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
The Inland Revenue Board of Malaysia (IRB/LHDN) has stepped up enforcement to align with global standards. Below are the most significant updates affecting taxpayers in 2025.
Below are some of the most significant changes to transfer pricing guidelines in Malaysia.
1. Stricter Penalties under Section 113B
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.
Non-compliance with transfer pricing documentation can now result in fines up to RM100,000 and imprisonment up to six months.
Failure to submit TP documentation may trigger a 50% surcharge on additional tax payable following a TP adjustment.
This signals the IRB’s serious intent to ensure taxpayers comply fully with TP requirements.
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.
2. Mandatory Disclosure in Form C
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.
Companies must now declare in Form C (Corporate Income Tax Return) whether they have prepared transfer pricing documentation.
Applies to businesses with both domestic and cross-border related-party transactions.
Incomplete or inaccurate disclosure can increase the risk of audits and investigations.
3. Updated Guidelines on the 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 2023 Malaysian Transfer Pricing Guidelines emphasise stricter application of the arm’s length principle.
Businesses must demonstrate that transactions between related parties are priced as if they occurred between independent entities.
Greater detail is required in:
Selection of transfer pricing methods.
Comparability analysis.
Documentation of the rationale behind pricing decisions.
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.
Higher 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.
Preparing robust transfer pricing documentation is resource-intensive.
MNCs and SMEs alike may need to engage tax consultants or accounting firms in Malaysia to meet LHDN’s requirements.
For SMEs with limited resources, this represents a significant cost challenge.
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.
Increased 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.
With more stringent rules, the likelihood of transfer pricing audits has risen.
The IRB now scrutinises method selection, comparability, and disclosures more closely.
Companies should prepare for potential disputes and set aside resources for audit defence strategies.
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.
3. Strategic Shifts in Cross-Border 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.
Businesses are restructuring supply chains and adjusting pricing models to ensure compliance.
Related-party transactions must be reviewed to minimise risks of double taxation and disputes across multiple jurisdictions.
This often requires close collaboration with tax advisors to implement sustainable transfer pricing policies.
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.
Compliance Checklist for Malaysian Businesses (2025)
To stay ahead of regulatory requirements, companies should:
✅ Prepare contemporaneous TP documentation annually.
✅ Disclose related-party transactions clearly in Form C.
✅ Benchmark transactions using appropriate methods.
✅ Maintain supporting documentation for comparability analysis.
✅ Review transfer pricing policies regularly with professional advisors.
Learn more about our tax services and how we can help ensure compliance.
FAQs on Malaysia Transfer Pricing Rules
Any company with related-party transactions (domestic or cross-border) that exceed the prescribed threshold must prepare documentation.
Penalties can be up to RM100,000 and/or imprisonment, plus a 50% surcharge on additional tax after adjustments.
It must be prepared annually and updated when there are material changes in related-party transactions.
Yes. SMEs engaging in related-party transactions are subject to TP rules, though compliance thresholds may differ.
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.
For businesses, this means:
Higher compliance obligations.
Increased penalties for non-compliance.
Greater scrutiny of related-party transactions.
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.
