How Does Transfer Pricing Help With Malaysia's Economy?

Transfer pricing represents pricing the transfer of goods and services between related parties. Related parties mean the entities or organizations that have equity control over each other. In such a case, one entity should be having more than 50% direct and indirect shareholdings control over the other party.


Generally, the transfer price should not be different from the current market price at the time of the transaction between independent individuals. This price is known as the arm’s length price. In most countries, the arm’s length price is decided by a regulatory body to ensure fairness and transparency. The Inland Revenue Board (IRB) is responsible for ensuring that the transfer pricing in Malaysia is smooth for the related price. Hence, the arm’s length principle is enforced by the IRB.


There are many different aspects of transfer pricing and transfer pricing documentation that affects companies in different ways. For instance, many companies do not realize that Malaysia is a unique country in which transfer pricing is applicable to cross-border and domestic transactions. Therefore, companies dealing with domestic party transactions should also be familiar with the rules and regulations of transfer pricing.


In this article, you will learn the effects of transfer pricing on your business and how it impacts Malaysia’s economy.

What is Transfer Pricing Documentation

According to the law, Malaysian taxpayers have to prepare transfer pricing documentation on an annual basis and follow the Malaysian Transfer Pricing Guidelines. A taxpayer must prepare transfer pricing documentation on every controlled transaction or at least when the company is filing its tax return.

 

The Guidelines also state that taxpayers have to prepare a thorough transfer pricing documentation:

  • If their gross income is more than RM25 million
  • If the total amount of the related party transaction is more than RM15 million
  • If the entity has received financial assistance of more than RM50 million

 

On the other hand, companies outside these requirements can use simple transfer pricing documentation in which the analysis of the organization structure, controlled transactions, and pricing policies are required.

business chart reported in tablet and paper

Country by Country (CbC) Reporting and Master File

CbC and Master File are applicable to multinational companies with overall revenue of more than RM 3 billion in the preceding financial year. Moreover, such companies should meet the following requirements:
  • Enterprises must have consolidated financial statements.
  • Multinational companies should have more than two related entities that are defined by ownership or control.
Such organizations will have to prepare the Master file and submit it along with the transfer pricing documentation in Malaysia. It is important to note that multinational enterprises with a group revenue of less than RM 3 billion are not affected by Master File. However, they comply with the normal requirements of transfer pricing documentation.

Due Date of Transfer Pricing Documentation

When a company submits Form C (Company Tax Return Form) in Malaysia, the form has the option of whether the taxpayer has maintained transfer pricing documentation in that particular year. Therefore, for timely submission, it is important that the companies prepare the required documentation by the time the tax return is filed so that Form C of the Company Tax Return is supported by this essential document.

 

However, it is important to note that taxpayers not subject to CbC and Master File must prepare the standard transfer pricing documentation, but they do not have to necessarily lodge the document. Instead, the document must be maintained and provided within 30 days of the request by the IRB.

businessman is calling in office

Impact on Economy

Transfer pricing in Malaysia certainly has a positive impact on the economy. The Malaysian Budget 2021 has made a number of changes in tax legislation, along with making strict rules for transfer pricing-related penalties.

 

It has become more important than ever because, due to globalization, more and more companies are getting involved in intra-group transactions.

 

Hence, transfer pricing documentation ensures that companies in Malaysia comply with the arm’s length nature of the transactions, and penalties are applied if the company is not complying with the rules and regulations.

 

As a result, tax authorities can collect more tax and prevent tax evasion.

In a Nutshell

The bottom line is that transfer pricing is a highly useful concept in modern, globalized economies, like Malaysia’s economy. It has a positive impact on the economy as transfer pricing documentation is used to ensure maximum compliance.


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