Transfer Pricing Rules (updated on 12 March 2021)
What is transfer pricing?
Principle of arm’s length
Is transfer pricing a bad thing?
Transfer pricing guidelines
What is transfer pricing documentation?
Surcharge and penalty
What do taxpayers need to do?
What is transfer pricing?
Transfer pricing is the pricing arrangement for the sale or transfer of goods, services and intangibles between related parties.
Related parties are parties who control one another, or who are under the common control of another party, whether directly or indirectly. They include branches and head offices, subsidiaries and holding companies, locally and abroad.
The transactions between related parties are called “related party transactions” or “controlled transactions”.
The principle of Arm’s Length
Related parties must ideally transact with one another at arm’s length. In short, it means the transfer price between related parties should not differ from the prevailing market price. Example: if Company A is selling its product X at RM100/KG to its non-related customers, it should also sell the product at the same price (or approximately) to its subsidiary, Company B.
IRBM can make adjustments to the prices if the transactions are not at arm’s length and impose additional tax and penalty.
Is transfer pricing a bad thing?
While transfer of goods and services between related parties are common and necessary, the government is concerned with transfer pricing arrangements that are not at arm’s length.
To evade tax, certain related parties may set prices for their products or services that are not reflective of the market dynamic forces. The prices are wilfully distorted or manipulated to gain tax advantage. And this practice would often result in tax revenue loss to the country.
Another common practice with global companies is the use of transfer pricing arrangement to shift profits from one country to another country with lower tax rate.
Transfer Pricing Guidelines
LHDN has issued Transfer Pricing Guidelines to provide guidance to persons involved in transfer pricing arrangements to operate in accordance with the rules and administrative requirements of the Inland Revenue Board Malaysia (IRBM) including record keeping and documentations (transfer pricing documentation).
It is wrong to think that transfer pricing requirements only apply to international trade. These guidelines are applicable to local and international transactions. Common transactions such as rental of properties or intra-group loans between related companies are caught under these rules too.
What is transfer pricing documentation (TP Documentation)?
All business entities are required to comply with arm’s length principles when setting prices for related party transactions. They are also required to prepare contemporaneous transfer pricing documentation and information that taxpayers shall rely upon to determine the transfer price prior to or at the time of undertaking the transactions.
The content of TP documentation may consist of the following information:
a. Organisational structure
b. Nature of business/industry and market conditions
c. Description of the concerned transactions and parties involved
d. Pricing policies and pricing formula
e. Assumptions, strategies and information that are relevant to the pricing policies
f. Comparability, functional and risk analysis
g. Selection and application of pricing method
h. Financial information
Master File
Taxpayers that are obliged under the Income Tax (Country-by-Country) Rules 2016 – such as multinational enterprises (MNE) are required to prepare the Master File. The Master File is usually prepared by the ultimate holding company of the MNE. A Master File should provide a top-level overview of the MNE’s global organisation and equity structure, business units and their functions, inter-company financial activities, the MNE’s financial and tax positions and its global pricing strategies and policies. The information in the Master File should be consistent with the local TP documentation.
** When IRBM requests for TP documentation, the taxpayer shall submit the local TP documentation and a copy of the Master File within 14 days (Section 113B of the ITA1967).
Surcharge and penalty
a. IRBM may impose RM20,000 to RM100,000 as penalty if the taxpayer failed to present its TP documentation within 14 days from the request date. IRBM may impose this penalty on each year of non-compliance. Typically, IRBM would request for 3 to 6 years of TP documentations in its course of audit/tax review. ~ With effect from 1 January 2021 ~
b. In the course of tax audit, IRBM can make adjustments to increase a taxpayer’s income or reduce its deductions or losses if the taxpayer has understated its profits due to non-arm’s length related party transactions. The understated profit is subject to tax and penalty.
The adjustments are further subject to a surcharge of 5% regardless of whether there is tax payable on the adjustments. ~ With effect from 1 January 2021 ~
Before IRBM finalises its adjustments, the taxpayer is given opportunity to respond to IRBM’s findings and adjustments. TP documentation is the taxpayer first line of defence to demonstrate to the IRBM that the prices are fixed at arm’s length.
What do taxpayers need to do?
a) Identify and review all related party transactions.
b) Assess transfer pricing risks.
c) Prepare contemporaneous TP documentation.
d) Submit TP documentation to IRBM when requested.
e) Ensure all related party transactions are priced in accordance with the arm’s length principle.
f) Ensure inter-company arrangements are at arm’s length and documented. And where appropriate - setup necessary written agreements.
g) Apply for advance pricing arrangements from IRBM to reduce TP adjustment risk, if applicable.
Types of controlled transactions
Common related party transactions include:
a. Sales or purchases of raw materials, stock in trade or other tangible assets
b. Intra-group loan and asset transfer
c. Royalties, license fees and other types of considerations in connection with use of intangible assets
d. Management fees including charges for financial, administrative, marketing and training services
e. Research and development
f. Any other services not previously mentioned
g. Rents/ lease of assets
h. Interests
i. Guarantee fees.
Transfer Pricing Advisory Services:
You are welcome to contact our transfer pricing support team.
Our services include:
Preparation of TP documentations
Handling of tax audit or tax disputes in relation to transfer pricing
Transfer pricing consultancy
Our transfer pricing team comprises of licensed tax agents, ex-IRB transfer pricing officers and experienced accountants. All engagements and enquiries are treated with the utmost discretion and confidentiality. For more information, please contact us or email us at TPadvisor@stanleyco.com.my.