By Gagandeep Nagpal and Thomas Chan
As we move into the new year, tax professionals are gearing up for the upcoming compliance season. However, with the newly introduced Malaysia Transfer Pricing Guidelines 2024 (MTPG 2024), there’s a silver lining for many taxpayers. Released by the Inland Revenue Board of Malaysia (IRB) on 24 December 2024, the MTPG 2024 comes into effect for the year of assessment 2023 onwards, replacing the previous Malaysia Transfer Pricing Guidelines 2012 (MTPG 2012). This update was essential to align the guidelines with new Transfer Pricing Rules (TP Rules 2023) introduced in 2023, addressing global tax developments (especially those led by the OECD) and recent local litigation precedents.
The revised guidelines introduce key changes, particularly certain relaxation in compliance requirements and revised thresholds, which may have an impact the way compliance would require to be performed. This article delves into these relaxations and other nuances which will have potential impact on TP compliance strategies of the taxpayers.
New framework for Domestic Controlled Transactions
In comparison to the MTPG 2012, the MTPG 2024 simplifies the compliance burden for domestic controlled transactions by setting more specific conditions and the following persons are not required to prepare a contemporaneous transfer pricing documentation (CTPD) –
“…
(d) person who entered solely into domestic controlled transactions with another person where both parties –
(i) do not enjoy tax incentives;
(ii) are taxed at the same headline tax rate; or
(iii) do not suffer losses for two consecutive years prior to the controlled transactions.”¹
Persons who are exempted as per the above criteria must still comply with the arm’s length principle for all controlled transactions entered into and must ensure to keep all relevant documents that are related to the controlled transactions, including documentation to support and prove the determination of the arms’ length price.²
This represents a welcome change, as it provides clarity and may reduce the compliance burden for taxpayers engaged solely in domestic controlled transactions. This exemption allows the IRB to concentrate on higher-risk cross-border transactions while easing compliance for domestic controlled transactions that pose low or no risk of tax arbitrage.
While the exemption relieves taxpayers from CTPD compliance, the IRB still expects taxpayers to demonstrate pricing as per the arm’s length principle. Failure to establish arm’s length pricing could lead to a surcharge of up to 5% of the gross TP adjustment amount.
The revised Transfer Pricing Audit Framework (TPAF 2024) stresses that TP adjustments made by the IRB to domestic controlled transactions do not automatically result in an offsetting adjustment. This remains at the discretion of the IRB and may lead to an audit of the counterparty requesting the offset. Therefore, as a matter of prudence, taxpayers should assess the materiality and potential audit risk exposure arising from domestic controlled transactions. Accordingly, taxpayers should evaluate the need to perform TP analyses and compile relevant supporting documents to establish arm’s length pricing.
Increased Thresholds for Compliance
In comparison to the MTPG 2012, the MTPG 2024 also raises and altered the thresholds for determining the level of details required in CTPD. Now, a person shall prepare a full CTPD as provided under the Rules if the person fulfils the following –
(a) generates gross business income of more than RM30 million in total and engages in cross-border controlled transactions totaling RM10 million or more annually; or (b) receives or provides controlled financial assistance of more than RM50 million annually³.
Key points to note are:
- The RM 10 million threshold in (a) above, refers only to cross-border controlled transactions. Therefore, taxpayers engaging solely in domestic controlled transactions may opt to prepare “minimum” TPD, subject to any exemptions that might apply to such taxpayers under the guidelines.
- The RM 50 million threshold in (b) above covers both domestic and cross-border transactions.
- The revised guidelines continue to require permanent establishments to prepare full TPD, regardless of these thresholds or any exemptions under the guidelines.
- Additionally, taxpayers qualifying for “minimum” CTPD must provide detailed information on key controlled transactions, defined as those related to the principal activity or transactions amounting to 20% or more of operating revenue⁴. Further, non-key covered transactions are still expected to be listed out in the minimum CTPD⁵.
Exemption
The guidelines now define a materiality threshold for exemption from TPD for a person who has entered into controlled transactions totaling not more than RM1 million.
While this provides relief for taxpayers with minor controlled transaction values, they are still expected to comply with arm’s length principles and maintain supporting documentation to avoid any additional tax and/or surcharge, even though they may not be subjected to documentation related penalty under Section 113B.
Some of other key notable changes which would have an impact on TP compliance strategy of taxpayers are –
Leverage on Master File
As per the TP Rules 2023, Schedule 1 was introduced as part of CTPD requirements. Most of the contents of Schedule 1 align with the Master File requirements. Therefore, MTPG 2024 permits the use of a multinational enterprise group’s Master File as a substitute for Schedule 1, provided it such Master File contains all the required information.
