp/1820059/PUA165_2023.pdf

Transfer Pricing Guidelines. (2022). Lembaga Hasil Dalam Negeri Malaysia. https://www.hasil.gov.my/en/international/transfer-pricing/transfer-pricing-guidelines/

To learn more about the updated Transfer Pricing Rules 2023, please visit the LHDN site for more information.