Malaysia’s transfer pricing laws comply with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within the Income Tax Act.
Arm’s Length Principle
Malaysia’s transfer pricing policies are based on the arm’s length principle, as provisioned in the OECD Transfer Pricing Guidelines. It stipulates that associated persons, including related companies, must price their transactions as if these were conducted by independent entities in comparable situations. This safeguards the appropriate allocation of profits and ensures the jurisdictions where economic activities are undertaken receive the right tax revenues.
Related Party Definition
In Malaysia’s transfer pricing rules related parties are referred to as “associated persons”. For two entities to be classified as associated one has to have control over the other or they must both be under a third party’s control. Control includes direct and indirect control and a shareholding of 20%or more may be enough to prove such a relationship. Indicators of control include dependence on proprietary rights provided by another entity, influence over key business decisions such as pricing and supply terms, or the appointment of directors by another entity.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Malaysia are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
Malaysian rules state a hierarchy of preferences for CUP, RMP, and CPM being the preferred choices. However, if none works reasonably, the taxpayer can use TNMM or PSM methods. In addition, if none of these five methods can be used, the tax authority may allow a different method, as long as it gives the most accurate comparison between related-party transactions.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Malaysia:
While Malaysia’s policy on comparability analysis aligns with the OECD Transfer Pricing Guidelines, it has a preference for domestic comparables over external for benchmarking analysis. However, tax authority will accept foreign data if it is reliable and well-explained. Secret comparables (hidden data) are not allowed. Malaysia uses an “arm’s length range” to decide fair prices, meaning prices should fall within a certain range of values. If prices fall outside that range, the tax authority can adjust them. Also, adjustments must be made when differences between transactions affect the price significantly.
Documentation Requirements
Transfer pricing documentation requirements in Malaysia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Malaysian tax authorities:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Taxpayers involved in related-party transactions must prepare local documentation, called the local file, which includes details about the company’s structure, the business, and the transactions with related parties, pricing policies, and financial information. This local file must be ready within 14 days if requested by the tax authorities.
For larger multinational groups required to file country-by-country reports, they must also prepare a master file. The master file provides an overview of the entire group, including its legal structure, main business activities, key intangible assets, financing, and overall financial and tax positions. If the parent company outside Malaysia prepares the master file, a Malaysian subsidiary must submit it along with the local file when asked.
Country by Country Reporting
In Malaysia, large multinational groups with yearly revenue of at least 3 billion ringgit must file a Country-by-Country (CbC) report within 12 months after the end of their financial year. This is usually done by the group’s main company in Malaysia, or a substitute if needed. The report shows basic financial details for each country the group operates in, such as revenue; profit or loss before income tax; income tax paid; number of employees; accumulated earnings; and value of tangible assets.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
If someone does business across borders with a related company, they can ask the tax authority’s Director General to agree on a pricing plan in advance, called an advance pricing arrangement (APA). This agreement can involve just one country (unilateral), two countries (bilateral), or more (multilateral). The APA usually covers three to five years and can be extended if everyone agrees.
Mutual Agreement Program (MAP)
As part of its tax treaties, Malaysia provides a Mutual Agreement Procedure (MAP) for resolving tax disputes. MAP can be sought through a written submission to both the tax authority called Inland Revenue Board of Malaysia and the Ministry of Finance. The application must be submitted within three years of the relevant event. Malaysia APAs enable the avoidance of disputes, including bilateral APAs which Malaysia permits. There are no costs associated with making a MAP request, and although there is no set timetable, Malaysia’s goal is to resolve disputes in under 2 years.
Approach to Transfer Pricing Audits
In Malaysia, tax audits of transfer pricing issues mainly go after related party transactions, which include goods, services, intellectual property, and loans. With the increase in complexity of the issue and the introduction of more rigorous rules, tax authorities are now asking for in-depth documentation and very thorough audits. Companies must put forth to prove their pricing methods and see to it that their TP policies are in line with local and international standards. Should companies fail to do so, they risk penalties, adjustments, or disputes with tax authorities.
Penalties
TP rules in Malaysia provision a fine of between 20,000 ringgit and 100,000 ringgits, and/or imprisonment of up to six months, if taxpayers fail to provide the documentation as requested by the tax authority.
Also, if the taxpayer adjusts the price of a related-party (controlled) transaction, a surcharge of up to 5% will be imposed. The 5% surcharge is applied to the amount of the adjustment, not to the total income or tax.
Taxation at a Glance
Malaysia is a federal country where taxes are imposed under federal law. The main tax authority for direct taxes, like income tax, is the Inland Revenue Board (IRBM), while the Royal Malaysian Customs Department (RMCD) handles indirect taxes such as sales and service tax. The main law governing income tax is the Malaysian Income Tax Act 1967.
The currency of Malaysia is the Malaysian ringgit. The official name of the Malaysian tax authority is the Malaysian Inland Revenue Board.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 24% |
VAT | 8/10% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 0/15% |
Withholding tax on royalties to non-residents | 10% |
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