How Does Transfer Pricing Affect Malaysian Companies?

For those unfamiliar with transfer pricing, in a nutshell, it refers to “pricing” for the transfer of goods, services and intangible between related parties. Related parties mean entities having equity control (more than 50% direct and indirect shareholdings) or management control over the other party. The transfer price should not differ from the prevailing market price reflected by the transaction between independent persons also known as “arm’s length price”. Like other countries in the region, Malaysia’s Inland Revenue Board (“IRB”) is actively enforcing the arm’s length principle.

Malaysia is a particular case as in practice transfer pricing applies to both cross-border and domestic related party transactions. Therefore, Companies with domestic related party transactions within Malaysia are not safe from having to comply with transfer pricing regulations.


IS MY COMPANY AFFECTED?

Transfer pricing documentation/ Local file

The compliance burden targets taxpayers to prepare “contemporaneous” transfer pricing documentation annually under the Malaysian Transfer Pricing Guidelines. Contemporaneous means that transfer pricing documentation should be prepared when a taxpayer is developing or implementing any controlled transaction or at the latest by the time that a company lodges its tax return.

Taxpayers are required to prepare transfer pricing documentation if they have:

  • Gross income exceeding RM25 million; and
  • The total amount of related party transactions exceeding RM15 million or
  • Provision of financial assistance exceeding RM50 million (not applicable for financial institutions).

Taxpayers that fall outside the thresholds mentioned above can opt to maintain a simplified transfer pricing documentation. The simplified transfer pricing documentation still requires some level of effort and analysis as it consists of the organisational structure, controlled transactions and pricing policies. Taxpayers are still required to test its controlled transactions by applying the most appropriate transfer pricing methods without going through a selection process of 5 generally accepted transfer pricing methods.

CbC Reporting and Master File

Country by Country Reporting and Master File applies to multinational enterprises with total consolidated group revenue of more than Malaysian Ringgit (RM) 3 billion in the preceding financial year and meet the following criteria:

  • Has consolidated financial statements
  • Has more than two related companies defined by ownership or control which are residents of other tax jurisdictions

Taxpayers obliged to prepare a Country-by-Country (“CbC”) Report are required to prepare the Master file and submit it together with the transfer pricing documentation when requested.

It is worth clarifying that MNEs below RM 3 billion of group revenue are not impacted by CbC Reporting or Master File. However, they still need to comply with normal transfer pricing documentation for its Malaysian operations (also knowns as Local File transfer pricing documentation).


WHEN IS IT DUE?

Transfer pricing documentation/ Local file

In 2014, the IRB introduced a section in Form C (Company Tax Return Form) asking the taxpayers to select “Yes” or “No” if they have maintained transfer pricing documentation for the relevant year.

For this reason, the standard transfer pricing documentation (also known as local file transfer pricing documentation) needs to be prepared by the time that the tax return is lodged to be able to support the response in Form C of the Company Tax Return.

CbC Report

Before submitting the CbC Report, written notification must be sent to inform IRB which entity is going to file the CbC Report no later than the last day of the reporting financial year.

The CbC Report itself is to be prepared annually, no later than 12 months since the end of financial year of the reporting entity. 


KEEP IN MIND

Lodgement requirements

CbC Report
Taxpayers need to file their CbC Report through an electronic format, as recommended by the Organisation for Economic Co-operation and Development (OECD). The IRB has adopted the OECD's XML Schema standardised electronic format. The submission is through the IRB’s IT platform.

Transfer pricing documentation/ Local file
Taxpayers not subject to CbC report have to prepare standard transfer pricing documentation (local file transfer pricing documentation), but lodgement is not required. 
The transfer pricing documentation should be made available within 30 days upon request by the IRB. The expectation is that the transfer pricing documentation is prepared by the time the taxpayer lodges its tax return to support its response in Form C.

Language Requirements
Transfer pricing documentation should be prepared in Bahasa Malaysia or English. While supporting documents are in another language, the translation should be provided upon submission of transfer pricing documentation.

There will be consequences for those who fail to comply with the regulation or to those furnishing false information to the IRB. They may come in the form of a penalty of MYR 20,000 to MYR 100,000, maximum imprisonment of 6 months, or both.


Questions?
Contact Transfer Pricing Solutions

Australia
+61 (3) 59117001
reception@transferpricingsolutions.com.au

Singapore
+65 31585806
services@transferpricingsolutions.asia

Malaysia
+ 603 2298 7153
services@transferpricingsolutions.asia