Steep Penalties for Not Preparing Transfer Pricing Documentation in Malaysia

The Inland Revenue Board of Malaysia (IRBM) has taken a significant move to improve transfer pricing compliance by introducing new penalty provisions, whereby taxpayers involved in related party transactions must prepare either full or partial transfer pricing documentation, depending on whether the taxpayer has reached the threshold. Failing to prepare the transfer pricing documentation will incur a penalty of RM 20,000 to RM 100,000 imposed by the IRBM.

With effect from year of assessment 2014, the IRBM formally introduced an additional question asking corporate taxpayers to indicate if they had prepared transfer pricing documentation by way of a “Yes or No.” in the Corporate Income Tax Return Form (Form C). With this additional disclosure, taxpayers would be required to prepare and maintain contemporaneous transfer pricing documentation as an annual tax compliance requirement prior to filing an annual income tax return.

Transactions between related companies include:

• sales to related companies;
• purchases from related companies;
• other payments to related companies;
• loans to/from related companies; and
• receipts from related companies.

Referring to the Income Tax (Transfer Pricing) Rules 2012 and Transfer Pricing Guidelines 2012, a person who undertakes related party transactions domestically and across borders should prepare contemporaneous transfer pricing documentation.

Basically, the Guidelines apply wholly to all taxpayers meeting the following conditions:

i) Taxpayers carrying out businesses with a gross income of more than RM25 million, and a total amount of related party transactions of more than RM15 million; and
ii) For taxpayers providing financial assistance, where such financial assistance is more than RM50 million. Transactions involving financial institutions are excluded.

Taxpayers who fall within the above scope of the Guidelines need to prepare contemporaneous transfer pricing documentation. Taxpayers who do not fall under the above scope may opt to prepare partial transfer pricing documentation covering specific requirements of the Guidelines.

A person who enters into a controlled transaction shall prepare contemporaneous transfer pricing documentation which includes records and documents which provide a description of the following matters:

• Organizational structure including an organization chart covering persons involved in a control transaction.
• Nature of the business or industry and market conditions.
• Controlled transactions.
• Assumptions regarding factors that influenced the setting of prices, or pricing policies and business strategies that influenced the determination of transfer prices.
• Comparability, functional and risk analyses.
• Selection of the transfer pricing method.
• Application of the transfer pricing method.
• Background documents that provide for or were referred to in developing the transfer pricing analysis.
• Index to documents.
• Any other information, data or document considered relevant in the determination of an arm’s length price.

To further tighten the enforcement of transfer pricing compliance by Malaysian taxpayers, the IRBM extended the transfer pricing adjustment periods from 5 years to 7 years in December 2014.

With the introduction of new penalty provisions for failing to prepare transfer pricing documentation, the IRBM updated the transfer pricing guidelines on 2 February 2021, whereby the time to submit transfer pricing documentation was reduced from 30 days to 14 days once requested by the IRBM.

The transfer pricing landscape in Malaysia continues to evolve, with the tax authority becoming more aggressive in scrutinizing the controlled transactions of domestic groups of companies. In view of the above, affected taxpayers must pay immediate attention and take immediate action, otherwise hefty and painful penalties will result.

Contemporaneous documentation is crucial to proving to the IRBM that the taxpayer’s pricing policy for controlled transactions is at arm’s length. Therefore, taxpayers should ensure that appropriate transfer pricing documentation for each particular year of assessment (YA) is ready and in place, so that transfer pricing audits can be dealt with more efficiently and effectively.

Contact us:

Ang Heng Ann
Tax Partner
Malaysia
Ecovis Malaysia Tax
Tel : +603 7981 1799
Fax: +603 7980 4796
Email: hengann.ang@ecovis.com.my