What you need to know about transfer pricing services in Malaysia

 

If your firm is doing business in Malaysia, it is crucial to understand the local transfer pricing services rules and practices. Here, we briefly explain these things.

The territorial taxation system, the efficiency of doing business, and a wide pool of bilingual talent make Malaysia an attractive place for MNEs. In addition, Malaysia has a convenient location- around 60% of the world’s population lives within a 5-hour radius. Yet, unlike other regional hubs, such as Hong Kong and Singapore, the Malaysian economy is still quite “local.” Agriculture and tourism are huge contributors to the Malaysian economy; but the main driver of the economy is the trading of commodities such as palm oil, crude oil, and rubber. This, in combination with the fact that Malaysia has several tax jurisdictions within its territory, results not just in international but also in domestic transfer pricing rules.

The Malaysian Inland Revenue Board (IRB) has no specific focus areas when it comes to transferring pricing. Instead, the IRD usually targets a particular industry for a specific period – it is easier to focus on companies with similar issues. Having said that, tax audit activity has surely increased in Malaysia. Even more so after the creation of the new Multinational Tax Department. And most multinational tax audits in Malaysia include a look at your transfer pricing strategy.

What are your transfer obligations in Malaysia?

General documentation requirements

Malaysia has well-defined and comprehensive transfer pricing documentation requirements. Transfer pricing documentation should include records and documents describing-

The organizational formation, including an organization chart covering persons involved in a controlled transaction.

The characteristics of the business or industry and market circumstances.
The controlled transaction.

Plans, theories, and data regarding factors that inspired the setting of any pricing policies.

Comparability, functional, and risk analysis.

Selection of the transfer pricing method.

Application of the transfer pricing method.

Documents used in improving the transfer pricing analysis.

Index to documents.

Any other report, data, or document considered relevant by the person to determine an arm’s-length price.

All relevant documentation must be provided in Bahasa Malaysia or English.

It is not needed to submit transfer pricing documentation when filing a tax return. However, the documentation must be made obtainable to the IRB within 30 days upon request. It is expected to keep the documentation in the administration for a period of 7 years.

Master file / local file

Malaysia has introduced the OECD three-tiered approach on transfer pricing documentation. Taxpayers that are to make the Country-by-Country Report have to also prepare a Master File and present it together with conventional transfer pricing documentation upon request by the IRB. The requirements to the Master File are very similar to those appointed by the OECD in Action 13. There is no requirement to prepare a Local File in addition to the general transfer pricing documentation requirements.

What penalties do you risk when not complying with the rules?

There are no particular penalties for transfer pricing but the following penalties given in rates of tax payable apply-

If there is no contemporaneous transfer pricing documentation: 35%

If transfer pricing documentation is prepared, but not according to the guidelines: 25%

Different penalties use when you prevent or interfere with a transfer pricing audit or when you fail to comply with the arm’s length principle after previous transfer pricing audits. The penalty is then increased by 20% as compared to the last penalty rate imposed. But the sum cannot exceed 100% of the amount of tax undercharged.

Bispoint Group gives complete business and financial resolutions for small & medium-sized enterprises in Malaysia (SMEs). We offer a full range of company secretary services in Malaysia, including company registration, transfer pricing services, accounting, tax, SST compliance, and financial due diligence. To know more details please visit our official website.