Malaysia published the Income Tax (Transfer Pricing) Rules 2023 in the Official Gazette on 29 May 2023, which replace the Income Tax (Transfer Pricing) Rules 2012. As compared to the 2012 rules, the 2023 Rules have been updated considering OECD guidelines, especially in relation to the contemporaneous transfer pricing documentation requirements (Rule 4). Rule 4 provides that a person who enters into a controlled transaction must prepare contemporaneous transfer pricing documentation prior to the due date for furnishing a return in the basis period for a year of assessment in which a controlled transaction is entered into. The contemporaneous transfer pricing documentation must contain:
- Information of the Multinational Enterprise Group as specified in Schedule 1 of the Rules, which is similar to the OECD Master file and broadly contains the following:
- the Multinational Enterprise Group's worldwide organizational structure that shows the location and ownership linkages among all entities in the Multinational Enterprise Group transacting with the person in the basis period;
- a description of the Multinational Enterprise Group's businesses that are relevant to the business of the person in the basis period;
- a description of the Multinational Enterprise Group's intangible property that is used in or applied to the business of the person in Malaysia in the basis period;
- the Multinational Enterprise Group's financial activities that are connected to the business of the person in Malaysia in the basis period; and
- the financial and tax position of the Multinational Enterprise Group;
- Information regarding the person's business as specified in Schedule 2 of the Rules, which is similar to the OECD Local file and broadly contains information on the following:
- organizational structure:
- nature of the business, industry, and market conditions:
- the controlled transaction(s):
- details of the pricing policies for each type of controlled transaction
- assumptions, strategies, and information regarding factors that influence the setting of pricing policies;
- functional, asset, and risk analysis including the risk analysis framework;
- comparability analysis;
- selection of the transfer pricing methodologies;
- application of the transfer pricing methodologies;
- financial information
- Information and documents regarding a cost contribution arrangement under Rule 10 (Cost Contribution Arrangement) as specified in Schedule 3 of the Rules;
- An index of the documents prepared;
- The date on which the contemporaneous transfer pricing documentation is completed; and
- Any documents that:
- form the foundation for the development of the transfer pricing analysis;
- support the development of the transfer pricing analysis; or
- were referred to in the development of the transfer pricing analysis; and
- any information, data, or other related documents used by the person to determine an arm's length price, including the effect of material changes to the business conditions during the basis period.
For the purpose of Rule 4, "Multinational Enterprise Group" means a collection of enterprises related through ownership or control that is required to prepare consolidated financial statements for financial reporting purposes under the applicable accounting principles or would be so required if equity interest in any of its enterprises were traded on a public securities exchange, which includes:
- two or more enterprises for which tax residence is in different jurisdictions; or
- an enterprise that is resident in Malaysia and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction, or is resident in another jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in Malaysia.
In addition to the above, a new section is included on the preparation and furnishment of documentation, containing the following three main points:
- In preparing contemporaneous transfer pricing documentation as specified under rule 4, a person shall determine an arm's length price based on the most current reliable information, data, or documents that are reasonably available at the time of determination of that person's arm's length price;
- The information, data, or documents used in preparing the contemporaneous transfer pricing documentation shall be kept and retained in such a manner as to enable the information, data, or documents to be readily ascertained and accessible by the Director General; and
- The Director General may, by notice, require any person to furnish the contemporaneous transfer pricing documentation in writing within 14 days from the date of service.
The Income Tax (Transfer Pricing) Rules 2023 have effect for the year of assessment 2023 and subsequent years of assessment. Based on the new Rules, updated guidelines are expected to be published on the Transfer Pricing webpage of the Inland Revenue Board of Malaysia in the near future.
Malaysia also published the Income Tax (Advance Pricing Arrangement) Rules 2023 in the Official Gazette on 29 May 2023, which replace the Income Tax (Advance Pricing Arrangement) Rules 2012. As compared to the 2012 Rules, the 2023 Rules have been expanded, including references to the Income Tax (Transfer Pricing) Rules 2023.
One of the main changes concerns the documentation that must be submitted when making a request for a pre-filing meeting. This includes that a draft outline of the case must be submitted to the Director General together with the request that consists of the following:
- the contemporaneous transfer pricing documentation as specified in the Income Tax (Transfer Pricing) Rules 2023;
- the names, addresses, and tax file references of the taxpayer and other persons involved in the proposed advance pricing arrangement whether in Malaysia or outside Malaysia;
- the proposed covered transaction;
- the proposed period covered by the advance pricing arrangement;
- the proposed transfer pricing methodology accompanied by an explanation of whether the method accords to the arm's length principle;
- a description of the critical assumptions under which the proposed transfer pricing methodology and analysis relating to the critical assumption will operate and the events that should be taken into account when considering the said assumption;
- financial statements and tax computations that are available at least for the latest three years prior to the application;
- a written indication of whether the income in relation to the covered transactions is tax-exempted by the other Competent Authority;
- the name, telephone number, and e-mail of the contact person of the company; and
- any other details as determined by the Director General.
It is also provided that the Director General will notify the taxpayer within fourteen days after the pre-filing meeting of their decision on whether the taxpayer may proceed to submit an application for an advance pricing arrangement. Once notified, the taxpayer has 6 months to submit the application (extended from 2 months). If not submitted within 6 months, the application is deemed withdrawn and the taxpayer will need to resubmit a request for a pre-filing meeting.
Another change concerns requests for the rollback of an advance pricing agreement. The 2023 Rules continue to allow rollback but also specify the maximum period allowed, which is no more than 3 years of assessment immediately preceding the covered period. The allowed covered period for an advance pricing agreement in is unchanged, including a minimum period of 3 years and a maximum of 5 years.