Introduction:
The Income Tax (Transfer Pricing) Rules 2023 were recently enacted in Malaysia, ushering in significant changes to enhance the country’s transfer pricing enforcement measures. These rules, effective from the year of assessment 2023, empower the Malaysia Inland Revenue Board (MIRB) to enforce transfer pricing regulations more effectively. This article provides an in-depth analysis of the key changes introduced by the new TP Rules, covering contemporaneous TP documentation requirements, the arm’s length range, comparability analysis, treatment of intangible property, practical considerations for taxpayers, and next steps.
Contemporaneous TP Documentation Requirements:
Under the new TP Rules, taxpayers are required to prepare contemporaneous transfer pricing documentation (CTPD) before the due date for filing their tax returns. The documentation must include extensive information on multinational enterprise groups, covering aspects such as the group’s master file, local organization chart, pricing policies, and comparability analysis. Taxpayers must ensure the CTPD is completed prior to the tax return due date and furnish it within 14 days upon request by the MIRB.
Arm’s Length Range:
The concept of the arm’s length range has been introduced to determine whether the price of a controlled transaction is at arm’s length. The range is defined as a figure or a range of figures between the 37.5th and 62.5th percentiles of the benchmarking data set. If the controlled transaction falls within this range, the price may be regarded as the arm’s length price. However, the MIRB retains the authority to adjust the price to the median or any other point above the median if there are comparability defects that cannot be quantified, identified, or adjusted. If the price falls outside the arm’s length range, the median is considered the arm’s length price.
Comparability Analysis:
The new TP Rules place greater emphasis on accurate delineation and comparability analysis. Taxpayers must accurately delineate controlled transactions based on economically relevant characteristics to identify comparable uncontrolled transactions. The use of prior-year data is subject to scrutiny by the MIRB, ensuring it does not unduly influence the life cycles or business cycles of the property or services. Taxpayers are required to justify their selection of transfer pricing methods and profit level indicators, considering the facts, circumstances, and relevant characteristics of the controlled transaction.
Treatment of Intangible Property:
The rules explicitly state that income attributable to intangible property (IP) should be awarded to the party that performs the functions and controls the risks related to the development, enhancement, maintenance, protection, and exploitation (DEMPE) of the IP, regardless of legal ownership. Taxpayers are required to include details of the IP used, the group’s strategy, and the locations of research and development facilities in their contemporaneous TP documentation. This aligns with the ongoing focus on DEMPE analysis for intangible property and cost contribution arrangements.
Practical Considerations for Taxpayers:
While the new TP Rules provide clarity and guidance on the arm’s length principle, certain aspects require careful consideration. Taxpayers should note that the MIRB retains the power to make adjustments to the median point or above, even if the price of the controlled transaction is within the arm’s length range. The rules also lack explicit guidance on addressing comparability defects. Additionally, taxpayers are faced with increased documentation requirements, especially for multinational enterprise groups not subject to the Master File requirements.
Next Steps for Taxpayers:
To comply with the new TP Rules, taxpayers should take proactive measures, including planning, preparing, and gathering the necessary information and documentation as per Schedule 1 of the rules. They should reassess operational conditions for any controlled transactions, ensuring accurate delineation and comparability analysis. Taxpayers should review and update their transfer pricing policies and procedures to align with the new rules, focusing on the treatment of intangible property and the DEMPE analysis. It is also crucial to establish robust record-keeping systems to maintain contemporaneous transfer pricing documentation and be prepared for potential MIRB requests for information.
Key takeaways:
Malaysia’s new TP Rules 2023 introduce significant changes aimed at strengthening transfer pricing compliance. The rules emphasize the importance of contemporaneous transfer pricing documentation, accurate delineation, and robust comparability analysis. Taxpayers must carefully consider the treatment of intangible property and ensure alignment with the DEMPE analysis. By proactively assessing their transfer pricing practices and complying with the new rules, taxpayers can mitigate the risk of transfer pricing disputes and ensure compliance with Malaysia’s transfer pricing regulations. Please note that this is a general overview of the key changes introduced by Malaysia’s new TP Rules, if you require further assistance with the preparation of TP documentation in Malaysia, please contact us.
Find the Malaysian regulation bellow.
pua165_2023-tp-rule-2023