Introduction
Understanding the appropriate transfer pricing methods is crucial for businesses operating in Malaysia. This blog post provides an in-depth exploration of the transfer pricing methods applicable in the Malaysian transfer pricing regime. We will discuss the prioritization of methods, factors determining comparability, and administrative rules and guidelines surrounding transfer pricing methodologies.
Applicable Methods
The Malaysian Transfer Pricing Guidelines 2012 emphasize the importance of a comparability analysis in applying transfer pricing methodologies. This analysis involves comparing controlled transactions with transactions between independent parties. Transactions are considered comparable when there are no significant differences or adjustments can be made to eliminate material differences. The following factors are taken into account to determine comparability:
1. Similarity in characteristics of products or services: This factor is particularly relevant for comparing prices rather than profit margins. Key characteristics include physical features, quality, volume of supply, nature of services performed, and the form and type of intangible property transactions.
2. Functions performed: A functional analysis is conducted to determine comparability, considering how functions, assets (including intangible property), and risks are allocated between the parties involved. Contractual terms are also analyzed as part of this assessment.
3. Other factors: Contractual terms, economic circumstances that may affect prices or profits, and business strategies (such as innovation and new product development) are considered. It is essential to assess whether independent enterprises would have adopted similar strategies.
The Malaysian Transfer Pricing Guidelines adopt the arm’s length pricing methodologies outlined in the OECD Guidelines. They provide three classes of transfer pricing methods:
1. Traditional methods:
a) Comparable uncontrolled price (CUP) method
b) Resale price (RP) method
c) Cost plus (CP) method
2. Transactional profit methods:
a) Profit split (PS) method
b) Transactional net margin method (TNMM)
3. Other methods: Taxpayers have the flexibility to apply any other method that enables them to arrive at an arm’s length price. However, the PS and TNMM methods should only be used when traditional transactional methods cannot be applied reliably.
Priority of Methods
In practice, taxpayers have the discretion to select any method or combination of traditional and transactional profit methods. The Income Tax (Transfer Pricing) Rules 2012 allow the use of the five OECD-based methods but favor the traditional methods. Profit methods are considered when traditional methods cannot be appropriately applied. The IRB, Malaysia’s tax authority, prefers methods that require minimal adjustments and provide the most reliable measure of an arm’s length result. When data on prices in comparable uncontrolled transactions is unavailable, the TNMM is often chosen. It is important to note that global apportionment methods are not accepted.
The CP method is recommended in specific scenarios, such as the sale of semi-finished goods between related parties, joint facility arrangements, manufacturing by contract manufacturers, or transactions involving services.
Regarding the selection of comparable transactions, the IRB prefers the use of Malaysian comparables. Taxpayers can refer to public directories and databases to search for comparable companies and transactions. Audited accounts of most Malaysian public and private companies are available from the Companies Commission of Malaysia. In cases where suitable Malaysian comparables are unavailable, the IRB may accept foreign comparables.
Administrative Rules and Guidelines
The Transfer Pricing Guidelines 2012 suggest comparing the controlled transaction with comparable transactions conducted in the same period. However, to obtain a comprehensive understanding of the facts and circumstances, it is useful to consider data from subsequent and prior years.
Confidentiality is maintained regarding information obtained by the income tax authorities, which cannot be shared with the customs authorities. Nonetheless, the income tax authorities may examine import/export documents on the taxpayer’s premises during a tax audit. Valuation of imported goods for customs duty purposes in Malaysia follows WTO rules, using the transaction value method with necessary adjustments. However, in transactions between related parties, the customs duty may be based on the transaction value of identical or similar goods when relevant comparable information is not available. While there are some similarities between WTO rules and transfer pricing methods, the objectives and bases for determining transfer prices for customs and direct tax purposes differ. Customs documents may serve as useful evidence for the income tax authorities when examining transfer pricing positions.
Conclusion
Navigating transfer pricing methods in Malaysia requires a thorough understanding of the applicable methodologies and administrative guidelines. Businesses must conduct a comparability analysis, considering factors such as product characteristics, functions performed, and other relevant circumstances. The Malaysian Transfer Pricing Guidelines provide a range of methods, with a preference for traditional methods, and allow for flexibility when traditional methods are not feasible. By adhering to these methods and administrative rules, businesses can ensure compliance with the transfer pricing regime in Malaysia, minimizing risks and optimizing their tax positions.