In this article, we provide the most recent updates and insights on the requirements for Malaysian Transfer Pricing Guidelines (MTPG) and its enforcement.
Malaysian Transfer Pricing Guidelines and Its Enforcement
All companies that have related party transactions are required to prepare contemporaneous transfer pricing (TP) documentation based on the Transfer Pricing Guidelines and Regulations issued on 20 July 2012 and updated on 15 July 2017.
Updates of Flowchart and Self-Test Kit by IRB on 2 December 2021
The domestic business enterprise will be relieved from the obligation of preparing transfer pricing (TP) documentation provided that any adjustment by the Inland Revenue Board of Malaysia (IRBM) in tax audits will not result in altering the total tax payable or suffered by the related parties in relation to the controlled transactions.
Which Companies Should Prepare TP Documentation?
Domestic business enterprises which have controlled transactions with related parties outside Malaysia or where one of the parties to the transaction enjoys tax incentives, tax losses or is taxed at a different rate and that any adjustments made may alter the total tax payable should prepare contemporaneous TP documentation.
Contemporaneous Transfer Pricing Documentation refers to documentation brought into existence:
a) When a person develops or implements any controlled transaction
b) Where the controlled transaction is reviewed and there are material changes
c) Documentation shall be updated before the due date upon submission of relevant Return Form
Threshold Requirement to Prepare TP Documentation
Business Enterprises that have (i) a turnover of more than RM25 million and related party transactions exceeding RM15 million per annum; or (ii) companies (non–financial institutions) who provide financial assistance to related parties exceeding RM50 million per annum are required to prepare full TP documentation.
Full Transfer Pricing Requirements:
♦ Organisational and ownership structure
♦ Nature of the business or industry and market conditions
♦ Details of the related party transaction
♦ Pricing policies
♦ Function and risk analysis
♦ Application of TP methodology
♦ Benchmarking analysis
♦ Any other information, data or document considered relevant to determine an arm’s length price
Business enterprises that do not meet the above thresholds will be required to prepare Limited TP documentation (LTPD) to support their related party transactions. LTPD comprises Organisation Structure, Controlled Transactions and Pricing Policies.
Associated /Controlled – Defined in TP Guidelines Chapter I Para 5.2:
Two companies are associated companies with respect to each other if one of the companies participates directly or indirectly in the management, control or capital of the other company; or the same persons participate directly or indirectly in the management, control or capital of both companies.
Associated / Controlled – Defined in Income Tax Act 1967 (the “ACT”)
According to “S139. (1)(a) of the ACT, a person shall be taken to have control of a company, if he exercises or is able to exercise or is entitled to acquire control (whether direct or indirect) over the company’s affairs and if he possesses or is entitled to acquire the greater part of the share capital or voting power in the company.
S139.(6) of the ACT explains that all the rights and powers of any company of which a person has, or he and associates of his have are considered as Associated /Controlled.
“Associated” is further explained in S139. (7) (a) of the ACT as: a person in any of the following relationships to that person, such as husband or wife, parent or remoter forebear, child or remoter issue, brother, sister and partner.
Associated / Controlled – Legislative Updates:
Before 1 Jan 2019 – S140 A(5) + S139 of the ACT
Controlled more than 50% share capital or voting power + S139 of the ACT
From 1 Jan 2019 onwards – S140 A(5) + S139 of the ACT
Controlled more than 50% share capital or voting power + S139 of the ACT
S140 A(5A) + S139 of the ACT
Controlled more than 20% share capital + (a) or (b) or (c) + S139 of the ACT
(a) – control over intellectual property, or
(b) – control over business activity, or
(c) – control over management.
Transfer Pricing Explained
Transfer Pricing is a Pricing System for related–party transactions or generally refers to intercompany pricing arrangements for the transfer of goods, services or intangibles between associated parties where at least one party is assessable or chargeable to tax in Malaysia.
TP should ideally not be different from the prevailing market price that would be reflected in a transaction between the independent parties.
This applies to Cross Border and Domestic related parties transactions:
1) Buy/ Sell of Goods or Property – raw materials, semi -finishes, finishes goods, property, plant & equipment, intangible such as trademark and know-how.
2) Buy/Sell of Services –management services, administrative services, technical & support services, marketing and distribution services.
3) Intragroup financing ( financial assistance) – loan, interest-bearing trade credit, advances or debt and provision of a guarantee.
The TP documentation is to support that related party transactions are performed based on the arm’s length principle.
