Key Changes to Transfer Pricing Rules 2023 in Malaysia

Introduction

The Income Tax (Transfer Pricing) Rules 2023 (also known as the "TP Rules 2023") were gazetted on May 29, 2023, by the Inland Revenue Board of Malaysia (“IRBM”). These rules which supersedes the Income Tax (Transfer Pricing) Rules 2012 ("TP Rules 2012"), take effect from the year of assessment (“YA”) 2023 and beyond. The TP Rules 2023 introduces new rules aimed at tightening the compliance requirements in Malaysia.

The TP Rules 2023 can be explained in two (2) broad strokes: the arm’s length principle and the TP documentation..

Key Changes from YA 2023 onwards

i. Arm’s Length Principle

Malaysia follows the arm's length concept, which is supported by the Organization for Economic Co-operation and Development (“OECD”). The aforementioned principle underscores the notion that pricing imposed on transactions between associated persons (or controlled transactions) ought to align with those imposed between independent parties under analogous circumstances (or uncontrolled transactions).

The arm's length price shall be determined in accordance with the acceptable transfer pricing methods by using the most recent, trustworthy, and reasonable information that is available. According to the TP Rules 2023, taxpayers must use single-year data of comparables, not weighted average data, and compare the outcomes of the controlled transaction with those of the uncontrolled transaction for the same basis year for a YA in a comparable market or economic environment.

The IRBM recognizes taxpayers' difficulties in obtaining up-to-date financial data for benchmarking purposes. Therefore, the IRBM now considers allowing taxpayers to utilize the previous year's data set for benchmarking purposes if the taxpayer can demonstrate it has exhausted their means in obtaining the current year data from all available sources when preparing the TPD. For instance, the FY 2022 data of comparable companies may be allowed for FY 2023 comparability analysis. However, the benchmarking data collection must be updated by taxpayers; either during the audit process or when the up-to-date financial data is made public.

Another key change highlighted in the TP Rules 2023 is the redefinition of the arm’s length range (“ALR”). The ALR is now defined as a range of figures or a single figure falling between the value of the 37.5 percentile to 62.5 percentile of the data set. The median is the mid-point of the ALR. The newly prescribed ALR range clearly deviates from the globally acceptable interquartile range (i.e., a point between the 25th percentile and 75th percentile). The narrower ALR may potentially place taxpayers' financials at risk of falling outside the ALR and consequently subjecting them to TP adjustments to the median. Notably, a surcharge of up to 5% may be imposed on the TP adjustments made.

In performing a benchmarking analysis for Malaysian entities, the IRBM has reaffirmed that local comparables should be used instead of overseas comparables when there are available local comparable businesses to serve as the benchmarking data set.

ii. Transfer Pricing Documentation (TPD)

When a taxpayer in Malaysia engages in a controlled transaction, they are required to prepare a set of contemporaneous TPD that demonstrates their adherence to the arm's length principle and supports their transfer pricing. This documentation is crucial for transfer pricing audits.

The Malaysian TP Guidelines prescribe the following financial thresholds for the preparation of a comprehensive set of TPD, i.e. Full TPD:

• Non-financial transactions - Annual gross income exceeding RM25 million, and total related party transactions exceeding RM15 million per annum; or
• Financial transactions - Provision of financial assistance exceeding RM50 million for non-financial institutions.

Otherwise, taxpayers are allowed to prepare documentation that is less extensive, i.e. Minimum TPD.

According to the TP Rules 2023, the IRBM mandates that a contemporaneous TPD be brought into existence prior to the deadline for filing a Corporate Income Tax (“CIT”) return (i.e. 7 months after the financial year end of the companies, or any extended CIT return filing, in a given YA). The completion date of the TPD must be indicated on the TPD and must be provided within 14 days upon request during a tax audit. Failure to comply with this requirement may result in a penalty ranging between RM20,000 and RM100,000 for each YA.