(Tax Update) Transfer Pricing Guidelines 2024

The Inland Revenue Board of Malaysia (IRBM) released the Malaysia Transfer Pricing Guidelines 2024 (MTPG 2024) on 24 December 2024, effective from the year of assessment 2023.

This new guideline expands upon the previous 2017 version, offering detailed clarifications and introducing new directives for taxpayers in preparing contemporaneous transfer pricing documentation (CTPD) in Malaysia.

Scope and Exemptions for CTPD Preparation

To alleviate compliance burdens, MTPG 2024 exempts certain individuals and entities from preparing CTPD:

Individuals not engaged in business activities.
Individuals conducting business (including partnerships) involved solely in domestic controlled transactions.
Entities engaged in controlled transactions totaling no more than MYR1 million.
Entities involved exclusively in domestic controlled transactions with another party, provided both parties:
- Do not benefit from tax incentives.
- Are subject to the same headline tax rate.
- Have not incurred losses for two consecutive years prior to the controlled transactions.

Despite these exemptions, all parties must adhere to the arm's length principle and maintain relevant documentation to substantiate their transfer pricing positions.

This requirement ensures readiness for potential audits, where proof of compliance may be necessary.

Revised Thresholds for Full and Minimum CTPD

MTPG 2024 updates the criteria for preparing full CTPD:

Full CTPD: Required for taxpayers with:
- Gross business income exceeding MYR30 million.
- Engaging in cross-border controlled transactions totaling MYR10 million or more annually.
- Receiving or providing controlled financial assistance exceeding MYR50 million annually.

Taxpayers below these thresholds may opt for a minimum CTPD, which includes:

Worldwide group structure.
Organizational structure.
Details of key controlled transactions related to principal activities or constituting 20% or more of operating revenue.
Pricing policy.

All CTPD must be prepared before the tax return filing deadline for the relevant assessment year.

Notably, while minimum CTPD does not explicitly require a comparability analysis, the IRBM may request one to justify transfer pricing, suggesting that preparing such an analysis proactively could be beneficial.

Safe Harbor Rule

The guidelines introduce a safe harbor rule for low value-adding intra-group services (LVAS), permitting a 5% mark-up without the need for a benchmarking study under the simplified approach. This rule aims to streamline compliance for specific transaction types.

To qualify as LVAS, the services must meet the following criteria: they should be supportive in nature, not integral to the core business of the MNE group, and should neither involve nor result in the creation of unique or valuable intangibles. Additionally, they must not involve the assumption or control of significant risks by the service provider or lead to the creation of such risks.

Arm’s Length Range

The guidelines redefine the arm's length range (ALR), narrowing it from the 37.5th to the 62.5th percentile. This change may increase the risk of financial deviations from the ALR, potentially triggering transfer pricing adjustments.

The two-step approach is outlined as follows:

Step 1: Determine the arm's length range
If the tested price falls within the arm's length range, it is deemed to comply with the arm's length principle. If it falls outside the range, proceed to Step 2.

Step 2: Calculate the median
The median is calculated as the midpoint between the lower quartile and the upper quartile.

Penalties and Enforcement

The MTPG 2024 addresses penalties for non-compliance, which can be substantial:

Fines ranging from RM20,000 to RM100,000 per year of assessment
Potential imprisonment
Surcharges of up to 5% on transfer pricing adjustments made by the IRBM

Transfer Pricing Audit Framework 2024

Alongside MTPG 2024, the IRBM introduced the Transfer Pricing Audit Framework 2024 (TPAF 2024) on December 24, 2024, effective from January 1, 2025. This framework outlines the procedures and expectations for transfer pricing audits, emphasizing:

Audit Selection: Based on risk assessments considering factors like transaction value, complexity, and compliance history.
Audit Process: Involves information gathering, analysis, and discussions with taxpayers to assess compliance with the arm's length principle.
Documentation: Stresses the importance of maintaining comprehensive and accurate CTPD to facilitate efficient audits.
Penalties: Details consequences for non-compliance, including potential adjustments and penalties.

TPAF 2024 aims to enhance transparency and consistency in transfer pricing audits, encouraging voluntary compliance among taxpayers.

Implications for Taxpayers

Taxpayers should assess their transactions against the updated thresholds to determine the appropriate level of documentation required. Even if exempt from full CTPD, maintaining sufficient records to demonstrate compliance with the arm's length principle is crucial. Proactive preparation can mitigate risks during potential audits.

In summary, MTPG 2024 and TPAF 2024 represent significant advancements in Malaysia's transfer pricing landscape, promoting clarity, compliance, and alignment with international standards. Taxpayers are advised to familiarize themselves with these guidelines to ensure adherence and prepare for the enhanced audit framework.

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