Malaysian taxpayers are required to conduct their cross-border transactions with related parties in accordance with the arm's length principle[1], and therefore, taxpayers are required to use the most appropriate transfer pricing method to ensure that their related party transactions comply with the arm's length principle. The TP Guidelines recognise the five methods[2] under traditional and transactional transfer pricing methods prescribed by the Organisation for Economic Co-operation and Development (“OECD”)

[1] The arm’s length principle requires that the conditions of related party transactions be consistent with those that would have been agreed upon between independent parties under similar circumstances

[2] The 5 methods include: Comparable Uncontrolled Price method; Resale Price method; Cost Plus method; Transactional Net Margin Method; and Profit Split Method.

Malaysian taxpayers are required to prepare a Country-by-Country Report (“CbCR”), Master File and a Local File as part of transfer pricing requirements.

• A CbCR discloses aggregate data on income, profit, taxes paid and economic activity among tax jurisdictions in which the Multinational Entities (“MNE”) operates and in Malaysia MNEs with an annual consolidated group revenue equal to or exceeding RM 3 billion are required to prepare and submit a CbCR.

• The Master File provides an overview of the global business operations and transfer pricing policies of the multinational group and in Malaysia applies to MNEs with an annual consolidated group revenue equal to or exceeding RM 3 billion;

• The Local File contains detailed information of the Malaysian entity, its intercompany transactions, detailed functional analysis, and transfer pricing analysis (i.e. a Local File is equivalent to the transfer pricing documentation discussed below).

Malaysian taxpayers are required to maintain contemporaneous transfer pricing documentation to support the arm's length nature of their cross-border transactions with related parties. The type of transfer pricing documentation including the eligibility are provided in the table below:

The documentations should be prepared in the English or Malay language and must be provided to IRBM within 14 days of request. Malaysian taxpayers are required to retain their transfer pricing documentation for a period of 7 years from the end of the relevant tax year.

Nevertheless, even if the documentation requirements are not met, taxpayers are still required to apply the arm's length principle in their related party transactions and maintain adequate records to support their transfer pricing positions.

Malaysian taxpayers have the option to apply for APAs, which are formal agreements with the IRBM that determine the appropriate transfer pricing methodology and the arm's length price for a specific set of transactions. APAs provide certainty and reduce the risk of transfer pricing disputes.

Malaysian taxpayers who fail to comply with the transfer pricing requirements may face transfer pricing adjustments, additional tax assessments, and high penalties such as:

• RM 20,000 and RM 100,000 and/or imprisonment of up to 6 months for failure to notify or providing incomplete/incorrect information or failure to provide contemporaneous documentation (Penalty of up to RM 1 million and/or imprisonment of up to 2 years for Labuan entities);

• Penalty of up to 5% surcharge for transfer pricing adjustments; and

• Penalty of up to 50% of tax undercharged.