Malaysia’s New 5% Mark-Up for Intra-Group Services: A True Compliance Relief or Just a Mirage?

Knowledge • Malaysia’s New 5% Mark-Up for Intra-Group Services: A True Compliance Relief or Just a Mirage?

Malaysia’s New 5% Mark-Up for Intra-Group Services: A True Compliance Relief or Just a Mirage?

In multinational enterprises, it is common for parent companies or group service companies to provide intra group services to related parties. These services are outsourced to the group service provider for business convenience and efficiency reasons. In Malaysia, the Inland Revenue Board of Malaysia (“IRB”) introduced the Transfer Pricing Guidelines released in December 2024 (“TPG24”), which incorporates the Low Value-Adding Services (“LVAS”) concession. A relief for service providers that provide routine, low value adding services to their related parties.

What is LVAS?

The TPG24 outlines the definition and characteristics of LVAS. In a nutshell the LVAS characteristics are:

Supportive Nature: These are auxiliary services that support the main business operations.
Non-Core Business: They do not form part of the core business activities of a Multinational Enterprise (“MNE”) group.
No Unique Intangibles: They do not require the use of unique and valuable intangibles and do not lead to the creation of such intangibles.
Limited Risk: They do not involve the assumption or control of substantial or significant risk by the service provider.

LVAS are supportive services provided by one or more members of a MNE group to other members within the group. These services do not form part of the core business activities of the MNE group and do not contribute significantly to the profit-earning activities or economically significant functions of the MNE group.

The concession or simplified approach

The TPG24 introduces a simplified approach for determining the arm's length charges for LVAS. This approach includes:

Profit Mark-Up: A standard mark-up of 5% on all relevant costs (excluding pass-through costs) is applied to determine the arm's length charge for LVAS.
Documentation Requirements: Taxpayers electing the simplified approach must prepare documentation that includes a description of the services provided, the rationale for the provision of LVAS, the selected allocation keys, and calculations showing the determination of the cost pool and the mark-up applied.

Services under LVAS

The TPG24 also provides some examples of services that are included and excluded from the LVAS definition, these are highlighted in the table below:

Example of services that would likely meet the definition of LVAS

Examples of activities that would not qualify for the simplified approach

Accounting and Auditing
Processing and management of accounts receivable and accounts payable
Budgeting
Human resources activities
IT services (where such IT services is not a part of the principal activity of the group)
Legal services
Tax obligations
General administration

services constituting the core business of the MNE Group;
R&D services (including software development)
manufacturing and production services
purchasing activities relating to raw materials or other materials that are used in the manufacturing or production process
sales, marketing and distribution activities
financial transactions
extraction, exploration, or processing of natural resources
insurance, takaful, reinsurance or retakaful
services of corporate senior management (other than management supervision of services that qualify as LVAS)

While many services providers may fall within the definition of LVAS, not all service activities would qualify as LVAS.

For instance, Business Process Outsourcing (“BPO”) service providers provide services that can range from routine low value-adding tasks to high value-adding activities that require specialised skills and contribute significantly to the core business operations of the Group.

Therefore, taxpayers must carefully assess their services to determine whether they qualify as LVAS.

Key Take Aways

Intra-Group service providers in Malaysia should use the guideline as described in the TPG2024 to assess whether their services fall within the definition of LVAS.

If the services fall within the definition of LVAs the taxpayer can use the 5% mark-up concession. It is worth noting that the 5% Mark-up concession is not mandatory.

The intention is for Malaysia Taxpayers to use the concession if all conditions are met. If the taxpayer doesn’t fulfill the conditions or chooses not to use the concession, a benchmarking is required to test the mark-up applied to the service transaction.

In essence the concession saves the Malaysian Taxpayer the time and effort to undergo for an external benchmarking to test the mark-up only. Malaysia Taxpayers are still required to prepare documentation that includes a description of the services provided and why are they chargeable, the rationale for the provision of LVAS, the selected allocation keys, and calculations showing the determination of the cost pool and the mark-up applied.

Therefore, the real saving is on the benchmarking to test the mark-up.

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