Transfer Pricing Malaysia | Arm’s Length, Control & Rules

Introduction

Transfer pricing in Malaysia refers to the pricing of goods, services, and intangibles transferred between associated persons. Ideally, the price between related entities should reflect the same conditions as transactions between independent parties — known as the arm’s length principle.

However, when companies under common control transact, prices may deviate from market reality. This can lead to tax adjustments by the Inland Revenue Board of Malaysia (LHDN) under the Income Tax Act 1967 (ITA).

Definition of Transfer Pricing

Transfer Pricing covers intercompany pricing arrangements for:

Transfer of goods
Provision of services
Use or transfer of intangibles (such as trademarks or patents)

The goal is to ensure prices are consistent with what independent entities would charge under similar circumstances.

Control and Associated Person

Under Section 139 ITA, “control” includes direct or indirect control.
Two companies are considered associated if:

One company participates directly or indirectly in the management, control, or capital of the other; or
The same persons participate directly or indirectly in the management, control, or capital of both.

A controlled company means:

It has not more than 50 members, and
Controlled by not more than five persons.

A person is considered to have control if he:

Can exercise or acquire control over the company’s affairs; or
Possesses or is entitled to the majority share capital or voting power; or
Is entitled to greater distributions or redeemable share capital on winding up.

📅 Update:
Effective 1 January 2019, the definition of control for transfer pricing purposes was lowered from 50% to 20% shareholding under Section 140A(5A) if a person has substantive control over business operations.

IRBM’s Power to Disregard Transactions

Under Section 140 ITA 1967, the Director General (DG) may disregard or recharacterize any transaction if it:

Alters the incidence of tax,
Relieves a person from tax liability,
Avoids or evades tax, or
Hinders the operation of the Act.

This applies to transactions between:

Persons one of whom has control over the other, or
Individuals who are relatives (including parents, children, siblings, uncles, aunts, nieces, nephews, cousins, or lineal descendants).

Arm’s Length Principle — Section 140A(2)

When a taxpayer enters into a transaction with an associated person, the taxpayer must apply the arm’s length price for that acquisition or supply.

💡 Arm’s length price means the price that would have been agreed between independent parties in comparable circumstances.

This ensures that profits are appropriately reported and taxed in Malaysia.

Transfer Pricing Documentation Requirements

Transfer Pricing documentation applies to controlled transactions involving the acquisition or supply of goods, services, and intangibles between associated persons.

Full TP documentation is required if:

Gross income exceeds RM25 million, and
Total related party transactions exceed RM15 million, or
Financial assistance provided exceeds RM50 million.

Documentation must include:
✅ Functional analysis (functions, assets, risks)
✅ Description of related party transactions
✅ Comparable analysis
✅ Transfer pricing methodology and justification

Transfer Pricing Methodologies

When determining the most appropriate method, consider:

Nature of the transaction (via functional analysis)
Comparability of uncontrolled transactions
Data completeness and reliability
Accuracy of assumptions used

If standard methods are not applicable, alternative methods may be accepted by LHDN if the outcome aligns with the arm’s length principle.

1️⃣ Comparable Uncontrolled Price Method (CUP)

Compares the price charged in a controlled transaction to the price in a comparable uncontrolled transaction.

2️⃣ Resale Price Method (RPM)

Used when a reseller buys from an associated enterprise and sells to an independent customer.

3️⃣ Cost Plus Method (CPM)

Suitable for semi-finished goods or contract manufacturing, where the transfer price is based on production cost plus a reasonable markup.

4️⃣ Profit Split Method (PSM)

Appropriate when related parties engage in highly integrated operations, and individual transactions cannot be evaluated separately.

5️⃣ Transactional Net Margin Method (TNMM)

Compares net profit margins relative to a base (e.g., costs, sales, or assets) to those earned by independent parties in comparable circumstances.

Record Keeping and Penalties

Under Sections 82 & 82A ITA, taxpayers must maintain documentation for at least seven (7) years, either physically or electronically.
Failure to maintain adequate records or submit required transfer pricing documentation can result in:

Adjustments by LHDN, and
Penalties up to 100% of the tax undercharged.

Key Takeaways

Transfer pricing ensures related party transactions reflect market conditions.
Control includes both direct and indirect participation — now at 20% shareholding threshold.
Arm’s length principle under Section 140A(2) requires fair pricing between associated persons.
Documentation is mandatory for large entities or significant related transactions.
LHDN may disregard artificial arrangements under Section 140 ITA.

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