Introduction
Transfer pricing adjustment Malaysia refers to the tax authority’s power to correct non–arm’s length transactions between related entities. Under Section 140 and 140A of the Income Tax Act 1967 (ITA), the Director General of Inland Revenue (DGIR) may adjust prices, interest, or charges that deviate from fair market value.
These adjustments ensure that multinational companies and controlled entities report profits accurately and comply with the arm’s length principle.
Section 140 — Power to Disregard Transactions
Under Section 140 ITA 1967, the DGIR has broad authority to disregard or recharacterize any arrangement that:
- Alters the incidence of tax;
- Relieves a person from tax liability;
- Avoids or evades tax; or
- Hinders the operation of the Act.
This includes transactions between:
- Persons where one controls the other; or
- Persons both controlled by the same entity.
These provisions allow the DGIR to counteract artificial or tax-avoidance arrangements and apply fair taxation on Malaysian income.
Section 140A — Transfer Pricing Adjustment
Introduced in 2009, Section 140A specifically governs transfer pricing.
If the DGIR believes that goods, services, or financial assistance were supplied or acquired at prices not reflecting market reality, he may substitute or impute the arm’s length price.
Adjustments apply when:
a) The price charged for goods or services is lower than market value;
b) The acquisition cost is higher than what independent parties would pay; or
c) No consideration is charged between related entities.
This ensures profits are correctly reported in Malaysia and prevents erosion of the local tax base.
Arm’s Length Principle and Range
The arm’s length price is what independent parties would agree upon under comparable circumstances.
Under Malaysia’s Transfer Pricing Rules, the arm’s length range typically falls between the 37.5th and 62.5th percentile of comparable data.
If the tested result falls outside this range, the median will be used to adjust the transaction price.
Earnings Stripping Rules (ESR) — 20% Restriction
The Earning Stripping Rules (ESR) replaced the old Thin Capitalisation Rules starting from the basis period on or after 1 July 2019.
Section 140C ITA restricts interest deduction from business income when the financial assistance arises in a controlled transaction.
Applicable to:
- Companies with total interest expense > RM500,000 in a YA;
- Financial assistance provided between related parties.
Not applicable to:
- Individuals
- Banks, insurers, takaful and retakaful operators
- Construction contractors
- Property developers
- Entities exempted under Sections 127(3)(b) or 127(3A) ITA
Maximum Interest Deduction
Under Section 140C, interest deductions are limited to 20% of tax-EBITDA.
Tax-EBITDA is calculated as:
EBITDA = A + B + C
| Component | Description |
| A | Adjusted business income before ESR restriction |
| B | Qualifying deductions (double, further, or special deductions under Section 154(1)(b)) |
| C | Interest expense related to financial assistance in a controlled transaction |
Record Keeping & Corresponding Adjustments
If one party in a controlled transaction receives a transfer pricing adjustment, the other may request a corresponding adjustment to prevent double taxation.
Taxpayers must maintain contemporaneous documentation for at least seven years, as required under Sections 82 & 82A ITA.
Failure to maintain proper documentation may result in:
- Additional assessments by LHDN; and
- Penalties up to 100% of undercharged tax.
Key Takeaways
- Section 140A empowers the DGIR to replace non–arm’s length prices.
- ESR limits interest deductions to 20% of tax-EBITDA.
- Related-party loans and pricing must follow arm’s length principles.
- Proper documentation is essential to avoid double taxation and penalties.
ANC Group – Your Personal Tax Advisor
Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.
Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.
ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.
We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.
If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.
