A. TP Guidelines
The 2012 TPG superseded the Guidelines previously issued in year 2003, and was intended to provide detailed guidance to taxpayers on how to comply with the requirements of the law under Section140A of Income Tax Act 1967 and the Income Tax (Transfer Pricing) Rules 2012. The 2012 TPG is applicable to:
- controlled transactions between associated persons, where at least one party is assessable or chargeable to tax in Malaysia; and
- Applies to both cross-border transactions and domestic related party transactions. The TPG need not be applied to domestic controlled transactions, provided that it can be proven that any TP adjustments made under Section 140A will not alter the total tax payable by both parties.
The 2012 TPG was updated on 15 July 2017 with one new chapter on Commodity Transactions (Chapter X) and an updated version of three existing chapters as follows:
- Chapter II – The Arm’s Length Principle
- Chapter VIII – Intangibles
- Chapter XI – Documentation
Some of the important additions to the chapters are highlighted below:
| Chapters | Details |
|---|---|
| The Arm’s Length Principle | The arm’s length principle must be in line with value creation.A Risk Analysis Framework has been introduced to emphasize on the interaction between risks and rewards. |
| Intangibles | The focus is on economic ownership of intangibles and how the arm’s length return must be based on the “DEMPE” concept. DEMPE stands for Development, Enhancement, Maintenance, Protection and Exploitation of intangibles. |
| Commodity Transactions (new) | Guidance on application of the Comparable Uncontrolled Price (“CUP”) method for commodity transactions. |
| Documentation | Master File requirements have been included. A documentation is deemed “contemporaneous” if it is prepared when developing or implementing a transaction with associated person(s). If there are material changes, the TP documentation should be updated prior furnishing the return for that year of assessment. Tax payer should update the financial data every year provided that there are no significant changes in the company. However, the comparable search should be refreshed every three years. Documentation should be on a transactional basis (this means that the TP documentation and benchmarking should be done for every related party transaction). |
Basically, the guidelines reinforces that companies involved in related party transactions in Malaysia must prepare a TP documentation for the relevant year of assessment. However, companies with the following conditions may opt to prepare a limited scope TP documentation to help ease their burden:
- Gross income less than RM25 million, and the total amount of related party transactions less than RM15 million, OR
- Financial assistance by related parties less than RM50 million. Financial assistance rendered by financial institutions is excluded from the scope of the TPG.
A full scope TP documentation may consists of the following:
- Organizational structure
- Nature of business/industry and market conditions
- Controlled transactions
- Pricing policies
- Assumption, strategies and information regarding factors that influenced the setting of pricing policies
- Comparability, functional and risk analysis
- Selection of the transfer pricing method
- Application of the transfer pricing method
- Financial information
- Other relevant/supporting documents
A simplified TP documentation consists of the items listed below:
- Organizational structure
- Controlled transactions
- Pricing policy
- Taxpayer is allowed to apply any method other than the five methods described in the TPG provided it results in arm’s length outcomes.
While the TP documentation has to be prepared, it does not need to be submitted unless requested by the tax authorities.
B. TP Audit Framework 2019
For Companies who fail to comply, penalties will be imposed under subsection 113(2) of Income Tax Act 1967 and the TP Audit Framework 2019, released on 15 December 2019 to replace the 2013 version. The rates from the framework are as follows:
| Condition | Penalty rate | ||
| Normal case | Voluntary disclosure (“VD”) | ||
| Understatement or omission of income | 100% | ||
| Taxpayer did not prepare TP documentation | 50% | N/A | |
| Taxpayer has prepared and submitted the TP documentation with the VD but not in accordance to the requirements; OR; Taxpayer has prepared a comprehensive and good quality TP documentation but failed to submit within 30 days upon request | 30% | 20% | |
| Taxpayer has prepared and submitted a comprehensive and good quality TP documentation with the VD in accordance to the requirements; OR; Taxpayer has prepared a comprehensive and good quality TP documentation and submitted within 30 days upon request | 0% | 0% | |
C. Income Tax (Country-by-Country Reporting) Rules 2016 (“CbyCR Rules”)
In addition to that, in 2017, the tax authorities issued the CbyCR Rules followed by the Labuan CbyCR Regulation. These regulations are effective from 1 January 2017 and is applicable to MNE Groups with total consolidated group revenue of at least RM 3 billion. The rules state that the ultimate parent (reporting entity) would have to complete the CbyC Report and submit it to the tax authorities on or before 12 months from the last day of the reporting FY (i.e. 31 December 2018 if the tax payer’s year end is 31 December 2017).
Additionally, there is also a requirement to notify the tax authorities if the tax payer is a reporting entity or a non-reporting entity in Malaysia. Taxpayers also have to declare in the form C if CbyC is relevant to them and if notification has been submitted.
| Type of entity | Details |
|---|---|
| Reporting entity | The reporting entity shall notify the Director General in writing if it is the ultimate holding entity on or before the last day of the reporting FY (i.e. 31 December 2017 if the tax payer’s year end is 31 December 2017). Letter will have to include details of all Malaysian and foreign non-reporting constituent entities |
| Non-reporting entity | The Malaysian subsidiary does not have to submit the CbyCR but they shall notify the Director General in writing of the identity and tax residence of the reporting entity on or before the last day of the reporting FY (i.e. 31 December 2017 if the tax payer’s year end is 31 December 2017). Please note that there are two types of notification for non-reporting entity as follows:Notification for non-reporting entities whose reporting entity is in Malaysia Notification for non-reporting entities whose reporting entity is outside Malaysia |
D. Tax return form
Effective from year of assessment 2014, the income tax return form includes a disclosure on whether TP documentation has been prepared. From FY 2019 onwards, the income tax return form was amended once again to include additional disclosures in regards controlled transactions highlighted as follows:
- Disclosure on whether tax payers carry out controlled transactions under Section 139 and 140A
This basically refers to companies carrying out transactions with related parties. A related party transaction table will be revealed when taxpayer ticks yes to enable taxpayers to disclose all the type of transactions they are involved in with the amount. Tax payer would also have to declare if TP documentation have been prepared.
- Disclosure of whether the taxpayer is subject to interest restriction under Section 140C.
In 2019, the tax authorities introduced Restriction on deductibility of interest under Section 140C of the Income Tax Act 1967, in effect from 1 July 2019 onwards. They also released the Income Tax (Restriction on Deductibility of Interest) Rules 2019 [P.U. (A) 175] and the Guidelines aimed at restricting the deduction of interest expense in connection with financial assistance in a controlled transaction. The Rules are applicable to:
- companies who have been granted any financial assistance in a controlled transaction; AND
- the total amount of any interest expense for all such financial assistance exceeds RM500,000 in the basis period.
The maximum amount of interest that is deductible is 20% of the Tax EBITDA. The balance is allowed to be carried forward.
