Transfer Pricing

In simple terms, transfer pricing refers to the transfer of goods or services in an associated enterprise or company, which may be covered by the transfer of goods or services based on the company’s primary profit-making activity

Transfer pricing laws and policies are mainly based on the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2010) issued by the Organization for Economic Co-operation and Development (OECD), but there are differences. Taking into account the domestic situation, certain components may have to comply with the Income Tax Act 1967 and the procedures of the Inland Revenue Department of Malaysia

A company is classified as an affiliate when it has managerial control over another company, or when both companies have the same directors

• Transaction-based approach, include:
  1. Comparative Price Approach (CUP)
  2. Resale Price Method (RPM)
  3. Cost Incremental Method (CPM)

• Profit-based approach, include:
  1. Profit Sharing Method (PSM)
  2. Net Trading Margin Method (TNMM)

When the country-by-country reporting system came into effect on January 1, 2017, multinational companies and groups were asked to comply with the following provisions:

• The Group’s total revenue for the financial year preceding the reporting financial year must be RM3 billion.
• The ultimate holding company must be registered under the Companies Act 1965 or any written law and be a resident of Malaysia
• The entities comprising the Group must be incorporated under the Companies Act 1965, any written law or a law outside Malaysia and be resident in Malaysia

The Malaysian tax authorities are increasingly vigilant in scrutinizing inter-company transactions between multinational companies and groups of domestic companies. Taxpayers need to ensure that related party transactions comply with the arm’s length principle. In a tax audit, if the IRD considers that a related party transaction is not carried out at arm’s length, it may result in tax liabilities and penalties and the IRD may make tax adjustments

To ensure compliance, the IRS includes a checkbox in the company’s tax return to state whether or not documentation of transfer pricing has been prepared. In light of this requirement, taxpayers entering into any related party transactions are advised to ensure that transfer pricing documentation is also prepared to demonstrate that their intercompany transactions are in the nature of arm’s length transactions

To reduce compliance burdens, the Transfer Pricing Guidelines specify that the requirement to maintain contemporaneous transfer pricing documentation applies only when the

• For those running a business with a total income of more than RM25 million and total controlled transactions of more than RM15 million
• For persons providing financial assistance, only if the financial assistance exceeds RM50 million

Taxpayers exceeding the threshold amounts described above may choose to prepare a short set of transfer pricing documents covering only the organizational structure, a description of the controlled transactions, and the related pricing policies, rather than a complete document

With the introduction of the Country-by-Country Reporting (CbCR) system, the ultimate controlling entity of a multinational group of companies headquartered here (with a total group revenue of more than RM3 billion) is responsible for preparing and submitting a Country-by-Country Report (CbCR) to the Inland Revenue Board (IRB) within one year of the end of its financial year

If a Malaysian taxpayer is also part of a group of multinational companies that prepares Country-by-Country Reports (CbCR) in other countries, it is required to notify the Inland Revenue Board (IRB) of its reporting entity and its place of residence before the end of its financial year

In order to avoid the risks associated with failing to comply with the Malaysian Transfer Pricing Guidelines, it is important that you seek the services of an experienced professional organization that can effectively guide you through all the regulatory requirements