Malaysia´s New Transfer Pricing Guidelines 2024

The Malaysia Transfer Pricing Guidelines 2024 (MTPG 2024) were published by the Inland Revenue Board of Malaysia (IRB) on 24 December 2024. These guidelines replace the previous ‘Malaysia Transfer Pricing Guidelines 2012’ (together with updates up to 2017). The MTPG 2024 will come into force from the year of assessment 2023 and subsequent years. The MTPG 2024 provides comprehensive details and clarity for taxpayers who have controlled transactions to comply with the Income Tax Rules (Transfer Pricing Rules) 2023 (‘TP Rules 2023’) issued on 29 May 2023, while reducing taxpayers' compliance burden.

The following is an overview of the most important updates to the MTPG 2024.

Scope and Excemptions for the Preparation of Contemporaneous Transfer Pricing Documentation (‘CTPD’)

A CTPD refers to a transfer pricing documentation prepared in accordance with the TP Rules 2023 and is bought into existence prior to the due date for furnishing a return in the basis period for a year of assessment in which a controlled transaction is entered into.
The threshold to prepare a full CTPD has been updated, wherein persons (a company, a body of persons and a corporation sole) shall prepare a full CTPD if they fulfil the following conditions:

generates a gross business income of more than RM 30 million in total and engages in cross-border controlled transactions totalling RM 10 million or more annually; or
receives or provides controlled financial assistance of more than RM 50 million annually.

To ease the burden of taxpayers in preparing a CTPD, the MTPG 2024 has introduced certain exemptions for the following taxpayers:

individuals not carrying on a business;
individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions;
person who entered into controlled transactions with a total amounting to not more than
RM 1 million; or
person who entered solely into domestically controlled transactions with another person where both parties do not enjoy tax incentives, are taxed at the same headline tax rate; or do not suffer losses for two consecutive years prior to the controlled transactions.

Nevertheless, taxpayers who are exempted must still comply with the arm’s length principle for all controlled transactions entered into, and must ensure to preserve all relevant documents that are related to the controlled transactions, including documentation to support and prove the determination of the arm’s length price.

Guidelines for Preparing Minimum CTPD

Persons who enter into a controlled transaction but do not fall under the exemptions and the threshold requirements above, are eligible to prepare a minimum CTPD, i.e., a transfer pricing documentation that has reduced requirements.

The reduced requirements on the content of minimum CTPD are the following:

Worldwide group structure;
Organisational structure;;
Description of controlled transactions;
Pricing policy.

Further, the MTPG 2024 indicates that item c) and d) above are confined to only “key controlled transactions”, which is defined as:

Controlled transactions that are related to the taxpayer’s principal activity, such as the acquisition or supply of raw materials for manufacturing activity.
Controlled transactions under than those in (i) that constitute 20% or more of the operating revenue in each year of assessment.

Nonetheless, taxpayers who prepare a minimum CTPD are still required to list all controlled transactions entered into, regardless of whether the transaction is a key controlled transaction or not.
In preparing a minimum CTPD, a taxpayer is allowed to apply any method allowed by the Director General that is able to demonstrate compliance with the arm’s length principle, as long as it results in a better approximation of the arm’s length price.
The MTPG 2024 mentions that even through comparability analysis is not required to be included in the minimum CTPD, taxpayers may need to prepare a comparability analysis upon request from the IRB to justify the transfer pricing. Nevertheless, this request will not make the original minimum CTPD non-contemporaneous.

Detailed Guidelines on Comparability Analysis (Benchmarking)

In selecting the potential comparable companies, the MTPG 2024 elaborates further details on qualitative and quantitative criteria to be considered when selecting comparable companies. The IRB specifically mentioned that comparable companies with a turnover of less than 10 % of the tested party’s revenue will be deemed to have a lesser degree of comparability unless they are accepted by IRB.
In a situation where CTPD (which includes a benchmarking analysis) has been prepared by a taxpayer and subsequently requested by the IRB during an audit, the taxpayer can update the benchmarking analysis by using the latest comparable financial information available during that audit exercise. The practice of updating the benchmarking analysis will not make the original transfer pricing documentation non-contemporaneous, provided all other requirements have been satisfied. However, if the updated benchmarking results in a transfer pricing adjustment, a surcharge may be imposed on that adjustment.

Introduction to The Simplified Approach for Low Value Adding Intra-Group Services (“LVAS”)

The MTPG 2024 introduces specific guidance on LVAS, which is in line with the OECD Transfer Pricing Guidelines.
LVAS refers to the supportive nature of such services, which are not part of the core business of the MNE Group. The provision of LVAS may be the principal business of the legal entity providing the service e.g., shared service centre, provided that these services do not relate to the core business of the group.
This simplified approach is only applicable to the Malaysian service provider. As for Malaysian service recipients, only payments made to LVAS service providers that have similarly adopted the OECD simplified approach in their jurisdictions will be considered to be in compliance with the arm’s length principle. In situations where another jurisdiction does not apply the OECD simplified approach, taxpayers must undertake comparability analysis to demonstrate that the payments made have complied with the arm’s length principle.
The MTPG 2024 provides examples services that would likely meet the definition of LVAS, as follows:

Accounting and auditing;
Processing and management of accounts receivable and payable;
Budgeting;
Human resources activities;
Information technology (“IT”) services (where such IT services is not part of the principal activity of the group);
Legal services;
Tax obligations; and
General administration.

To determine the arm’s length charge for LVAS, a fixed profit mark-up of 5 % can be applied to all applicable costs, excluding any pass-through costs. The same mark-up shall be applied for all LVAS, irrespective of the categories of services. The mark-up under the simplified approach does not need to be justified by a benchmarking study, but the taxpayer should prepare all relevant document on this simplified approach.

Application of Arm’s Length Principle

Based on the TP Rules 2023, arm’s length range (“ALR”) is defined as a range of figures or a single figure falling between the value of the 37.5 percentile to 62.5 percentile of the data set. Where the tested party's results fall outside the ALR, the IRB may adjust to the median point of the ALR. The MTPG 2024 has further elaborate the application and give examples to calculate the ALR.
The IRB prefers local comparable companies over foreign companies for establishing the ALR.

Significant Expansion on Business Restructuring

The MTPG 2024 has significantly expanded Chapter 5 (Business Restructuring) to align with the OECD TP Guidelines. This includes applying the arm’s length principle in a business restructuring, other options realistically available, and considerations to be presented to the IRB.

Intra-Group Financial Transactions

Given the complexity and depth of analysis required for determining the arm's length price or condition for financial transactions, the IRB will issue separate guidelines to address specific transfer pricing requirements in relation to intra group financial transactions.

Downward TP Adjustments and Corresponding TP Adjustments

The IRB affirmed that any downward adjustment for transfer pricing purposes will not be applicable since the TP Rules 2023 do not provide for such adjustments.
Further, any TP adjustment will also be reflected in a corresponding adjustment upon request by other party of the controlled transaction.

Key Takeaway for Taxpayers

The MTPG 2024 has expands significantly to provide further details and clarifications for the preparation of the CTPD in line with the TP Rules 2023. The change in scope and threshold, the introduction of exemptions for preparing the CTPD and adoption on LVAS are a game changer which aim to reduce the compliance burden for taxpayers. Further, with clarifications on certain topics such as comparability study and business restructuring, it is recommended for taxpayers to re-assess the technical approach adopted previously when preparing CTPD.