Tax-ED Knowledge Kit
Transfer Pricing: Simplified and All You Need to Know
What is Transfer Pricing (TP)?
Transfer pricing involves setting prices for transactions between companies that are related or controlled by the same owner. It is important for tax compliance, as companies must follow rules to ensure these prices are similar to those charged between unrelated businesses, helping to avoid tax issues and disputes.
Is TP Compliance Required for Your Business?
Transfer pricing is designed to regulate businesses within the same industry by establishing benchmark pricing. If the price of goods sold deviates from this benchmark, companies must provide justification for offering a lower market price instead of the usual price. An exception to transfer pricing compliance is granted only to individuals with no business income.
Generally, when the parties involved are taxable in Malaysia, maintaining transfer pricing documentation is strongly advised.
Who Is Required to Comply with Transfer Pricing Regulations?
Meets the threshold of gross business income exceeding RM25 million and total controlled transactions exceeding RM15 million.
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Provision or receipt of controlled financial assistance exceeding RM50 million (excluding financial institutions).
Individual taxpayers who do not carry on a business.
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Taxpayers who do not have controlled transactions.
Those who only conduct transactions within Malaysia and can demonstrate that any transfer pricing adjustments do not change the overall tax owed or paid by either party are not significantly affected by transfer pricing rules.
Types of Transfer Pricing
Smaller companies with less complex transactions typically only need to comply with Minimum Transfer Pricing Documentation, which represents the basic level of compliance with transfer pricing regulations. This usually involves maintaining essential documentation to demonstrate that related party transactions are conducted at arm's length.
In contrast, larger multinational corporations or those with complex intercompany transactions generally require Full Transfer Pricing Documentation, as it provides a robust defense against potential audits and disputes with tax authorities.
Small businesses with less complex transactions.
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Does not meet the threshold.
Controlled transactions with party(ies) outside Malaysia.
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Involves related parties chargeable to tax in Malaysia.
The business is a non-chargeability being due to the tax incentives or suffers from continual losses?
Documents for Transfer Pricing
Once you have identified the category your business falls under, you can start preparing the required documents for compliance.
Minimum Transfer Pricing Documents
Taxpayers are only required to provide a general business description of all the relevant associated person.
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Taxpayers do not have to prepare a complete comparability study and may apply other than the five methods as described in the Malaysian TPGL provided it result in, or best approximates, arm’s length outcomes.
eg, taxpayer may use a price list to justify the price used for both controlled and uncontrolled transaction.
Full Transfer Pricing Documents
The Master file provides an overview of the multinational enterprise (MNE) group, including organizational structure, business description, financial information, and the group's transfer pricing policies.
The detailed information specific to the local entity, including financial statements, details of related party transactions, and the transfer pricing methods used.
A written policy outlining the approach and methodologies used for pricing related party transactions.
A document that describes the functions performed, assets used, and risks assumed by each party involved in the transactions.
This includes benchmarking studies or analyses that support the arm's length nature of the pricing, often comparing the company's transactions to those of similar unrelated entities.
Copies of any agreements related to the transactions between related parties.
Audited financial statements of the local entity and, if applicable, the parent company.
Any additional documents that support the transfer pricing analysis, such as market studies, industry reports, and correspondence with tax authorities.
Failure to Prepare Transfer Pricing Documentation
Failure to prepare the information required will be subjected to penalty under Section 113B of the Income Tax Act 1967 between RM20,000 to RM100,000.
While some businesses may not meet any of the criteria mentioned, we strongly recommend that companies with offshore investments prepare Full Transfer Pricing Documentation.
Conclusion
In general, transfer pricing is essential for companies operating internationally, as it reduces the risk of audits and disputes while promoting fair pricing practices among related entities. By establishing arm's length transactions, businesses can enhance transparency and uphold a strong reputation with tax authorities.
