Introduction:
The Inland Revenue Board of Malaysia (IRBM) has recently announced the enactment of the Income Tax (Transfer Pricing) Rules 2023, superseding the previous TP Rules 2012. Effective from the year of assessment 2023 onwards, these new regulations signify a concerted effort to bolster compliance standards within Malaysia’s taxation framework.
Key Changes in TP Rules 2023:
The TP Rules 2023 pivot around two core principles: the arm’s length principle and transfer pricing documentation (TPD). Malaysia’s arm’s length concept echos the standards advocated by the Organization for Economic Cooperation and Development (OECD). This principle emphasizes the alignment of transaction pricing between associated entities with that of independent parties under similar circumstances.
Arm’s Length Principle:
The TP Rules 2023 stipulate the use of single-year data and not weighted average data for comparables, emphasizing the need for contemporaneous analysis. Recognizing the challenges in obtaining real-time financial data, the IRBM permits the utilization of the previous year’s data set, subject to exhaustive efforts in sourcing current-year data. However, timely updates during audits or upon the availability of up-to-date information are mandatory in order to maintain compliance.
Furthermore, the redefinition of the arm’s length range (ALR) introduces a narrower spectrum, spanning from the 37.5th to the 62.5th percentile. This departure from the conventional interquartile range may heighten the risk of financials deviating from the ALR, potentially triggering transfer pricing adjustments and accompanying surcharges of up to 5% of the TP adjustment.
Transfer Pricing Documentation (TPD):
Comprehensive TPD is mandated for transactions exceeding specified financial thresholds. The TP Rules 2023 emphasize the contemporaneous preparation of TPD prior to the Corporate Income Tax (CIT) return filing deadline, ensuring timely compliance. Failure to adhere to this requirement may result in substantial penalties ranging from RM20,000 to RM100,000 per annum.
Additionally, Schedule 1 and Schedule 2 of the TP Rules 2023 outline mandatory information disclosure requirements for Multinational Enterprise (MNE) Groups and local entities. This includes comprehensive organizational structures, business descriptions, financial activities, and transfer pricing methodologies, facilitating a holistic understanding of business operations for regulatory oversight.
Changes at a Glance:
| Items | TP Rules 2012 | TP Rules 2023 |
| Timeline to prepare TPD | – No statutory timeline so long as the TPD is made available upon request by the IRB. | – TPD must be dated and be ready by the tax return filling deadline. |
| Information to be disclosed in a TPD | – Does not include the list of information require in a TPD. Instead, it is covered under MTPG. – The list of information under the MTPG is similar to Schedule 2 – Information on Company | – Schedule 1: Information on MNE Group – Schedule 2: Information on Company – Schedule 3: Information on Cost Contribution Arrangement – Any relevant supporting documents – Date of completion of the TPD |
| Furnishing of a contemporaneous TPD | Not applicable | The Director General may, by notice under his hand require any person to furnish the contemporaneous TPD in writing within fourteen (14) days from the date of service. |
| Determination of arm’s length price (“ALP”) | Discuss the transfer pricing methods. | A person shall determine an ALP based on the most current reliable information, data or documents that are reasonably available at the time of determination. |
| Comparability of transactions | The application of data for comparability from other years prior to or after that basis period is allowed if complete and accurate data are available. | The application of data for prior years shall only be used to assist in the selection of the comparable and not for the use of multiple-year averages. This implies that multiple-year averages (weighted average) are no longer applicable. |
| Definition of ALR | Not included in the TP Rules 2012 but generally applied the OECD Guidelines between the 25th percentile and 75th percentile. | “Arm’s Length Range” means a range of figures or a single figure falling between the value of 37.5 percentile to 62.5 percentile of the data set. |
| Transfer pricing adjustment | Not included in TP Rules 2012. However, in practice, the IRB would adjust the margins that fall below the median to the median of the ALR. | – Margins that fall outside ALR, will be adjusted to Median. – Margins that fall within the ALR would generally be acceptable. |
Conclusion:
The amendments introduced in the TP Rules 2023 carry significant implications for taxpayers involved in transfer pricing activities within Malaysia. Notably, Malaysia’s deviation from OECD standards by defining its own ALR necessitates meticulous transfer pricing planning for multinational corporations operating in the region. This heralds a new era of compliance and transparency in Malaysian transfer pricing practices. As companies navigate these regulatory changes, diligent adherence to contemporaneous documentation and alignment are paramount. By embracing these measures, taxpayers can navigate the evolving tax landscape while mitigating potential risks and ensuring compliance.
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