Understanding Transfer Pricing Guidelines in Malaysia
Understanding Transfer Pricing Guidelines in Malaysia
Transfer pricing refers to a set of rules or guidelines for pricing transactions between two companies. The most common method used for transfer pricing would be the arm’s length principle, which ensures that controlled transactions between two companies are priced based on market rates. The purpose of this principle is to prevent tax evasion and ensure fair, and consistent taxation.
Transfer pricing refers to the rules and methods used to determine the price at which transactions occur between related companies or divisions within the same organisation, especially those located in different countries. These transactions, known as controlled transactions, can include the transfer of goods, services, intellectual property, or other assets.
The goal of transfer pricing is to ensure that these transactions are conducted at arm’s length, meaning the prices reflect what would have been charged between independent entities under similar circumstances. This principle is crucial for preventing tax avoidance by ensuring that profits are appropriately reported and taxed in the correct jurisdictions.
Transfer pricing is important as it helps to prevent double taxation because every country consists of different tax rates. Companies or related parties are able to cut down the overall tax costs as well as ensure proper taxation is performed which is aligned with Malaysian tax laws. Additionally, transfer pricing is also important to prevent any disputes among the related parties involved as it offers transparency when it comes to financial reports.
The basic transfer pricing guidelines in Malaysia are issued by the Inland Revenue Board of Malaysia (IRBM) and aligned with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines as well as the arm’s length principle. The transfer pricing guidelines are required to ensure prices which are charged in intercompany transactions are charged based on the market price.
TP Documentation refers to the set of documents required by the company to prepare and submit in order to show as proof that all parties' transactions are aligned with the arm’s length principle.
Some of the documents include the company's organisational structure, the nature of all parties' transactions, financial records, and how the arm’s length prices are calculated. Here are the different types of documentation:
These files showcase a high-level overview of the business operations on a global scale as well as any financial data and transfer pricing policies of the multinational enterprise.
This report showcases the profit, revenue and taxes paid, as well as any financial data of the multinational enterprise on a country-by-country basis.
This includes a detailed analysis of a local entity and all related parties' transactions, and financial standings as well as any proof of the transfer pricing methods which were used.
In Malaysia, the transfer pricing guidelines for the regulatory requirements of TP documentation state that as long as the transactions exceed RM25 million in total sales or exceed RM15 million in financial transactions, companies are required to prepare the transfer pricing documentation.
These documents must be prepared in time before the companies file their tax return for the year. If companies fail to prepare the transfer pricing documents, they could be at risk of penalties or fines.
The local file, also known as transfer pricing documentation, usually includes the local entity and the financial records, all parties' transactions as well as the transfer pricing method that was used to ensure the arm’s length pricing rule is adhered to.
The master file is a detailed overview of the multinational enterprise’s global operations such as the financial transactions, organisational structure, business activities, and the status of the company’s current financial and tax standings.
Country-by-country reporting (CbCR) is required for multinational enterprises that have a total consolidated revenue exceeding RM3 billion. This report needs to be submitted by multinational enterprises with information such as organisational structure, business description, and current financial and tax standings.
If a company in Malaysia fails to comply with the transfer pricing documentation requirements, they risk getting several penalties or fines of up to RM100,000. Additionally, they could even be imprisoned for up to six months.
It’s important to understand the transfer pricing guidelines as a business to regularly perform transactions with other companies. As long as you meet the minimum transfer pricing documentation in Malaysia, any potential penalties or fines can be avoided.
If you require further assistance and information about transfer pricing documentation requirements, consult us today for our transfer pricing services in Malaysia!
Additionally, don’t miss the chance to register for our upcoming seminar, Navigating Transfer Pricing in Malaysia: Trends, Compliance & Cases by emailing us at contactus@bdo.my.
We are a dedicated team of professionals, equipped with extensive expertise in transfer pricing, ready to provide you with tailored guidance and comprehensive support to navigate the complexities of compliance effectively.
