Malaysia’s development on transfer pricing

Article by Shahreen Mahther

Malaysia issued its first Malaysian Transfer Pricing Guidelines (MTPGL) way back in 2003, when Base Erosion and Profit Shifting (BEPS) were not in the picture yet.  It later issued a more comprehensive version of its MTPGL in 2012, together with the issuance of gazetted Income Tax (Transfer Pricing) Rules 2012 (the Rules) in 2012, when provisions for arm’s length principle under Section 140A of the Income Tax Act (ITA) 1967 was enacted. The regulations are largely and principally based on the OECD Transfer Pricing Guidelines (TPGL) 2010 and contained penal provisions for non-compliance.

Moving forward, with the introduction of BEPS and publications of its final reports in November 2015, Malaysia revised its MTPGL, in line with its participation as one of the Inclusive Framework (IF) members. Therefore, a revised MTPGL was published in 2017, with updates made to respective chapters, namely the arm’s length principle, intangibles, commodity transactions and documentations.

With a view to increase the rate of compliance, the Malaysian Finance Act 2020 introduced some key transfer pricing elements that came into effect on 1st January 2021.  Consequently, the Rules and MTPGL were drafted and currently awaiting approval.  The new Rules provide and adopt amendments made on chapters of the MTPGL in 2017, new provisions introduced and enacted under the Act, introduction to surplus charges as penal provision and a few other amendments. The new MTPGL will take into account the amendments and introduction of the new provisions in the ITA 1967, the Rules, and OECD TPGL version 2017 and version 2022, as well as providing enlightenment on other issues raised by auditors, tax practitioners and taxpayers. The application of the new MTPGL will be in line with the enforcement of the new Rules, and will supersede the Transfer Pricing Rules 2012.

The highlights of the proposed amendments are as follows:

i.      The power of Director General of IRBM to disregard any structure in related party transactions, which has been inserted as a provision under the ITA 196 since previously it was included under the Rules;

ii.     The power of Director General of IRBM to make adjustments to the structure of related party transactions;

iii.    Application of surcharge on transfer pricing adjustments;

iv.   Introduction of the application of “control” under related party transactions which is only applicable for transfer pricing issues;

v.    Amendments and updates based on OECD Transfer Pricing Guidelines 2017 and 2022 to be applied at domestic level such as the application of the most appropriate transfer pricing method, economically relevant characteristics, business restructuring, intra-group services and intra-group financing;

vi.   Guidelines for the preparation and submission of transfer pricing documentation. It is largely based on BEPS Action 13 on Transfer Pricing Documentation, introducing the concept Master File and Local File, enlisting the information and documentations required.  Flexibility is given to small and medium enterprises in the preparation and submission of transfer pricing documentation, based on qualified criteria; and

vii.  Updates and amendments on existing paragraphs to be consistent with other current legislations and provisions, as well as international regulations.

Subsequently, the Transfer Pricing Audit Framework will be amended in line with all amendments made to the Rules and MTPGL.

Nevertheless, the evolution of transfer pricing audit has also witnessed the capacity, skills and knowledge of the transfer pricing auditors being strengthen over the years, resulting in for more transfer pricing cases being audited, with more complex issues being explored and concluded.

As the transfer pricing landscape continues to evolve globally, particularly with the introduction of the Two-Pillar Approach which will address issues relating to digitalisation of economy and other global tax issues, more amendments and introduction to new regulations are expected in order to continuously ensure Malaysia is at a level playing field globally.