Simplified vs Full Transfer Pricing Documentation in Malaysia

As a general guide, the Malaysia Transfer Pricing Guidelines apply to all cross-border and domestic controlled transactions except for domestic transactions between taxpayers who are:

• Both assessable and chargeable to tax in Malaysia; and
• Any adjustments made will not alter the total tax payable or suffered by both persons.

Taxpayers are required to prepare a full transfer pricing documentation if they meet any of the following requirements:

• Gross income exceeding RM25 million and total amount of controlled transactions exceeding RM15 million; or
• Provision of financial assistance exceeding RM50 million (does not apply to financial institutions)

To ease compliance burden, taxpayers that fall outside the thresholds may opt to prepare a simplified transfer pricing documentation.

We have prepared the below comparison between simplified and full transfer pricing documentation in Malaysia:

The common misconception on the preparation of a simplified TPD is that taxpayers only need to disclose the (a) organisational structure; (c) controlled transactions; and (d) pricing policies in the documentation. However, this is not correct as the simplified transfer pricing documentation still requires some level of effort and analysis to prove that the price of the transfer pricing is a market price and therefore follows the arm’s length principle.

It is worth noting that taxpayers are still required to test its controlled transactions by applying an appropriate method but without going through the selection process of the five accepted transfer pricing methods as required in a full transfer pricing documentation. Depending on the facts and circumstances, taxpayers may still be required to perform a benchmarking analysis.  

When considering whether to prepare a simplified or full transfer pricing documentation, taxpayers should evaluate from the perspective of cost vs benefit and compare the cost of preparing the transfer pricing documentation against the potential impact from a transfer pricing adjustment by the tax authority plus penalties for not having contemporaneous documentation.

Nonetheless, the benefits of preparing and maintaining a contemporaneous transfer pricing documentation ensure the following:

• Reduce the risk of audit and dispute with the Inland Revenue Board of Malaysia (“IRBM”);
• Explains taxpayer’s position to IRBM;
• Minimize penalties in the event of an audit adjustment; and
• Recognised as good practice by IRBM. To ensure compliance, IRBM has included a checkbox in the corporate tax return to declare whether transfer pricing documentation has been prepared.
• Being ready in the event of audit for the current and prior years considering that IRBM can audit up to 7 years

Prior to 1 January 2021, taxpayers are subject to penalties ranging from 20% to 50% (i.e. depending on whether TPD is prepared or not and the quality of TPD) on the additional tax payable resulting from a transfer pricing adjustment, whereby no penalty is imposed on businesses with no tax payable, for example taxpayers incurring losses.

Effective 1 January 2021, taxpayers are subject to the following key changes following the release of the Finance Bill 2020:

• New penalty of between RM20,000 to RM100,000 or imprisonment for a term up to 6 months, or both for failure to furnish TPD on time.
• New surcharge of up to 5% on transfer pricing adjustments (i.e. not on additional tax payable and hence will implicate non-taxable taxpayers enjoying tax incentives/ tax losses).

Furthermore, it is worth noting that the period to submit transfer pricing documentation upon IRBM’s request has been shortened from 30 days to 14 days.

Therefore, it is important for taxpayers to be ready and proactively prepare transfer pricing documentation considering the short time to provide transfer pricing documentation (within 14 days) and the number of years that IRBM can audit (7 years).