The transfer pricing (TP) landscape in Malaysia is a constantly changing picture. While guidelines have existed since 2003, the focus has progressively broadened through the release of rules and revised guidelines in 2012. Two years later, the requirement to declare the existence of contemporaneous documentation in tax returns deepened the awareness and enhanced compliance among taxpayers. The Base Erosion and Profit Shifting (BEPS) Actions 8-10 and 13 were adopted in the revised guidelines in 2017, with some additional requirements/exceptions from a local perspective.

Another important recent development was the broadening of the definition of related parties, which came about with the lowered shareholding threshold – from 50% to 20% under specific circumstances. Increases in penalty rates were also made in the revised TP audit framework in 2019 to emphasize the importance of quality and comprehensiveness of TP documentation and its timely submission.Malaysia is also expected to adopt the recently issued Organisation for Economic Cooperation and Development (OECD) guidance on financial transactions and the anticipated guidance on TP issues arising from COVID-19 and digital economy taxation measures.

Audits and dispute resolution

In Malaysia, there are two main types of audits carried out by the Inland Revenue Board of Malaysia (IRBM): desk and field audits. The selection for audit is based on certain risk parameters, although these remain undisclosed. Taxpayers that have been audited in the past will continue to be monitored and may be selected again for compliance. The statute of limitations for TP is seven years.

Malaysia has had a few court rulings on TP matters, and litigation at higher appellate forums can drag on, consuming considerable time and resources. The taxpayer is also required to pay the entire additional tax liability plus penalty upfront on the issuance of a notice of assessment from the IRBM, before proceeding with litigation.

Taxpayers can explore non-adversarial routes such as an Advance Pricing Arrangement (APA) or voluntary disclosure. There are certain operating thresholds to qualify for an APA application and extensive information is sought at the pre-filing stage. Taxpayers can also opt for voluntary disclosure to concede upfront on TP issues in order to avoid a full audit, and to qualify for significantly reduced penalty rates. The Mutual Agreement Procedure (MAP) option is also available through most tax treaties. It is aligned with BEPS Action 14 (except for mandatory arbitration) and is a good way to avoid economic double taxation.

Local nuances

Malaysia plays an active role as observer at the OECD and the local regime is largely aligned with the OECD TP guidelines. However, like many other countries, Malaysia has its unique practical nuances, such as the following:

  • The IRBM has a preference for net margin analysis, and arising therefrom, the use of local tested party and local comparables
  • The current practice of the IRBM is to adjust the taxpayer’s net margin to the year-on-year median of the comparables’ range
  • The Local File is extensive on certain fronts, such as details of persons to whom local management reports, worldwide organisation structure, detailed pricing policy along with supporting documents, etc.

Apart from the above, there are other noteworthy points:

  • Out-of-book downward adjustments are generally discouraged and not allowed during audit
  • Intercompany contracts should be updated, signed, and stamped (there are separate stamp duty implications)
  • While there is no capital gains tax in Malaysia, there are provisions for taxing real property gains, transfer of shares in a real property company and compensation for loss of income
  • TP provisions apply equally to domestic intercompany transactions, although offsetting adjustment can be claimed by the counterparty in the situation of an additional TP assessment on a domestic controlled transaction; such a counterparty would generally be audited before the offset is allowed
  • Attribution of profit can be performed based on the arm’s length principle; however, Malaysia has not subscribed to the authorized OECD approach
  • Penalty is linked to undercharged tax and the eventual rate imposed may vary on a case-by-case basis (i.e. merits of the case, quality of TP documentation, etc.)

Anticipated focus areas

Losses or constant low operating margins for a local taxpayer (irrespective of characterization) will continue to attract scrutiny. The IRBM increasingly challenges the role of taxpayers in the development, enhancement, maintenance, protection, and exploitation (DEMPE) of trade and marketing intangibles, with demand for additional remuneration in case similar value-adding activities are performed locally. Being an inbound jurisdiction, global corporate recharges (including royalty, management fees, etc.) are expected to remain in focus. Further, marketing support service structures that involve significant interactions with prospective customers will face more scrutiny from a permanent establishment perspective. Medical devices, pharmaceuticals, FMCG, food ingredients, logistics, electronic and electrical, and digital services may be some of the focus industries for audit, while hospitality and travel and tourism might attract less attention.

Malaysia is expected to ratify its Multilateral Instrument (MLI) Convention soon. The IRBM’s growing reliance on big data and data analytics in selecting audit targets and conducting issue-based focused audits is also expected to enhance its due diligence capabilities and speed. All of this is amplified by access to Country-by-Country Reports and Master Files, and the enhanced sharing of information among foreign tax authorities.

Malaysia generally follows the OECD-aligned TP approaches, although the local nuances, cultural norms, and practical considerations play a vital role in audit outcomes. Hence, taxpayers must always keep these in mind while formulating TP and audit strategies.

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