Following the publication of the first draft of the OECD Guidelines, Malaysia issued Transfer Pricing Guidelines in 2003. These were superseded by the 2012 Transfer Pricing Guidelines and updated in July 2017.

In 2013, the MIRB (Malaysian Inland Revenue Board) issued a Transfer Pricing Audit Framework outlining its approach and requirements. This Framework was superseded by the Transfer Pricing Audit Framework 2019.

Malaysia adopted and implemented BEPS Action 13 for Transfer Pricing documentation from January 1, 2017, onwards.

Arm’s Length Principle

The Arm’s Length Principle is the governing standard set out by the OECD Guidelines for Transfer Pricing. The Arm’s Length Principle is based on a comparison of prices, margins, profit sharing, or other related party transaction indicators with prices, margins, profit sharing, or other non-related party transaction indicators.

For entities governed by the Income Tax Act 1967 (ITA), the Arm’s Length Doctrine of Transfer Pricing is mandatory under Section 140A of the ITA.

Related Parties

Section 2(4) of the ITA defines related parties as follows:

  1. Two or more companies related to each other according to Section 6 of the Companies Act 1965.
  2. A company is so closely related to another one, which is so closely related to a third one.
  3. The same persons hold over 50% of the shares in each of two or more companies.
  4. Each of two or more companies is so related to at least one of two or more companies paragraph (c) applies to, all the companies concerned form part of the same group for this Act.”

Section 139 of the ITA presumes control where a person:

  1. Exercises, may exercise, or is entitled to acquire direct or indirect control over the company’s matters.
  2. Holds or is entitled to acquire a majority of the capital stock or voting rights of the corporation.
  3. Is entitled to a majority of the assets available for distribution among the members if liquidated.

In addition, Section 6 of the Companies Act 1965 has been amended as Section 7 of the Companies Act 2016 and sets out cases where corporations are deemed to be related to each other:

“Where a corporation:

  1. Is the controlling corporation of another;
  2. Is a subsidiary of another; or
  3. Is a subsidiary of the controlling company of another one.”

Transfer Pricing Methods

There are five methods used in Malaysia to determine the Arm’s Length Price:

  • Comparable Uncontrolled Price Method.
  • Cost Plus Method.
  • Resale Price Method.
  • Profit Split Method.
  • Transactional Net Margin Method.

Although implementing another method is not specifically permitted, there is no strict prohibition thereof. If the methods provided for in the Guidelines are not suitable for a particular arrangement/transaction, it will depend on the Director General of Inland Revenue (DGIR) of Malaysia to apply or not another Transfer Pricing Methodology that provides the greatest comparability between transactions.

Transfer Pricing Documentation

Local Report

Taxpayers must prepare the Transfer Pricing Documentation annually under the Malaysian Transfer Pricing Guidelines.

It must be prepared when a taxpayer enters into any related transaction or, at the latest, when a company files its tax return.

Taxpayers must prepare the Transfer Pricing documentation if they have:

  • Gross income exceeding RM25 million during the year and
  • The total amount of related party transactions exceeding RM15 million during the year or
  • Provision of financial assistance exceeding RM50 million for non-financial institutions.

Country by Country Report and Master File

Taxpayers required to prepare the Country-by-Country Report must also prepare the Master File jointly with the Transfer Pricing documentation upon request.

The Country-by-Country Reports and Master File apply to multinational companies with total consolidated group revenue exceeding RM3 thousand million in the preceding fiscal year and meet the following criteria:

  • Consolidated financial statements.
  • More than two related companies defined by ownership or control that are residents of other tax jurisdictions.

Transfer Pricing documentation must be performed within 14 days after the request of the Malaysian Inland Revenue Board (IRB).

The Country-by-Country report must be prepared and filed to the IRB within 12 months after the end of the tax year.

Transfer Pricing Penalties

If a company fails to provide contemporaneous Transfer Pricing documentation upon request, the taxpayer may be subject to a fine ranging from RM 20,000 to RM 100,000 and/or imprisonment of up to six months.

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