Arm’s Length Principle
Section 140 of the Income Tax Act 1967 (ITA) empowers the Director-General of Inland Revenue (DGIR) to disregard certain transactions which are believed to have the direct or indirect effect of altering the incidence of tax.
Section 140 allows the DGIR to disregard transactions believed not to be at arm’s length and make the necessary adjustments to revise or impose tax liability on the persons concerned.
Thus, this section requires taxpayers to determine and apply the arm’s length price on any controlled transactions.
Determination of Arm’s Length Price
The determination of an arm’s length price involves the following steps which are interrelated and listed in no particular order:
1) Analysis of transactions and functions
2) Characterization of business
3) Identification of comparable transactions
Arm’s Length Pricing Methodologies
The following are five (5) prescribed TP methodologies and Benchmarking:
a) Comparable Uncontrolled Price Method -> Price Against Price
b) Resale Price Method -> Gross Margin
c) Cost Plus -> Cost Plus Mark Up
d) Profit Spilt -> Allocation of Profit to Each Party in the Value Chain
e) Transactional Net Margin Method –>Net Operating Margin
The suitability of each method would depend on the facts and circumstances of each category of controlled transactions. However, there must be consistency in the approach for similar products or services over time in relation to the particular enterprise.
Importance of Comparability / Benchmarking Analysis
A comparability /benchmarking analysis is a prerequisite in the application of all transfer pricing methods that conform to the arm’s length principle.
This involves comparing conditions in a controlled transaction with those in an uncontrolled transaction. A controlled transaction in a comparability analysis is the transaction that has been identified as the transaction where pricing may not be at arm’s length.
Comparability/benchmarking analysis supports taxpayers with reliable economic data by comparing the related party transaction with a third party in the same or similar circumstances. This will minimise the risk of TP or Price adjustments as the data contained in the benchmarking analysis will be the basis to defend the taxpayer’s position in front of the IRBM.
For LTPD, no external comparability study is required (other methods such as price list or local benchmarking may be applied.)
Intragroup services are services provided by one or more members of a group for the benefit of the other members within the group. In general, no intra-group service should be allowed for the following activities:
Shareholder activity refers to an activity that the parent company performs solely because of its responsibility as a shareholder due to its ownership interest in one or more members of the group.
Duplicative services are services performed by a group member that merely duplicates a service that another group member is already performing in-house, or that is being performed by a third party.
Services that Provide Incidental/Passive Association Benefits
This refers to services performed by one member of a group, such as a shareholder or coordinating centre, which relates only to specific group members but incidentally provides a benefit to other members of the group. Such incidental benefits would not warrant a charge to the incidental recipient because the perceived benefit is so indirect.
If there are exceptional circumstances that require on-call services to be considered as chargeable services, it must be proven that an independent person in comparable circumstances would incur such a charge.
Application Of Arm’s Length Principle For Intragroup Services
In applying the arm’s length principle to intragroup services, taxpayers should consider:
(i) Whether services have been provided; and
(ii) If so, whether the charge for these services is at arm’s length prices
Recent TP Audit Focus
♦ Existence and Benefits test for service recipients.
♦ Duplicative Services test on whether such services are already provided in-house.
♦ Existence of Intangible Properties
♦ IRB often challenges interest–free financing within the group.
♦ Taxpayers need to apply arm’s length interest rates.
Loss Making Entities
♦ Need to compile quantitative and qualitative supporting documents to justify the loss.
♦ To prove that the effect of adjustment will not alter the total tax payable for the domestic intra-group.
♦ IRBM would expect a TPD with benchmarking study to be performed for multi-national Entities.
Transfer Pricing Audit Framework 2019 was issued on 1 April 2013 and updated on 15 December 2019 and the related TP Penalties are:
♦ Taxpayers who did not prepare a TPD will be fined a penalty rate of 50% of any additional tax payable as a result of TP price adjustment.
♦ If the TPD is prepared and submitted on a timely basis, the penalty rate can be reduced to 30%.
♦ Zero penalty is possible if the taxpayer has a good quality TPD
Malaysian Transfer Pricing Guidelines Effective 1 January 2021:
♦ Penalty of RM20,000 to RM100,000 for failure to submit a TPD upon request by the IRB under new section 113B of the Act.
♦ Surcharge of 5% on any TP adjustments made during an audit.
♦ Expanded scope of the IRBM to disregard transactions under S.140A (3A) and (3B).
♦ Period to submit the TPD has been reduced to 14 days.
Hence it is essential that all companies promptly attend to the requisite of TP requirements, if applicable. If you have questions or require our assistance, please email us at firstname.lastname@example.org or contact our Ms. Priya at email@example.com.