What is Transfer Pricing?
Transfer Pricing (TP) refers to the pricing of transactions between related parties, such as the sale or purchase of goods, services, intangibles, or financial arrangements. These transactions occur between companies that are under common control or have overlapping ownership, such as when the same individuals are directors or shareholders of both entities.
In simpler terms, consider a trading company that buys or sells goods to its related party — whether locally or across borders. The price charged in these internal transactions is referred to as the transfer price. While these are internal to the corporate group, they carry real financial implications and are subject to scrutiny by tax authorities.
Proper transfer pricing ensures that these transactions are conducted at arm’s length, meaning the prices must reflect what would have been charged between independent parties under similar conditions. This is essential to prevent profit shifting and ensure compliance with tax regulations.
Transfer Pricing vs Normal Trading
Since transactions occur between related parties, the pricing must reflect what would be charged in an open market — this is referred to as the arm’s length price. In other words, the company should price goods or services provided to related parties in line with prevailing market rates. Adhering to the arm’s length principle helps prevent tax complications and ensures compliance with regulatory requirements, particularly with authorities such as the Inland Revenue Board of Malaysia (IRBM).
Transfer Pricing Rules 2023 – Key Updates
With effect from Year of Assessment (YA) 2023, the Transfer Pricing Rules 2023 [P.U.(A) 165/2023] replace the previous 2012 rules. Key enhancements include:
- Contemporaneous Documentation Timing
– TP documentation must now be completed by the due date of the income tax return and must clearly state the completion date.
- Expanded Disclosure Requirements – Three mandatory Schedules are introduced:
- Schedule 1 (MNE Group Information): Group structure, global value chain description, consolidated financial statements.
- Schedule 2 (Taxpayer Business Information): Local organizational structure, employee numbers, key personnel, details of controlled transactions, comparability and economic analysis, and aggregation rationale.
- Schedule 3 (Cost Contribution Arrangements): DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions, contributions, and control.
- Arm’s Length Range Clarification
– Acceptable range is the 37.5th to 62.5th percentile. If results fall outside this range, the IRBM may adjust to the median.
- Intangibles and DEMPE Analysis
– Greater emphasis on functional analysis of intangibles beyond legal ownership, including control of risk and decision-making authority.
- Low Value-Adding Intra-Group Services (LVAS)
– Eligible support services may adopt a simplified 5% mark-up approach, avoiding the need for full comparability analysis
- Audit and Submission Timeline
– Taxpayers must submit TP documentation within 14 days upon request by IRBM. Failure to do so can result in penalties between RM20,000 and RM100,000 and/or imprisonment.
- Minimum TP Documentation (MCTPD)
– Smaller taxpayers (below RM30M revenue and RM10M controlled transactions) may prepare simplified documentation but must still demonstrate compliance with the arm’s length principle.
- Language and Record Keeping
– Documentation can be in English or Malay and must be kept in Malaysia for at least 7 years.
Legal Regulations and Penalties
Under the Income Tax Act 1967, TP Rules 2023, and Transfer Pricing Guidelines 2012 (as updated), contemporaneous TP documentation must be ready to submit within 30 days (or 14 days if requested under audit framework). Failure to prepare according to requirements may result in:
- 25% tax adjustment – for documentation not prepared in accordance with the guidelines.
- 35% tax adjustment – for failure to prepare contemporaneous documentation at all.
Additional penalties (RM20,000 – RM100,000 and/or imprisonment) may apply under TP Rules 2023 for non-compliance with submission deadlines.
Who Must Prepare TP Documentation
Under TP Guidelines 2012 and TP Rules 2023:
- Companies with gross income > RM30 million and related party transactions > RM10 million (or financial assistance > RM50 million) must prepare full contemporaneous TP documentation (CTPD).
- Companies below the threshold may opt for simplified CTPD (MCTPD).
- Regardless of thresholds, all taxpayers engaging in controlled transactions must ensure transactions are at arm’s length and maintain reasonable supporting evidence.
Why Proper TP Documentation Matters
- Compliance – Avoids tax audits, penalties, and adjustments.
- Transparency – Provides clarity on pricing policies and business rationale.
- Efficiency – Reduces disputes with tax authorities and protects the company’s tax position.
Updated for TP Rules 2023
