Frequently Asked Questions (FAQs) on Matters Pertaining to Transfer Pricing

On 3 September 2024, the Inland Revenue Board of Malaysia (“IRB”) released FAQs pertaining to TP Documentation (“TPD”), new Malaysian TP Guidelines, TP audit, TP adjustment and surcharge which you will find summarised below.

Necessity of taxpayers preparing a TPD despite having only domestic RPT that can be proven that will not alter the tax payable

According to the Malaysian Transfer Pricing Guidelines (“MTPGL”) 2012 (updated 2017), the preparation of a full TPD is not required for transactions between persons who are both assessable and chargeable to tax in Malaysia, provided it can be proven that any adjustments made under the Guidelines will not alter the total tax payable by both parties. These persons are allowed to prepare a minimum TPD.

Exemption for Small and Midsize Enterprises (“SME”) to prepare TPD

Therefore, SMEs (except for individuals not carrying on a business) engaged in controlled transactions should prepare a full or minimum TPD, depending on the threshold.

Threshold for full TPD

A TPD is required to be prepared, as any transactions between related entities are considered controlled transactions and should comply with the arm's length principle. Taxpayers who do not meet the designated threshold are eligible to opt for a minimum TPD instead of a full TPD.

Identification of backdated TPD by IRB

IRB has their own methods and indicators of identifying backdated TPD.

Extension of time for TPD completion date and filing return date

Extension of time will not be granted. The TPD must be prepared before the due date for furnishing a return for a YA. Since the TPD completion date coincides with the tax return submission deadline, any grace period provided in the IRB’s filing program or any approval for an extension of time for submission of the tax return, the new extended due date will also be applicable to the completion of the TPD.

Difference between contemporaneous TPD (“CTPD”) and TPD

To qualify as CTPD, the TPD should contain all requirements stipulated in subrule 4(2) of the TP Rules 2023 and be brought into existence prior to the due date for furnishing the tax return. A TPD that fails to meet these requirements is considered a non-contemporaneous TPD, and the taxpayer will be subject to penalties.

Schedule 1 and Schedule 2 requirements for Malaysian parent company with overseas subsidiary

Both Schedule 1 and Schedule 2 requirements should be met, regardless of whether the parent company is incorporated in Malaysia and the subsidiary is incorporated overseas or vice versa.

Schedule 1 requirement for a Malaysian subsidiary of an MNE group if it is only involved in domestic controlled transactions and is required to prepare a full TPD

If the MNE group businesses are relevant to business in Malaysia, Schedule 1 should be prepared, even if the taxpayers only engage in domestic controlled transactions. Otherwise, the TPD will not be considered contemporaneous.

Schedule 1 requirement for a taxpayer that operates in a foreign country but does not consolidate its financial results

Schedule 1 applies to MNE groups that have business establishments in two or more jurisdictions, regardless of whether the MNE group has consolidated its financial statements or not. These businesses also include permanent establishments.

Schedule 1 requirement for overseas companies that are dormant, inactive, newly incorporated with no revenue, or have no related party transactions with the Malaysian company for the year of assessment

MNE groups are referred to as business establishments in two or more jurisdictions. These business establishments include, but are not limited to, dormant companies, newly established companies, and inactive companies. Therefore, if the groups fulfil this definition, Schedule 1 is applicable.

Further revision on benchmarking result

TP Rules 2023 allow for taxpayers to prepare their TPD based on the most current reliable information reasonably available at the time of preparation. However, once the current year financial information for the comparable is available, further revisions to the benchmarking result should be made to reflect similar economic or market conditions with the same basis period.

Updating of benchmarking study for minimal TPD

Taxpayers are allowed to conduct comparable searches in databases for the benchmarking study once in every three (3) years, as long as the operational conditions remain unchanged. However, the financial information and suitability of the chosen comparables should be reviewed on an annual basis.

TP Audit Notification

IRB will issue a letter to the taxpayer at least fourteen (14) calendar days before the scheduled audit visit.

TP Audit Settlement

The TP audit should be completed within 450 calendar days from the audit commencement date, where the commencement date refers to the audit visit date.

TP Adjustment: Double taxation

If the TP adjustments involve cross-border transactions, the Malaysian taxpayer may submit a Mutual Agreement Procedure (“MAP”) request to the Competent Authority (“CA”) of Malaysia or of the treaty partner to eliminate double taxation.

Surcharge: Subsection 140A(3C) Income Tax Act 1967 – Appeal

Taxpayers who are aggrieved with the surcharge imposed can appeal to the IRB for a reduction or remission. Subsection 124(3) of the ITA has empowered the director general to abate or remit any surcharge imposed on a case-to-case basis, provided that the taxpayers have submitted reasonable justification for the appeal.