Introduction
On 24 December 2024, the Inland Revenue Board of Malaysia (“IRBM”) released the highly anticipated Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024). Compared with its predecessor issued on 20 July 2012, the MTPG 2024 is more refined and incorporates the latest clarifications from the IRBM regarding compliance with transfer pricing provisions under Section 140A of the Malaysian Income Tax Act 1967 (“MITA”). The guidelines strictly adhere to the transfer pricing principles outlined in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued in January 2022. In addition, they incorporate further clarifications on the Income Tax (Transfer Pricing) Rules 2023 gazetted on 23 May 2023 (“TPR 2023”). Overall, the MTPG 2024 aims to provide clarity in assisting taxpayers engaging in controlled transactions to comply with the provisions set forth in TPR 2023 and the IRBM’s requirements. Despite being released in December 2024, the MTPG 2024 takes effect from the year of assessment (“YA”) 2023 onwards.
Here are the key highlights of the MTPG 2024:
- Revising thresholds for preparing Contemporaneous Transfer Pricing Documentation (“CTPD”)
- Providing illustrations on the application of the new Arm’s Length Range (ALR) and adjustments to the median by the IRBM
- Detailed guidance on the qualification criteria for Low Value Adding Intragroup Services (“LVAS”)
- Reaffirming the scope of financing assistance transactions, and announcing a separate document to address their complexity
- Explaining transfer pricing aspects related to business restructuring exercises undertaken by controlled entities
Thresholds for preparing Contemporaneous Transfer Pricing Documentation (“CTPD”)
The MTPG 2024 resets the threshold for the preparation of full CTPD as follows:
- Business income and cross-border transactions – Annual gross business income exceeding RM30 million and total cross-border controlled transactions exceeding RM10 million annually; or
- Financial transactions – Receives or provides controlled financial assistance of more than RM50 million annually.
For taxpayers engaging in relevant controlled transactions that exceed the specified thresholds, a full CTPD must be prepared and completed before the due date for furnishing the tax return for the relevant YA. If the thresholds are not exceeded, taxpayers are eligible to prepare a "Minimum CTPD", which is less extensive but still ensures compliance with the arm's length principle.
While documentation is mandatory, the following types of taxpayers are exempt from preparing any CTPD:
- Individuals not carrying on a business;
- Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions;
- Person who entered into controlled transactions (including domestic and cross-border) with a total amount not more than RM1 million per year; or
- Person who entered solely into domestic controlled transactions with another person where both parties: –
- do not enjoy tax incentives;
- are taxed at the same headline tax rate; or
- do not suffer losses for two consecutive years prior to the controlled transactions
Crowe’s observations
The resetting of the gross sales revenue threshold from RM25 million to RM30 million represents a minor change that benefits businesses with sales turnover between RM25 million and RM30 million. As for the list of exempted taxpayers, many local groups of companies are expected to benefit, especially if their controlled transactions are equal to or below RM1 million per annum, or if the controlled transactions are wholly conducted domestically, provided all 3 conditions are met. Further clarification from the IRBM may be required to determine whether the 3 conditions must be fulfilled collectively or individually.
For groups of companies engaged in both domestic and cross-border controlled transactions, the threshold has been relaxed to focus solely on cross-border transactions exceeding RM10 million, without a minimum threshold for domestic controlled transactions. This is a departure from the previous threshold of RM15 million, which combines both domestic and cross-border controlled transactions. This relaxation will help reduce documentation obligations, overall compliance costs and administrative burdens for many local groups of companies.
Practically, a large local conglomerate with multiple business segments generating sales revenue above RM30 million and primarily engaged in local inter-company transactions (such as provision of management services, sales and purchases of goods, rental of equipment, etc.), with relatively insignificant cross-border transactions with foreign related entities (i.e. below RM10 million), will only be required to prepare minimum CTPD.
We speculate that the rationale for this relaxation is that the IRBM does not perceive a high risk of tax leakage from inappropriate transfer pricing practices within this category of taxpayers. This is because tax revenue from domestic controlled transactions will be collected from either the seller or the buyer of the goods or services, both of whom are taxpayers in Malaysia.
Having said that, persons exempted from preparing CTPD must still comply with the arm’s length principle for all controlled transactions (including domestic and cross-border). They must ensure that all relevant documents related to the controlled transactions are kept, including documentation supporting the determination of the arm’s length price. Failure to comply with the arm’s length principle may result in a surcharge of up to 5% of the total TP adjustment made by the IRBM during a tax audit, pursuant to Section 140A(3C) of the Act.
The flowchart below summarises the application for the IRBM’s thresholds set for the preparation of CTPD under the MTPG 2024:
Read More
