Introduction
As transfer pricing regulations continue to evolve, businesses operating in Malaysia must ensure compliance with comprehensive documentation requirements. Robust transfer pricing documentation not only facilitates transparency and compliance but also minimizes the risk of tax audits and subsequent adjustments. In this blog post, we will explore the documentation guidelines established by the Malaysian Inland Revenue Board (IRB) and delve into the three-tiered approach: contemporaneous documentation, master file, and country-by-country reporting.
I. Contemporaneous Documentation
The Transfer Pricing Rules 2012 require taxpayers to maintain contemporaneous documentation that supports their transfer pricing transactions. Although specific documentation requirements are not prescribed in the Income Tax Act (ITA), adherence to these guidelines is highly advantageous. By reducing the risk of tax audits and subsequent adjustments, businesses can ensure a smooth and transparent transfer pricing process.
Taxpayers must prepare and maintain documentation that covers key areas such as global group structure, organizational and ownership structure, nature of the business or industry, controlled transactions, pricing policies, comparability and functional analysis, transfer pricing methods, background documents, and any other relevant information to determine the arm’s length price. The documentation should be retained for a period of seven years, as recommended by the IRB.
II. Three-tiered Transfer Pricing Documentation
(a) Local File
In Malaysia, there is no specific requirement to prepare a separate Local File in addition to the general transfer pricing documentation requirements. However, businesses must ensure that their contemporaneous documentation addresses the local aspects of their transfer pricing transactions.
(b) Master File
The Transfer Pricing Guidelines 2012 were updated on 15 July 2017 to introduce the Master File as part of transfer pricing documentation. This requirement applies to multinational enterprises (MNEs) that meet specific criteria, including having consolidated financial statements and more than two related companies defined by ownership or control in other tax jurisdictions. The Master File provides a comprehensive overview of the MNE group’s global business operations, including its organizational structure, intercompany transactions, transfer pricing policies, and intangible assets.
(c) Country-by-Country (CbC) Reporting
Since 1 January 2017, Malaysia has implemented rules regarding annual country-by-country (CbC) reporting. These rules apply to Malaysian-parented multinational groups with total consolidated group revenue exceeding MYR 3 billion in the preceding financial year. The reporting entity, typically the ultimate holding company or surrogate holding company, is responsible for filing the CbC report. The CbC report provides information on the aggregate amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees, and tangible assets for each jurisdiction where the multinational group operates.
III. Documentation Deadlines
Transfer pricing documentation does not need to be submitted with the tax return. However, businesses must have their documentation available for the IRB within 30 days upon request. Failure to provide documentation within the specified timeline may result in penalties or further scrutiny from tax authorities.
Under the guidelines issued on 15 July 2017, companies required to submit a CbC report must also submit a master file upon request. Malaysian subsidiary companies should include a copy of the master file with their transfer pricing documentation.
Conclusion
In Malaysia’s transfer pricing landscape, comprehensive documentation is a crucial aspect of compliance and risk management. Adhering to the contemporaneous documentation requirements, preparing a master file for qualifying multinational enterprises, and fulfilling country-by-country reporting obligations are vital steps to ensure transparency and minimize tax risks. By proactively addressing these documentation guidelines, businesses can navigate the complexities of transfer pricing regulations, foster trust with tax authorities, and uphold a strong compliance posture. It is imperative that businesses consult with tax professionals to develop robust transfer pricing documentation that meets the specific requirements set forth by the Malaysian Inland Revenue Board.