The Purpose of Preparing Transfer Pricing Documentation
The purpose of preparing transfer pricing documentation is to provide evidence to tax authorities that related party transactions (or “controlled transactions”) have been conducted in accordance with the arm's length principle. This arm’s length principle requires that the prices or terms of transactions between related parties be the same as those that would have been agreed upon by unrelated parties in comparable transactions under similar circumstances.
Transfer pricing documentation is therefore essential for taxpayers engaged in controlled transactions, as it helps to demonstrate that their pricing decisions are based on objective criteria and market conditions, rather than on non-commercial considerations.
By preparing and maintaining transfer pricing documentation, taxpayers can also reduce their exposure to penalties and adjustments by tax authorities, as they will have a clear record of their transfer pricing policies and practices. Additionally, transfer pricing documentation can help to facilitate dispute resolution with tax authorities, as it provides a basis for discussion and negotiation.
Preparing Transfer Pricing Documentation is Mandatory
In Malaysia, transfer pricing documentation requirements are set out in the Income Tax (Transfer Pricing) Rules 2012 (“TP Rules”). The TP Rules apply to all companies that enter into controlled transactions with related parties, whether local or abroad.
Transfer pricing documentation for taxpayers with controlled transactions must include records and documents detailing the organisational structure, nature of business or industry and market conditions, controlled transactions, pricing policies, strategies, comparability and functional risk analysis, transfer pricing method, any other relevant information to establish an arm’s length price, and relevant financial information.
In Malaysia, the Country-by-Country Reporting (CBCR) requirements apply to multinational enterprise (MNE) groups that have a consolidated group revenue of RM3 billion or more in the previous financial year. The Malaysian taxpayer, who may be the ultimate company of the MNE or part of the group must also make available the Master File and include it with the Transfer Pricing Documentation upon request by the IRBM.
The master file in transfer pricing is a high-level document that provides an overview of the global business operations of the multinational enterprise (MNE) group. The purpose of the master file is to provide a comprehensive view of the MNE group's overall transfer pricing policies and practices, which can be used by tax authorities to assess the consistency of the group's transfer pricing across different jurisdictions.
Contemporaneous Transfer Pricing Documentation
The taxpayer must create and maintain transfer pricing documentation for any controlled transaction they develop or implement. If there are significant changes to the controlled transaction, the documentation must be updated prior to filing the tax return for the year of assessment.
Submission of Transfer Pricing Documentation
The Transfer Pricing Documentation is not required to be submitted with the annual Return Forms. However, the documentation should be made available within 14 days upon request by the IRBM.
The penalty for failing to submit transfer pricing (TP) documentation within 14 days of a written request by the IRBM can result in significant penalties. On conviction, defaulters can be liable to a fine of not less than twenty thousand ringgit and not more than one hundred thousand ringgit or to imprisonment for a term not exceeding six months or to both.
Non-compliance with TP Rules can also result in other severe penalties: The Director General of Inland Revenue can make an adjustment to reflect the arm’s length price, or interest rate, for that transaction by substituting or imputing the price or interest, as the case may be; and to disallow considerations for controlled financial assistance which are deemed excessive in respect of a person’s fixed capital. These adjustments can result in additional taxes, penalties, and surcharges.