Malaysia
1. TP legislation/guidelines
Inland Revenue Board (“IRB”) issued TP guidelines on 8 July 2003. A revised version of TP guidelines will be issued soon. Legislation has been introduced effective from 1 Jan 2009.
2. TP documentation required to be filed with tax return
Taxpayer who enters into a controlled transaction is required to prepare and maintain contemporaneous TP documentation. It is mandatory to prepare but not required to be filed together with the tax return.
3. TP audits done by tax authority
IRB issued the Tax Audit Framework (TAF) effective from 1/1/2009. This new TAF replaces the old TAF issued in Jan 2007. Tax audits are carried out under the self-assessment regime. Every company is expected to be subject to a desk or field audit at least once every five years. Every MNC that was audited was queried on their transfer pricing policy. Such audits are typically triggered by indicators of potential non arm’s length pricing such as consistent losses or low profits. The focus for the IRB in recent audit has been the manufacturing and servicing sectors. Head office charges and management fees, in particular, have been under intense scrutiny.
4. Advance Pricing Arrangement
Taxpayers are allowed to apply for APAs with effect from 1 January 2009.
5. Mutual Agreement Procedures
Malaysia has a wide network of tax treaties under which MAP should be available to affected taxpayers.
6. Basis to recover intra-group service charges
IRB generally accepts a cost plus 5% mark up for routine support services.
7. Cross border management fee charges
Taxpayers are allowed deduction for such charges from overseas holding company or head office provided they are charged on arm’s length basis that is commensurate with the services provided. 10% withholding tax would apply if such services are rendered in Malaysia subject to tax treaty provisions.
8. Inter-company loans
IRB has introduced thin capital rules. Lender must determine and charge at arm’s length interest rate. Interest expense is deductible provided arm’s length and thin capitalization rules are satisfied.
15% withholding tax applicable on interest payments made to non-residents, subject to lower rates applicable under tax treaty provisions.
Nevertheless, the Government has deferred the implementation of thin capital rules until further notice.
9. Transfer pricing penalties
No specific penalty regime. Existing legislation and penalty structure is applicable and can be in the region of 100% - 300% of the tax undercharged. The new TAF effective 1/1/2009, sets out the penalty rates to be imposed. The penalty rate is in the range of 15% to 35% of additional tax payable; the lower range indicative of voluntary disclosure before the case is selected for an audit. Repeated offence(s) will give rise to an additional penalty of 10% on the tax undercharged but limited to a sum not exceeding 100% of the amount of tax undercharged.
Updated: Aug 2011
This publication has been prepared for the purpose of quick information dissemination to our counterparts in other Countries. Its contents should not be used as a basis for advice or formulating decisions under any circumstances.
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