Commitment to BEPS Action 13
Malaysia is fully dedicated to implementing the recommendations of Action 13 of the Base Erosion and Profit Shifting (BEPS) effort by the Organization for Economic Co-operation and Development (OECD). The objective is to gather information about the global operations of Multinational Enterprises (MNEs) from sources other than their headquarters. To achieve this, Malaysia’s Inland Revenue Board (MIRB) utilizes Country-by-Country (CbC) reports, Transfer Pricing Documentation, and TP Disclosure Forms.
Legal Framework and OECD Alignment
Malaysia’s transfer pricing regulations are primarily defined in Section 140A of the Malaysian Income Tax Act, 1967, and the Income Tax (Transfer Pricing) Rules 2012. The MIRB issued the Transfer Pricing Guidelines in July 2012, replacing the earlier version from 2003. These rules require the application of the arm’s length principle for controlled transactions, whether they are domestic or cross-border.
Definition of Related Party
Malaysian regulations define related parties as individuals or entities that have control over each other, individuals related by blood, or entities controlled by another entity. “Control” is further defined in Section 139 of the Act. Companies are considered associated if one controls the other or if the same individuals control both entities. The concept of related companies within a group is provided under Section 2(4) of the Act.
Nature of Transfer Pricing Documentation
Transfer pricing (TP) is regulated under Section 140A of the Income Tax Act, 1967, and under Section 17D of the Labuan Business Activity Act 1990. The Malaysian Transfer Pricing Rules and Guidelines were introduced in 2012 and updated in 2017. These regulations apply to TP documentation prepared after July 15, 2017.
Advance Pricing Agreement (APA)
The MIRB introduced section 138C in 2009, allowing entities involved in cross-border transactions with associated parties to apply for an APA. APAs can be for unilateral, bilateral, or multilateral transactions for a period of 3 to 5 years. There are application fees, and the process duration varies depending on the type of APA.
The MIRB conducts regular transfer pricing inspections. Areas of focus include intra-group services, cost allocation of the head office, and scrutiny of companies with financial ratios and figures deviating from industry averages. These audits can cover up to seven preceding years.
Transfer Pricing Documentation
Transfer pricing documentation is required to be submitted only upon the MIRB’s request. However, corporate taxpayers must disclose in their annual corporate income tax return whether they have prepared TP documentation. Specific thresholds determine the need for comprehensive documentation.
Level of Documentation
Transfer pricing documentation includes information about organizational structure, controlled transactions, pricing policies, assumption strategies, comparability analysis, transfer pricing methods, financial information, and supporting documents.
Economic Analysis – Benchmark Study
Malaysia prefers local comparables and does not readily accept foreign comparables. Foreign comparables are expected to meet criteria related to economic circumstances, such as the geographic location of the market and market size.
Inter-company (IC) Legal Agreement
Legal agreements formalizing relationships between group entities are of lower importance, as the “conduct of parties” is emphasized, following OECD 2017 Guidelines.
Production Process for TP Relevant Returns
Detailed information about filing requirements, formats, deadlines, notification requirements, and language preferences is provided, covering various tax-related documents and forms. Documents can be in Malay or English.
The MIRB provides options for notification, and penalties apply for non-compliance. Notification changes were introduced in 2021 to allow CbC notifications to be part of annual tax returns.
Taxpayers are required to maintain records for seven years to enable tax authorities to determine income or losses from business activities.
Penalties and Interest Charges
Penalty regimes for understatements of income from transfer pricing arrangements depend on the quality of transfer pricing documentation. The penalties can be substantial, as outlined in transfer pricing audit guidelines.