On December 30, 2024, Malaysia’s transfer pricing (TP) regulations have undergone significant updates with the introduction of the Malaysian Transfer Pricing Guidelines 2024 (TP Guidelines 2024) and the Transfer Pricing Tax Audit Framework 2024 (TPTAF 2024). These changes aim to enhance compliance, align with international standards, and provide clearer guidance for businesses. This article delves deeper into key aspects of the new regulations, focusing on contemporaneous documentation, documentation thresholds, exemptions, and penalties related to non-compliance.

Key Changes and Highlights

1. Contemporaneous Transfer Pricing Documentation (CTPD) :

• CTPD must be prepared before the due date for filing tax returns for the relevant YA. It must be submitted to the Malaysian Inland Revenue Board (MIRB) within 14 calendar days upon request.

2. Revised Documentation Thresholds :

• Full CTPD: Required for entities with gross business income exceeding RM30 million and cross-border controlled transactions totalling RM10 million annually or provides or receives financial assistance from group participant of more than RM50 million. This documentation must include detailed information about controlled transactions, pricing methodologies, and a comprehensive functional analysis (Refer Paragraph 11.7 of Chapter 11 of TP Guidelines 2024 for detail content of full CTPD).
• Minimum CTPD: Applicable for taxpayers below these thresholds, this includes essential details such as a description of controlled transactions, pricing policies, and a summary of the organizational structure. This streamlined approach aims to ease compliance burdens while ensuring transparency.

3. Expanded Exemptions :

• Exemptions from comprehensive documentation now include individuals not engaged in business, those conducting solely domestic controlled transactions, and entities with controlled transactions totalling not more than RM1 million.
• Additional exemptions continue for entities involved in domestic transactions where both parties do not enjoy tax incentives or are taxed at the same headline tax rate.
• Notably, all exempt entities must still comply with the arm’s length principle and maintain adequate records to support their pricing determinations.

4. Comparability Analysis and Arm’s Length Range :

• The guidelines emphasize the necessity of conducting a robust comparability analysis to establish an appropriate arm’s length range for pricing controlled transactions. Taxpayers must ensure that their transfer pricing policies reflect market conditions and are substantiated by adequate documentation justifying pricing decisions. This includes assessing comparable uncontrolled transactions and considering factors such as market conditions, economic circumstances, and business strategies.
• In accordance with the updated 2023 Transfer Pricing Rules, the Malaysian Transfer Pricing Guidelines 2024 elaborate on the adoption of an arm’s length range, which is defined as a range of figures falling between the 37.5th and 62.5th percentiles of the dataset. This range is deemed acceptable by the Director General of Inland Revenue (DGIR) for establishing an arm’s length price for controlled transactions.

5. Business Restructuring :

• The TP Guidelines 2024 provide detailed prescriptions around business restructuring activities within multinational enterprises (MNEs). This includes accurate delineation of restructuring transactions, pre- and post-restructuring functional analyses of relevant parties, and evaluation of realistic alternatives available. The guidelines emphasize that any reduction in profits attributable to restructuring must be justified by actual reductions in functions, assets, and risks.

6. Low-Value Adding Intra-Group Services (LVAS) :

• A simplified approach for low value adding intra-group services is now available, allowing a flat mark-up of 5% on relevant costs incurred by Malaysian service providers or those adopting similar OECD approaches. This streamlining is designed to facilitate compliance while ensuring that services rendered are appropriately priced. Paragraph 6.25 of Chapter 6 of TP Guidelines 2024 provides list of activities which do not qualify for as LVAS and Paragraph 6.26 of Chapter 6 of TP Guidelines 2024 provide list of examples which are likely to fall under the category of LVAS.

7. Penalties :

The 2024 guidelines significantly expand the powers of the Director-General of Inland Revenue (DGIR) and introduce stricter penalties for non-compliance.

• Expanded Adjustment Powers: Under the 2024 Malaysian Transfer Pricing Guidelines (Subsections 140A(3), (3A), and (3B) of the Income Tax Act (ITA)), the DGIR’s power to adjust income is expanded beyond simply addressing non-arm’s length pricing; they can now also disregard transactions entirely if deemed to lack economic substance or recharacterize transactions to reflect their true economic nature (substance over form), potentially treating, for example, a loan as an equity contribution if its terms are not at arm’s length.
• Surcharge for TP Adjustments: A new surcharge of up to 5% of the transfer pricing adjustment can be imposed, regardless of whether there is any tax payable. This is a significant change and acts as a deterrent against aggressive transfer pricing practices. Even if the adjustments don’t result in additional tax owed (perhaps due to losses in the relevant year), the 5% surcharge can still be applied.
• Failure to furnish CTPD (Section 113B (1)): Failing to provide the required documentation within 14 days of receiving a notice from the Inland Revenue Board of Malaysia (IRBM) can result in substantial fines (between RM20,000 and RM100,000) and/or imprisonment of up to six months.
• Insufficient Record Keeping (Section 119A of the ITA): The requirement to maintain proper records is emphasized. Insufficient record-keeping for seven years, including CTPD, can lead to fines (RM300 to RM10,000) and/or imprisonment of up to one year.

Business Implications

These updates highlight Malaysia’s commitment to enhancing tax compliance and transparency while aligning with international standards. Businesses operating in Malaysia must reassess their transfer pricing strategies and documentation practices to ensure adherence to these new regulations. Failure to comply could result in significant financial penalties and increased scrutiny from tax authorities. For further insights on compliance requirements and how these changes may affect your business operations, consult your tax advisors or legal experts.