Transfer pricing documentation: what Malaysian SMEs actually need

Transfer pricing is often filed mentally under multinational tax. In Malaysian practice it reaches much further down: a director's loan to the company, a management fee paid to a related entity, staff shared across two companies under common ownership, or goods bought from an affiliate abroad are all controlled transactions between associated persons.

Three positions, not one rule

The Income Tax (Transfer Pricing) Rules 2023 and the Malaysia Transfer Pricing Guidelines 2024, which have effect from the year of assessment 2023, do not impose a single obligation on everyone with a related party. They sort taxpayers into three quite different positions, and the practical question is which one you are in.

• Not required to prepare documentation. This includes a person whose controlled transactions total no more than RM1 million; individuals not carrying on a business; sole proprietors and partnerships engaged only in domestic controlled transactions; and a person whose controlled transactions are solely domestic where both parties enjoy no tax incentives, are taxed at the same headline rate, or have not suffered losses for two consecutive years before the transactions.
• Minimum documentation. Anyone with controlled transactions who is neither exempted nor over the full-file thresholds may prepare a minimum file, which carries reduced requirements. They may still choose to prepare a full one.
• Full documentation. Required where gross business income exceeds RM30 million in total and cross-border controlled transactions total RM10 million or more annually, or where controlled financial assistance received or provided exceeds RM50 million annually. A permanent establishment prepares a full file regardless of the thresholds.

Contemporaneous means before the return, not after the query

Contemporaneous documentation is defined as documentation brought into existence prior to the due date for furnishing the return for the basis period in which the controlled transaction was entered into. It must also record the date it was completed. Documentation assembled after a query arrives is not contemporaneous, and under section 140A the burden of demonstrating an arm's length outcome sits with the taxpayer.

The file is not submitted with the return. It has to be furnished within 14 days of the date a notice of request is served. That window is short enough that a file which does not already exist cannot realistically be produced within it.

What happens if it is not there

• Failure to furnish documentation within 14 days of a request is an offence under section 113B, carrying a fine of not less than RM20,000 and not more than RM100,000, or imprisonment, or both — for each year of assessment concerned.
• Where no prosecution is instituted, a penalty in the same RM20,000 to RM100,000 range may be imposed for each year in which the failure occurs.
• Where the Director General makes a transfer pricing adjustment, a surcharge of up to 5% of the adjustment may be imposed under subsection 140A(3C) — and it applies whether or not the adjustment actually results in tax payable.

What a file needs to establish

The formal contents are set out in the schedules to the Rules, but the substance a file has to carry is consistent whichever level applies:

• The group and ownership structure.
• The business, its markets and what actually drives its value.
• Every controlled transaction and its value.
• A functional analysis — the functions performed, assets used and risks assumed by each party.
• The pricing method chosen, and the reasoning for choosing it.
• Comparability or benchmarking support for the result.
• An index to the documents, and the date the file was completed.

Benchmarking does not have to be rebuilt from scratch every year. Comparable searches may be refreshed every three years where operating conditions are unchanged, provided the financial data and the continued suitability of the comparables are reviewed annually. Records should be retained for seven years.

Where smaller groups most often get caught

Three recurring issues. Management fees charged between related companies with no evidence of the service actually delivered. Interest-free or non-market-rate loans between related parties. And cost allocations for shared premises or staff done on a round-number basis with no allocation key. Each of these is defensible with a page of contemporaneous reasoning and difficult to defend without it.