Transfer Pricing Malaysia
Transfer pricing is an accounting practice by which inter-company generally makes reference to companies who are part of the same Group or related companies.
Over the years, Malaysia has become one of the fastest growing business hubs in the world because of her business friendly environment and central location. More than half of the world’s population lives within a 5-hour radius of Malaysia, and several business tycoons are looking to establish their companies on her soil.
Due to this, tax audit activities have intensified especially for Transfer Pricing. Tax payers who are involved in related company transactions must prepare “transfer pricing documents” which needs to be submitted to the tax authorities when requested.
Transfer Pricing Obligations in Malaysia
Malaysia has a list of items that should be included in the Transfer Pricing Documentation as follows:
- The organizational structure, containing an organization chart which shows the parties involved in any controlled transaction.
- Nature of business/ industry and market conditions
- The controlled transaction.
- Pricing policies
- Assumptions, strategies, as well as information pertaining to factors influencing the pricing policy established.
- Functional, comparability, and adequate risk analysis.
- Selection and Application of the transfer pricing method.
- Financial information
- Documents used in developing the transfer pricing system index.
- Any other relevant information or document for determining price.
Note that all transfer pricing documentation must be written in English or Bahasa Malaysia. Also note that it is not mandatory to submit transfer pricing documentation when filing a tax return. Nevertheless, these documents must be provided to the Malaysian Inland Revenue Board (IRB) within 30 days, and it must be kept in the administration for 7 years.
The Transfer Pricing Guidelines now has two other requirements in addition to the transfer pricing documentation. These are the Country-by-Country reporting, and the Master File.
Country-by-Country Reporting (CbCR)
This applies only to Multinational Enterprises (MNEs) with consolidated revenue of RM3 billion or more in the previous financial year.
In the event that the Malaysian company is the ultimate holding company of an MNE that fulfils the requirement above, the company should prepare and submit the following documents:
- Complete the notification for reporting entity to notify the Director General in writing if it is the ultimate holding entity on or before the last day of the reporting FY (i.e. 31 December 2019 if the tax payer’s year end is 31 December 2019). Please note that the notification letter will have to include details of all Malaysian and foreign non-reporting constituent entities
- Complete the CbyCR and submit it to the tax authorities on or before 12 months from the last day of the reporting FY (i.e. 31 December 2020 if the tax payer’s year end is 31 December 2019).
Malaysian companies who are subsidiaries of the MNE (either Malaysian based or foreign based ultimate parent) only has to fill up and submit the notification letter to notify the IRB in writing of the identity and tax residence of the reporting entity.
The IRB has also mandated the submission of a Master File alongside the transfer pricing documentation (also known as Local File) and CbCR. Any MNE which meets the criteria for submitting the CbCR in Malaysia, must also present the Master File.
What would happen when you fail to comply with the rules of transfer pricing Malaysia?
The following penalties or fines will be imposed on you when you fail to comply with the rules:
- Omission or understatement of income will attract a 45% penalty
- Failing to provide a contemporary transfer pricing documentation will attract a payable tax of 35%;
- If transfer pricing documentation is not prepared according to the guidelines, a payable tax of 25% is the fine.