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moreMalaysia’s transfer pricing landscape has seen significant changes over the last decade. Beginning with the introduction of Section 140A of the Income Tax Act, 1967 (“ITA”) in 2009 to the most recent 2024 Malaysia Transfer Pricing Guidelines (“TP Guidelines”) and 2024 Transfer Pricing Tax Audit Framework (“TP Audit Framework”), transfer pricing is riding on the crest of the tax wave.
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| Further, in the TP Guidelines, tax authorities have provided exemptions to taxpayers from preparing a CTPD if certain conditions are met. However, taxpayers must still comply with the arm’s length principle. In order to prove the arm’s length principle, notwithstanding exemptions are given, a CTPD will be a strong defense documentation in the event of a TP Audit. Hence, it will still be important for taxpayers to prepare and maintain one. At the very least, a Minimum CTPD is still recommended to be prepared. Another welcoming update in the new TP Guidelines was on the Low Value-Adding Intra-Group Services (“LVAS”) where Malaysian Service Providers who solely provide services that are supportive in nature to its related parties are now allowed to apply a 5% mark-up on total costs without having to perform a benchmarking study. This move appears to be similar to the OECD simplified approach adopted in Singapore where a blanket rate of 5% mark-up can be applied in order to reduce administrative work on taxpayers. However, it will be important for taxpayers to properly identify if these services fall under the category LVAS. When in doubt, it is encouraged to maintain a local benchmarking study.
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The table below gives a breakdown of the fines.
| No. | Period of Delay* (Number of days) | Penalty Amount (Section 113B) |
|---|---|---|
| 1. | Up to 7 days | RM 20,000.00 |
| 2. | More than 7 days up to 14 days | RM 40,000.00 |
| 3. | More than 14 days up to 21 days | RM 60,000.00 |
| 4. | More than 21 days up to 28 days | RM 80,000.00 |
| 5. | More than 28 days | RM 100,000.00 |
Note: *The period of delay is calculated from the expiration of a 14-day period from the date of service of the written notice until a complete CTPD is submitted to Inland Revenue Board of Malaysia.
Beginning 2023 onwards, taxpayers need to be aware of the timeline in preparing the contemporaneous documentation. They must also ensure documentation is completed on time.
Notwithstanding the above, the tax authority has consistently encouraged taxpayers to undertake Voluntary Disclosure (“VD”). This can be performed after the tax return submission deadline but before the commencement of a TP audit, by completing a VD form. However taxpayers must ensure they prepare a list of required documents such as having a CTPD and an organizational chart for the relevant Year of Assessment (s), audited accounts, tax computation, tax return form and information on incentives (if any), computation of comparability analysis and its comparables’ audited accounts and information on omitted income or error in reported income/ claims.
Many may wonder about the benefits of performing a VD if their case is never selected for a TP Audit. The key advantage lies in the potential surcharge reduction. Instead of facing a maximum 5% surcharge under a normal TP audit, taxpayers who opt for a VD may benefit from a lower surcharge, ranging between 0% and 4%, as considered by the tax authorities. If taxpayers believe that a VD could be a strategic move to significantly reduce potential surcharge penalties, it is an option worth considering.
Overall, in Malaysia, while the tax authorities have been aggressive in the audit landscape, taxpayers who understand the importance of maintaining a CTPD, have adequate supporting documentation, and cooperate with the tax authorities will be able to manage TP Audits with confidence.
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