{Tax Update} Malaysia's 2023 Transfer Pricing Rules Update: Navigating New Challenges

Latest Development on Trans Pricing (TP) Rules 2023

The technical update on the changes in Transfer Pricing (TP) ruling in Malaysia from the TP Rules 2012 to TP Rules 2023 highlights several key areas where modifications have been made.

Here's a refined comparison and outline of the changes:

Definition of CTPD (Controlled Transaction Pricing Documentation)

TP Rules 2012: Defined as documentation created during the development or implementation of a controlled transaction and updated for material changes.

TP Rules 2023: Redefined to emphasize documentation prepared before the due date of a tax return in the year a controlled transaction is entered.

Timeline to Furnish the CTPD

TP Rules 2012: No specific timeline for furnishing CTPD upon request.

TP Rules 2023: CTPD must be available within 14 days upon request by the Malaysia Inland Revenue Board (MIRB).

Content of CTPD

TP Rules 2012: Lacked requirements for including MNE Group information, detailed business information, completion date, and applicability indication.

TP Rules 2023: Mandates inclusion of extensive MNE Group information, detailed business information guidance, completion date, and indications of inapplicable information.

Definition of Arm’s Length Range

TP Rules 2012: No definition, but practice often used the 25th to 75th percentile range.

TP Rules 2023: Defined as a range or a single figure between the 37.5th to 62.5th percentiles of the benchmarking data set.

TP Adjustment

TP Rules 2012: Silent on adjustment specifics within or outside the arm’s length range.

TP Rules 2023: Allows MIRB to adjust to the median if outside the range, and to the median or above if within the range under certain conditions.

Selection of the Most Appropriate TP Method

TP Rules 2012: A hierarchy-based selection of TP methods with no power for the Director General to revise the taxpayer's selected method.

TP Rules 2023: Removes the hierarchy of methods and gives the MIRB authority to replace the taxpayer's chosen method if deemed inappropriate.

Key Points to Note for Taxpayers on TP Rules 2023:

Documentation Timeliness:

The new rules emphasize the need for timely preparation and submission of CTPD, which must now be done before the tax return due date and made available within 14 days upon request.

Detailed and Comprehensive Reporting:

There is a heightened requirement for comprehensive and detailed information in the CTPD, including specific business and group information.

Arm's Length Range Precision

The definition of the arm's length range is more precise, potentially affecting the analysis of transfer pricing and the range within which transactions should fall.

TP Adjustment Clarity

The 2023 rules clarify how adjustments should be made, giving the MIRB more authority in adjusting to the median, thereby reducing ambiguity and discretion.

Flexibility in Method Selection

The removal of the method hierarchy suggests a more flexible approach to selecting the most appropriate TP method, while also granting the MIRB the power to intervene if necessary.

These changes indicate a move towards more stringent, precise, and potentially more administratively burdensome TP requirements. Companies dealing with controlled transactions in Malaysia must adapt to these changes to ensure compliance and effective management of transfer pricing risks.

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