TRANSFER PRICING (TP) requirement is included in the Income Tax Act 1967 so that profits are distributed within a corporate group in line with the arm’s length principle amid differences in tax rate, exemption status and so on. In other words, the primary purpose of transfer pricing is to ensure that businesses do not artificially move profits between entities for tax avoidance.
Gone are the days when transfer pricing was perceived as an anti-avoidance provision. Today, it is much more than that. Preparation of TP documentation is a vital annual compliance for many businesses. Failure to prepare TP documentation each year on a contemporaneous basis attracts a penalty of RM20,000 to RM100,000 regardless of whether the transactions are in fact conducted at arm’s length.
In Malaysia, TP applies to both domestic and cross-border transactions. It even extends to transactions between associated persons who are not part of the same group of companies — for example, companies with common directors, where each holds at least a 20% shareholding.
On Dec 24, 2024, IRBM updated its TP guidelines, introducing significant changes on the requirement to prepare full TP documentation as compared to a minimum TP documentation. In broad terms, the new guidelines allow more businesses to prepare minimum TP documentation, instead of a full documentation. Hence, leading to potential cost savings for businesses.
Historically, any business with controlled transaction exceeding RM15 million were required to prepare full TP documentation. Put simply, controlled transactions refer to sales, purchases or service transactions with a subsidiary, parent company, sister company or other kind of “Associated Person”.
The recently published guidelines lower the threshold to RM10 million. At first glance, one might expect more businesses to be required to prepare full TP documentation. But, counterintuitively, it is likely that fewer businesses would have to prepare full TP documentation as the new threshold of RM10 million applies on cross-border transactions.
For instance, a company with RM2 million in cross-border controlled transactions and RM16 million in domestic controlled transactions would have been required to prepare full TP documentation pursuant to the old guidelines. However, a minimum TP documentation would now suffice for the same company. (For avoidance of doubt, the contents of a minimum TP documentation shall encompass both the RM2 million and the RM16 million.)
Further, any business with gross income (loosely, revenue) below RM30 million is not compelled to prepare full TP documentation. There are also different thresholds applicable in respect of financing transactions.
What’s the difference between a full TP documentation and a minimum TP documentation?
As one might presume, a minimum TP documentation is far less onerous as information about functional profile of the entity and analysis of the industry in which it operates is not required. Further, a comparability analysis – being the mammoth task of collecting and analysing qualitative and financial information of hundreds of potential comparable companies – is not mandatory for the case of minimum TP documentation. This is a delight for many businesses, but do not jump into a conclusion too soon.
Even for the case of a minimum TP documentation, taxpayers are required explain and justify their pricing policy to prove it aligns with the arm’s length principle. In some cases, ”justification” for a pricing policy to comply arm’s length may not be practical at the absence of a comparability analysis.
Hence, businesses that qualify to prepare minimum TP documentation must carefully evaluate their options: whether to prepare a minimum TP documentation without a comparability study or to include a comparability study (or to prepare full TP documentation).
There are also cases in which a business is completely exempt from the requirement to prepare TP documentation – such as entities with controlled transactions not more than RM1 million per annum or purely domestic controlled transactions (provided certain criteria are met). However, even in such cases, the entities are not immune from the requirement to prove the prices are in fact consistent with arm’s length principle.
Beyond the scope of TP documentation, the recently published Transfer Pricing Guidelines (and the concurrently published Transfer Pricing Audit Framework) bring about multiple technical developments which impacts pricing of intragroup transactions, along with restructuring arrangements and the preparation of TP documentation.
As an overall, it is not business as usual. While the updates could lead to cost savings for some businesses, it’s not something to be taken for granted. Companies are advised to consult professionals to ensure optimal compliance for both pricing and documentation requirements.
With the IRBM’s increasing attention on TP matters, it’s imperative for each business to ensure the “internal pricing” policies are justified and well-documented.
This article is contributed by Nasha Raina Rahim, a transfer pricing expert at TRATAX Sdn Bhd, a firm of independent tax consultants and a member firm of WTS Global. Views expressed are solely her own.