However, caution should be exercised when using standard OECD Master Files as substitutes for Schedule 1, as the latter requires specific information relevant to the business in Malaysia, which may not be sufficiently detailed in an OECD Master File.
Additionally, the timing of the Master File preparation (within 12 months of the ultimate parent entity’s financial year-end) must be carefully coordinated to ensure “contemporaneous” nature of TPD for local compliance purposes (prepared prior to the return filing due date). Subject to IRB’s concurrence, an alternative strategy could be to refer to the immediately preceding year’s Master File, with an addendum prepared as soon as the same year’s Master File becomes available. This approach is consistent with the approach expected to be adopted by taxpayers on use of comparable companies’ data for the purpose of benchmarking, as highlighted below.
Benchmarking update
As per the TP Rules 2023, taxpayers are required to use comparables’ results for the same basis year for a year of assessment. However, due to the non-availability of the latest financial results, taxpayers are allowed to use prior year financial data during the preparation of CTPD. Once the current year’s financial data becomes available, taxpayers are expected to update the benchmarking analysis to evaluate whether adjustments are necessary to reflect appropriate arm’s length pricing for the controlled transactions.
MTPG 2024 further clarifies that updating benchmarking analyses, even at the audit stage, will not invalidate the contemporaneous nature of the original documentation, provided all other requirements are met. However, any TP adjustments resulting from the updated analysis may still attract a surcharge.
As a proactive measure to mitigate the risk of additional taxes and/or surcharge at the audit stage, taxpayers can re-evaluate the benchmarking analysis once the current year’s financial data of comparables is available. For efficiency, this re-evaluation could be timed alongside the immediately following year’s compliance. Where the margin earned by a taxpayer is being analysed, and it falls below the arm’s length range of results established by the year-on-year data of comparables, the taxpayer can explore options to support their margin, such as performing comparability adjustments and/or documenting specific economic conditions that impacted the margin or undertake a voluntary disclosure.
Benchmarking for Low-Value Added Services (‘LVAS’)
This is another relief to taxpayers in case of LVAS, wherein, mark-up applied on the cost base does not require justification through a benchmarking study. However, taxpayers are still required to conduct a detailed analysis of the nature of the services to ensure it qualifies as LVAS. Further, functions, assets and risks analysis would require to be carried out to establish that service provider is routine risk/limited risk service provider.
Special Considerations for Losses
As per MTPG 2024, taxpayers reporting losses are expected to provide detailed explanations in their CTPD, including non-TP factors, such as ineffective business strategies, global economic conditions, or natural disasters that contributed to the losses⁶. While there was a reference to this in MTPG 2012, it was not as explicit as the text in MTPG 2024⁷.
Additional Documentation for Specific Transactions
As per MTPG 2024, there is an expectation to include additional documentation for specific transactions, which would extend the content requirements laid out in the TP Rules 2023⁸. These additional documentations pertain to business restructuring, intra-group services, cost contribution arrangements (CCA), intangibles, and intra-group financial assistance.
These additional documentation requirements are not prescribed in the TP Rules 2023 and seem to be additionally introduced through MTPG 2024. Therefore, it is unclear at this stage, as whether penal implications will arise if this information is not included in CTPD.
Conclusion
The MTPG 2024 introduces several changes that ease compliance for certain taxpayers. The guidelines facilitate the implementation of the TP Rules 2023 and include detailed prescriptions on specific controlled transactions and taxpayer circumstances that should aid in interpreting the expectations of the IRB. While the guidelines allow some exemptions and flexibility, taxpayers with a history of disputes and those entering specific intragroup arrangements (such as business restructuring and financial transactions) should maintain the necessary documentation to support their TP positions.
¹ Para 1.5 of MTPG 2024
² Para 1.6 of MTPG 2024
³ Para 1.7 of MTPG 2024
⁴ Para 11.13 of MTPG 2024
⁵ Para 11.14 of MTPG 2024
⁶ Para 4.13 of MTPG 2024
⁷ Para 18.2 of MTPG 2012
⁸ Para 11.7 and Appendix A of MTPG 2024
Gagandeep Nagpal is Partner | Tax-Transfer Pricing, Deloitte Tax Services Sdn. Bhd.
Thomas Chan Yeu Wai is Director | Tax–Transfer Pricing, Deloitte Tax Services Sdn. Bhd.
The content in this article is the personal view of the authors and does not purport to reflect the views of Deloitte Malaysia.
