Malaysia: Transfer pricing and advance pricing arrangement rules 2023

The Income Tax (Transfer Pricing) Rules 2023 were published in the official gazette on 29 May 2023 and are effective for year of assessment (YA) 2023 and subsequent YAs.

The new rules will significantly enhance and strengthen the position of the Malaysia Inland Revenue Board (MIRB) on transfer pricing enforcement, and include the following features:

• The arm’s length range is now defined as a range of figures or a single figure falling between the value of 37.5 percentile to 62.5 percentile of the benchmarking data set, when acceptable by the MIRB. If the price of the controlled transaction is:
  • Within the arm’s length range, such price may be regarded to be the arm’s length price. However, the MIRB may still adjust the price of the controlled transaction to the median or any other point above median (within the arm’s length range) when:
    • The comparable data is the kind which has a lesser degree of comparability, or
    • There are comparability defects which cannot be quantified, identified, or adjusted.
  • Outside the arm’s length range, the arm’s length price shall be taken to be the median.
    
• To be contemporaneous, transfer pricing documentation must be completed prior to the due date for furnishing a tax return for that YA. The contemporaneous transfer pricing documentation must be submitted within 14 days upon request by the MIRB.
• The list of information that needs to be included in the contemporaneous transfer pricing documentation was expanded to include extensive information on the multinational enterprise group that is typically part of the group’s Master file.
• The rules make it clear that an owner of intangible property (IP) that does not perform the functions nor control the functions or risks related to the development, enhancement, maintenance, protection and exploitation (DEMPE) of the IP is not entitled to any income attributable to the IP. Taxpayers must include in their contemporaneous transfer pricing documentation details of the IP used, the group’s strategy for the development, ownership and exploitation of the IP, locations of the research and development facilities and more.
• The provision allowing taxpayers to request for offsetting adjustments was removed.
• The minimum transfer pricing documentation template (for taxpayers with gross income not exceeding RM25 million or related party transactions not exceeding RM15 million) was updated to remove the need to characterize the business activity and the disclosure requirement for dividend, and explanatory notes were attached to help taxpayers complete the template.

The Income Tax (Advance Pricing Arrangement) Rules 2023 were also published in the official gazette on 29 May 2023. 

A taxpayer who carries on a cross-border transaction may apply for an advance pricing arrangement (APA) in relation to a covered transaction for specific terms and conditions:

• From a country having an income tax treaty, a taxpayer may only apply for a bilateral APA (BAPA) or multilateral APA (MAPA).
• From a country that does not have an income tax treaty, a taxpayer may only apply for a unilateral APA.
• A permanent establishment (PE) may only apply for a BAPA or MAPA when such application is made by its head office on behalf of the PE.

• The application for an APA must be submitted within six months (previously two months) after receipt of the notification to proceed with the application after the pre-filling meeting.
• The application for APA will incur a non-refundable fee of:
  • RM5,000 if the application is made within two months
  • RM10,000 if the application is made after two months but within six months after receipt of the notification, and any other expenses as the MIRB may determine.

• A taxpayer may request for a rollback of BAPA and MAPA, subject to certain conditions.
• A rollback, if allowed, may not cover more than three years of assessment immediately preceding the covered period.

Read a June 2023 report prepared by the KPMG member firm in Malaysia