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Transfer Pricing Malaysia: New Income Tax Rules in 2023

The Inland Revenue Board of Malaysia (IRBM) has issued the latest Income Tax (Transfer Pricing) Rules 2023, which are effective from the 2023 assessment year and replace the Income Tax (Transfer Pricing Rules) 2012. The experts from ECOVIS MALAYSIA TAX SDN BHD explain what companies must pay attention to.

What the New Transfer Pricing Rules Bring

The rules apply to controlled transactions given in subsection 140A (2) of the Income Tax Act and are used in determining and applying the arm’s length price for the acquisition or supply of property or services in accordance with these rules. This article highlights some of the key changes which taxpayers making such transactions must be aware of.

The New Definition of Contemporaneous Transfer Pricing Documentation (CTPD)

Under the new rules, a person who enters into a controlled transaction must prepare a CTPD prior to the due date for furnishing a return in the basis period of an assessment year in which the controlled transaction takes place.

The CTPD must contain:

  • Multinational enterprise group information (master file information).
  • The individual’s business information (local file information).
  • Information and documentation regarding the cost contribution arrangement.

Timeline: The CTPD must be prepared prior to the tax return lodgement due date and furnished within 14 days upon request by the IRBM.

Date: The CTPD completion date must be provided.

Non-applicable information: The CPTD must also include information, data or documents concerning non-applicability.

Taxpayers are obliged to prepare full transfer pricing documentation if the company has:

  • gross income of more than MYR 25 million and
  • total related party transactions of more than MYR 15 million or
  • receives financial assistance of more than MYR 50 million (does not apply to transactions involving financial institutions).

Hierarchy of Transfer Pricing Methods No Longer Applies

According to the 2012 rules, the IRBM required transfer pricing methods to be selected on a hierarchy basis to assess applicability and reliability. However, the new 2023 rules remove this hierarchy of methods.

Director General’s Power

The director general of the IRBM has the right to:

  • Make an adjustment to reflect the arm’s length price or arm’s length interest rate for a transaction by substituting or imputing the price or interest rate, as appropriate.
  • Adjust the price of the controlled transaction to the median if the price is outside the arm’s length range, or to any point above the median if the price is within the arm’s length range. This applies when the uncontrolled transaction is of a lesser degree and any of the comparability defects cannot be quantified, identified or adjusted.

Impose a surcharge in accordance with subsection 140A(3C) of the Income Tax Act.

Arm’s Length Range

Definition: The Income Tax (Transfer Pricing) Rules 2023 defines the “arm’s length range” as a range of figures or a single figure falling between the value of 37.5 percent and 62.5 percent of the data set and acceptable to the director general in determining whether the arm’s length price has been applied in a controlled transaction. This range is derived by either applying the same transfer pricing methodology to multiple comparable data or applying different methods, as determined under rule 6 of the Income Tax (Transfer Pricing) Rules 2023.

According to rule 6, the methods for determining the arm’s length price are:

  • The traditional transactional method.
  • The transactional profit method.
  • Any other method allowed by the director general which provides the highest degree of comparability between the transactions.

The introduction of these enhancements to the transfer pricing rules aims to increase taxpayers’ transfer pricing compliance and make it easier for the IRBM to enforce. Taxpayers must ensure that they take the appropriate steps to ensure compliance, as the rules are becoming more stringent.