What is Transfer Pricing?
Transfer pricing refers to the rules and methods used to determine the price at which transactions occur between related companies or divisions within the same organisation, especially those located in different countries. These transactions, known as controlled transactions, can include the transfer of goods, services, intellectual property, or other assets.
The goal of transfer pricing is to ensure that these transactions are conducted at arm’s length, meaning the prices reflect what would have been charged between independent entities under similar circumstances. This principle is crucial for preventing tax avoidance by ensuring that profits are appropriately reported and taxed in the correct jurisdictions.
Importance of Transfer Pricing
Transfer pricing is important as it helps to prevent double taxation because every country consists of different tax rates. Companies or related parties are able to cut down the overall tax costs as well as ensure proper taxation is performed which is aligned with Malaysian tax laws. Additionally, transfer pricing is also important to prevent any disputes among the related parties involved as it offers transparency when it comes to financial reports.
Understanding How Transfer Pricing Works in Malaysia
The basic transfer pricing guidelines in Malaysia are issued by the Inland Revenue Board of Malaysia (IRBM) and aligned with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines as well as the arm’s length principle. The transfer pricing guidelines are required to ensure prices which are charged in intercompany transactions are charged based on the market price.
Transfer Pricing (TP) Documentation
TP Documentation refers to the set of documents required by the company to prepare and submit in order to show as proof that all parties' transactions are aligned with the arm’s length principle.
Some of the documents include the company's organisational structure, the nature of all parties' transactions, financial records, and how the arm’s length prices are calculated. Here are the different types of documentation:
1. Master File
These files showcase a high-level overview of the business operations on a global scale as well as any financial data and transfer pricing policies of the multinational enterprise.
2. Country-by-Country Report (CbCR)
This report showcases the profit, revenue and taxes paid, as well as any financial data of the multinational enterprise on a country-by-country basis.
3. Local File
This includes a detailed analysis of a local entity and all related parties' transactions, and financial standings as well as any proof of the transfer pricing methods which were used.
The Regulatory Requirements for TP Documentation in Malaysia
In Malaysia, the transfer pricing guidelines for the regulatory requirements of TP documentation state that as long as the transactions exceed RM25 million in total sales or exceed RM15 million in financial transactions, companies are required to prepare the transfer pricing documentation.
These documents must be prepared in time before the companies file their tax return for the year. If companies fail to prepare the transfer pricing documents, they could be at risk of penalties or fines.
Master File and Local File
The local file, also known as transfer pricing documentation, usually includes the local entity and the financial records, all parties' transactions as well as the transfer pricing method that was used to ensure the arm’s length pricing rule is adhered to.
The master file is a detailed overview of the multinational enterprise’s global operations such as the financial transactions, organisational structure, business activities, and the status of the company’s current financial and tax standings.
Country-by-Country Reporting (CbCR)
Country-by-country reporting (CbCR) is required for multinational enterprises that have a total consolidated revenue exceeding RM3 billion. This report needs to be submitted by multinational enterprises with information such as organisational structure, business description, and current financial and tax standings.
Penalties for Non-Compliance
If a company in Malaysia fails to comply with the transfer pricing documentation requirements, they risk getting several penalties or fines of up to RM100,000. Additionally, they could even be imprisoned for up to six months.
Conclusion
It’s important to understand the transfer pricing guidelines as a business to regularly perform transactions with other companies. As long as you meet the minimum transfer pricing documentation in Malaysia, any potential penalties or fines can be avoided.
If you require further assistance and information about transfer pricing documentation requirements, consult us today for our transfer pricing services in Malaysia!
Additionally, don’t miss the chance to register for our upcoming seminar, Navigating Transfer Pricing in Malaysia: Trends, Compliance & Cases by emailing us at contactus@bdo.my.
We are a dedicated team of professionals, equipped with extensive expertise in transfer pricing, ready to provide you with tailored guidance and comprehensive support to navigate the complexities of compliance effectively.