Transfer Pricing
What is transfer pricing?
Transfer pricing is the setting of transfer prices for transactions relating to sales and purchase of goods, services, intangibles and financing provided between associated persons within a Group.
The main principle of transfer pricing is that all related party transactions should be conducted at arm’s length.
What is the arm’s length principal in transfer pricing?
According to the arm's length principle, a transfer price is acceptable if all transactions between associated parties are conducted at arm's length price. Arm's length price is the price which would have been determined if such transactions were made between independent entities under the same or similar circumstances.
Who are the associated persons or related party in transfer pricing?
Definition of a related party:
A related party, in relation to a person, means any other person:
- who, directly or indirectly, controls that person;
- The parties are individuals who are relatives of each other; or
- where both persons are, directly or indirectly, controlled by a common person.
Definition of relatives:
- Parent
- Child (including stepchild or adopted child)
- Brother, sister, uncle, aunt, nephew, niece, cousin, ancestor or lineal descendant
The following characteristics will deem to have control [Section 140(5A) of Income Tax Act] over another person:
- Having shareholding of 20% or more; AND satisfying at least one of the followings:
- Business operations of that person depends on the proprietary rights, such as patents, non-patented technological know-how, trademarks, or copyrights, provided by the other person or a third person; or
- The business activities, such as purchases, sales, receipt of services, provision of services, of that person are specified by the other person, and the prices and other conditions relating to the supply are influenced by such other person or a third person; or
- Where one or more of the directors or members of the board of directors of a person are appointed by the other person or a third person.
Why is transfer pricing important?
Its importance lies in determining profit allocation, tax liabilities, and regulatory compliance across different jurisdictions. Proper transfer pricing ensures fair taxation, minimizes legal and reputational risks, influences operational decisions, and maintains accurate financial reporting, all vital for effective and ethical management of global business operations.
Who is required to prepare transfer pricing documentation in Malaysia?
Malaysian entities entering into transactions with associated persons are required to prepare contemporaneous transfer pricing documentations (“TPD”). This applies to both cross border and domestic transactions.
- A full TPD is required when a Company has:
- Annual gross income (total of business and non-business income) exceeding RM30million AND engage in cross-border controlled transactions totaling RM10million or more anually; or
- Receive or provide controlled financial assistance exceeding RM50million annually.
- Taxpayers who does not meet the above threshold may opt to prepare a limited TPD.
Individuals who are not carrying on a business is not required to prepare transfer pricing documentation.
Is it compulsory for local SMEs to prepare transfer pricing documentation? Do I need to prepare transfer pricing documents if I only have domestic related party transactions?
Based on the Transfer Pricing Guidelines 2024, the following taxpayers are exempt from preparing any TPD:
- Individuals not carrying on a business;
- Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions;
- Person who entered into controlled transactions (including domestic and cross-border) with a total amount not more than RM1 million per year; or
- Person who entered solely into domestic controlled transactions with another person where both parties: –
- do not enjoy tax incentives;
- are taxed at the same headline tax rate; or
- do not suffer losses for two consecutive years prior to the controlled transactions
Persons exempted from preparing TPD must still comply with the arm’s length principle for all controlled transactions (including domestic and cross-border). They must ensure that all relevant documents related to the controlled transactions are kept, including documentation supporting the determination of the arm’s length price. Failure to comply with the arm’s length principle may result in a surcharge of up to 5% of the total TP adjustment made by the IRBM during a tax audit, pursuant to Section 140A(3C) of the Act.
Are there any exemptions to prepare transfer pricing document in Malaysia?
As explained above, based on the Transfer Pricing Guidelines 2024, the following taxpayers are exempt from preparing any TPD:
- Individuals not carrying on a business;
- Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions;
- Person who entered into controlled transactions (including domestic and cross-border) with a total amount not more than RM1 million per year; or
- Person who entered solely into domestic controlled transactions with another person where both parties: –
- do not enjoy tax incentives;
- are taxed at the same headline tax rate; or
- do not suffer losses for two consecutive years prior to the controlled transactions
When do I need to prepare transfer pricing documentation?
At the time where a person is developing or implementing any controlled transactions.
All documentations should be made available within 14 days upon request by the IRB. Taxpayers are also required to indicate in income tax return form (Form C) whether TPD has been prepared for that particular year of assessment.
Information contained in the TPD should be reviewed and updated yearly.
Do I need to prepare transfer pricing documentation yearly?
As long as the operational conditions remain unchanged, the comparable searches in databases supporting part of the Transfer Pricing Documentation should be updated every three years rather than annually. However, financial data and suitability of the existing comparable should be reviewed and updated every year in order to apply the arm's length principle reliably.
Do I need to submit transfer pricing documentation along with tax return forms?
Transfer pricing documentation is not required to be submitted with annual tax return forms. However, the documentation should be made available to the IRB within 14 days upon request.
Penalties for failure to comply with transfer pricing requirements in Malaysia
- Fine between RM20,000 to RM100,000 and/or imprisonment up to 6 months, or both upon conviction. [Section 113B of the Income Tax Act 1967 (“ITA”)]
- 5% surcharge on TP adjustments made during TP audits by the Inland Revenue Board (“IRB”). [Section 140A(3C) of the ITA]
- IRB is empowered to disregard the structure in a controlled transaction and make TP adjustments to the structure the IRB thinks fit. [Section 140A(3A) & (3B) of the ITA]
What are the differences between a full-scope transfer pricing document and a limited transfer pricing document?
|
Details |
Full scope |
Limited scope |
|
Organizational Structure |
✔ |
✔ |
|
Nature of the business/ industry and market conditions |
✔ |
✖ |
|
Details of related party transactions (controlled transactions) |
✔ |
✔ Note: Taxpayers may provide a general business description of all the relevant associated person(s). |
|
Pricing Policies |
✔ |
✔ Note: Taxpayers do not have to prepare a complete comparability study and may apply any method other than the five TP methods as described in the MTPG provided it results in, or best approximates, arm’s length outcomes. (For example: a taxpayer may use a price list to justify the price used for both controlled and uncontrolled transactions.) |
|
Assumption, Strategies and Information regarding Factors that Influence the Setting of Pricing Policies |
✔ |
✖ |
|
Comparability, Functional and Risk Analysis |
✔ |
✖ |
|
Selection of the Transfer Pricing Method |
✔ |
✖ |
|
Application of the Transfer Pricing Method |
✔ |
✖ |
|
Benchmarking analysis |
✔ |
✔ (if required) |
|
Financial Information |
✔ |
✖ |
Transfer Pricing Document Service
We assist clients in preparing both full scope and limited scope transfer pricing document. We provide transfer pricing service in Ipoh, Kampar, Tapah, Taiping, Chemor, Cameron Highlands, Sitiawan, Manjung, Bidor, Penang, Kedah, Alor Setar, Kelantan, Kuantan, Pahang, Perlis, Terengganu, Kuala Lumpur, Selangor, Melaka, Johor Bahru, Seremban and other areas in Malaysia. Kindly contact us for more information.
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