Malaysia’s Transfer Pricing Rules: An Overview of Recent Changes and Their Impact
Transfer pricing (TP) is a critical element of international business, which governs the pricing of goods, services, and intangibles between related parties across borders. In Malaysia, transfer pricing rules have become increasingly stringent in recent years.
These developments align with global tax trends, particularly the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives, which aim to prevent profit shifting to low or no-tax jurisdictions.
In this article, we explore recent changes to Malaysia’s transfer pricing rules and assess their impact on businesses, including multinational corporations (MNCs) and small and medium-sized enterprises (SMEs).
Recent Changes to Transfer Pricing Guidelines
Transfer pricing in Malaysia has evolved significantly in response to both international and domestic pressures.
The Malaysian Inland Revenue Board (IRB), or Lembaga Hasil Dalam Negeri (LHDN), has been focused on tightening regulations to ensure compliance with international standards.
Below are some of the most significant changes to transfer pricing guidelines in Malaysia.
Amendment to Section 113B: Penalties for Non-Compliance
One of the most notable changes is the amendment to Section 113B of the Income Tax Act 1967, which has introduced harsher penalties for non-compliance with transfer pricing documentation requirements.
The fine for non-compliance can now be as high as RM 100,000, with the possibility of imprisonment for up to six months. Furthermore, failure to submit the required TP documentation could result in a 50% increase in any tax payable following a TP adjustment.
This change represents a clear signal that the Malaysian authorities are serious about enforcing transfer pricing compliance.
Companies, particularly those operating through a China desk or involved in complex cross-border transactions, need to ensure that they are meeting these stringent documentation requirements to avoid costly penalties.
Introduction of New Disclosure Requirements
The LHDN has also introduced new disclosure requirements in Form C (the Corporate Income Tax Return Form), which mandates taxpayers to declare whether they have prepared transfer pricing documentation.
This disclosure applies to companies with both domestic and cross-border related party transactions. These new rules are intended to increase transparency and assist the IRB in targeting companies that may be manipulating transfer pricing to reduce their tax liabilities.
For businesses operating across multiple jurisdictions, such as those with dealings in China or other major trade partners, complying with these enhanced disclosure requirements is vital.
Firms that operate through a China desk, for instance, must pay particular attention to how they document transactions between their Malaysian entity and their foreign counterparts, as incomplete or inaccurate disclosures could lead to audits or investigations.
Updated Guidelines on the Application of Arm’s Length Principle
Another significant update is the enhanced focus on the arm’s length principle, which dictates that related-party transactions should be priced as if they were occurring between unrelated entities under comparable conditions.
The revised Malaysian Transfer Pricing Guidelines, which were updated in 2023, provide more detailed guidance on how businesses should apply this principle, particularly in relation to the selection of transfer pricing methods and comparability analysis.
The arm’s length principle is crucial for MNCs and SMEs alike, ensuring that profit allocation between related entities reflects the economic reality of their operations.
Professional service providers, such as accounting firms in Malaysia, are now tasked with ensuring that their clients are not only using appropriate transfer pricing methods but are also thoroughly documenting the rationale behind these methods.
The Impact on Businesses
The changes to Malaysia’s transfer pricing rules have far-reaching implications for businesses of all sizes. The tightened regulations, increased penalties, and enhanced disclosure requirements mean that companies must be more diligent in managing their transfer pricing strategies.
Below are some of the key impacts these changes are having on businesses operating in Malaysia.
Increased Compliance Costs
The stricter transfer pricing regulations have inevitably increased compliance costs for businesses, particularly MNCs. Preparing comprehensive TP documentation that meets the LHDN’s requirements is both time-consuming and resource-intensive.
Companies may need to engage external consultants or accounting firms in Malaysia to ensure their documentation is up to standard. For firms with operations involving a China desk, the complexity is further heightened due to the need to reconcile Malaysian and international tax laws.
For SMEs, which may not have the same level of resources as larger corporations, the compliance burden can be even more challenging. The cost of investing in internal compliance measures could place significant financial pressure on smaller businesses, especially those that engage in cross-border trade.
Heightened Risk of Audits and Disputes
With the LHDN’s increased focus on transfer pricing compliance, businesses are now more likely to face audits and disputes if their transfer pricing practices are found to be lacking.
Accounting firms in Malaysia have reported a rise in audit activity related to transfer pricing, with the IRB scrutinizing everything from the selection of TP methods to the comparability analysis.
As a result, businesses must be prepared for the possibility of disputes and may need to set aside additional resources for defending their transfer pricing practices.
Strategic Shifts in Business Operations
The tightening of Malaysia’s transfer pricing rules is also causing businesses to reconsider their overall strategies when it comes to cross-border transactions.
Companies with regional operations are increasingly focusing on ensuring that their related-party transactions are not only compliant with Malaysian law but also optimized to avoid tax disputes in multiple jurisdictions.
In many cases, companies are now working closely with their tax advisors and accounting firms in Malaysia to develop stronger transfer pricing policies.
These policies often involve restructuring their supply chains, adjusting pricing models, or shifting certain functions to different entities within their corporate group to ensure compliance with both domestic and international transfer pricing rules.
The Role of Professional Service Providers
The tightening of Malaysia’s transfer pricing rules has increased demand for tax consultants and accounting firms. Businesses rely on these firms for compliance, documentation, comparability analysis, and risk mitigation strategies.
This is especially important for multinational companies (MNCs) with cross-border operations, as these firms help reconcile Malaysian rules with other jurisdictions.
With transfer pricing audits on the rise, professional service providers, such as accounting firms in Malaysia can assist in pricing practices and cross-border taxation to ensure compliance with the arm’s length principle and minimizing disputes.
All in All
The recent changes to Malaysia’s transfer pricing rules demonstrate the government’s commitment to aligning with international tax standards and preventing profit shifting. These developments have created both challenges and opportunities for businesses.
As compliance requirements increase, companies must ensure that their transfer pricing practices are strong and transparent.
For many, the expertise of accounting firms in Malaysia will be essential in addressing this increasingly complex regulatory environment, especially when dealing with international operations.
