On 29 May 2023, the Income Tax (Transfer Pricing) Rules 2023 (“TP Rules 2023”) were gazetted, signifying a major development in Malaysia’s transfer pricing landscape and marking a stricter transfer pricing compliance regime.
Greater requirement to maintain transfer pricing documentation (“TPD”)
Legislation update
In the past, taxpayers were required to maintain contemporaneous TPDs on a yearly basis. However, there was no statutory deadline imposed by the IRB as TPDs were only required to be made available upon request. Effective YA 2023 onwards, a contemporaneous TPD is one that must state the completion date and contain a list of mandatory information and documents. Rule 4 requires taxpayers to prepare contemporaneous TPDs before the due date for furnishing a return in the basis period for a YA in which a controlled transaction is entered into. In short, the TPD must be dated on a date before the tax filing due date to be contemporaneous.
Although not required to be filed to the IRBM when a tax return is filed, Rule 5(3) of the TP Rules 2023 now provides that a contemporaneous TPD must be furnished to the IRB within 14 days upon request. Failure to submit a contemporaneous TPD on time can attract penalties ranging from RM20,000 to RM100,000 for each YA and/or imprisonment for up to 6 months or both, as stated in Section 113B of the Income Tax Act 1967 (“ITA”),.
Crowe’s observation
Companies engaging in controlled transactions should take immediate measures to ensure compliance with the new requirements. It is recommended that companies should first update and complete their TPD up to the latest YA i.e., YA 2022, so that it can start preparing TPD for YA 2023 onwards.
The timeline for compliance varies depending on the financial year end of companies. It is important to take note that the companies with the FYE 31 January 2023 will be the first group affected by the TP Rules 2023. These companies shall need to file their tax returns by 30 September 2023 (i.e. 7 months after the FYE plus one-month grace period based on the Tax Filing Program for the Year 2023 issued by the IRB on 31 May 2023). Similarly, TPDs must be prepared by the time the tax returns are filed to the IRB to be regarded as contemporaneous TPD.
List of mandatory information to be included in the TPD
Legislation update
Under the Rule 4(2) of the TP Rules 2023, a list of mandatory information has been listed for disclosure by Multinational Enterprise (“MNE”) Groups and local business entities, as outlined in Schedule 1 and Schedule 2 of the TP Rules 2023. A summary of the information that are required to be disclosed is shown below:
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MNE Group Information under Schedule 1 |
Business Information under Schedule 2 |
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a) MNE Group’s organizational structure and ownership structure.
b) Description of the MNE Group’s businesses (e.g., products, services, supply chain, business model, business drivers and industry information).
c) Description of the MNE Group’s intangible property.
d) MNE Group’s financial activities.
e) Financial and tax position of the MNE Group.
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a) Organizational structure including ownership structure, management reporting lines between management of the business and its associated persons as well as a local organization chart.
b) Nature of the business, industry and market conditions – this includes business models, strategies and corporate business plans relevant to the business.
c) Controlled transactions.
d) Details of the pricing policies for each type of controlled transactions.
e) Assumption, strategies and information regarding factors that influence the setting of pricing policies.
f) Functional, asset and risk analysis including the risk analysis framework.
g) Comparability analysis (e.g., description of comparable transactions and details regarding the basis and criteria for selection).
h) Selection of the transfer pricing methodologies.
i) Application of the transfer pricing methodologies.
j) Financial information.
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Companies that are involved in cost contribution arrangements (“CCA”) are required to disclose the information and documents under Schedule 3 of the TP Rules 2023. Apart from this, companies are also expected to include supporting documents, references and any foundational documents for the transfer pricing analysis.
Rule 4(3) further notes that where any of the information, data or other related documents required under Rule 4(2) is not applicable to the person who enters into a controlled transaction, the person shall indicate the non-applicability of the information, data or documents in the contemporaneous TPD.
Crowe’s observation
Companies engaging in controlled transactions should take immediate measures to ensure compliance with the new requirements. It is recommended that companies should first update and complete their TPD up to the latest YA i.e., YA 2022, so that it can start preparing TPD for YA 2023 onwards.
The timeline for compliance varies depending on the financial year end of companies. It is important to take note that the companies with the FYE 31 January 2023 will be the first group affected by the TP Rules 2023. These companies shall need to file their tax returns by 30 September 2023 (i.e. 7 months after the FYE plus one-month grace period based on the Tax Filing Program for the Year 2023 issued by the IRB on 31 May 2023). Similarly, TPDs must be prepared by the time the tax returns are filed to the IRB to be regarded as contemporaneous TPD.
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