Transfer Pricing in Malaysia: Essential Documentation Needed

Transfer Pricing in Malaysia: A Complete Guide for SMEs

Introduction: Why Transfer Pricing in Malaysia Is Crucial for Businesses

Transfer pricing in Malaysia refers to the method of pricing goods, services, and intellectual property exchanged between related entities, such as a Malaysian company and its foreign parent or subsidiary. These transactions must comply with the arm’s length principle, meaning they should reflect prices that independent parties would agree upon under similar conditions.

Transfer pricing has become a key focus area for Lembaga Hasil Dalam Negeri (LHDN), the Inland Revenue Board of Malaysia. As more Malaysian companies engage in cross-border or intra-group transactions, proper transfer pricing documentation is no longer optional—it is essential to remain compliant and avoid penalties.

Why Is Transfer Pricing Compliance Important?

LHDN uses transfer pricing rules to prevent profit shifting between jurisdictions and to ensure that Malaysian companies are taxed appropriately.

Non-compliance can lead to:

Taxable income being adjusted upward
A surcharge of 5% on transfer pricing adjustments
Penalties for incomplete or missing documentation
Increased audit risk for future tax years

In short, businesses that ignore transfer pricing obligations risk costly tax consequences.

Examples of Related Party Transactions

Many SMEs are surprised to learn that their everyday transactions may be subject to transfer pricing regulations. Common examples include:

Buying and selling goods with a related company overseas
Charging management or technical service fees to a subsidiary
Licensing or using intellectual property within the group
Providing or receiving loans from a related entity
Sharing the cost of services across multiple group entities

Each of these must be priced at arm’s length and supported with documentation.

Transfer Pricing Requirements in Malaysia

Under the Income Tax (Transfer Pricing) Rules 2023, companies must prepare contemporaneous documentation if they meet any of the following:

Annual gross income exceeds RM 25 million, and
Related party transactions exceed RM 15 million, or
Financial assistance to related parties exceeds RM 50 million

The documentation must include:

Group and company background
Descriptions of related party transactions
Functional analysis (functions, assets, and risks)
Transfer pricing method used and its justification
Benchmarking analysis using comparable transactions

These documents must be ready and submitted within 14 days upon request by LHDN.

What Are the Penalties?

Failure to comply with LHDN requirements may result in:

A 5% surcharge on the amount of adjustment
RM 20,000 penalty for failing to furnish documentation
Risk of tax reassessment and additional interest charges
Red flags for future audits or investigations

That’s why even businesses below the threshold should consider maintaining simplified documentation.

How USAFE Supports Transfer Pricing in Malaysia

At USAFE, we help Malaysian businesses stay compliant with LHDN’s evolving transfer pricing landscape. Our transfer pricing specialists work with you to assess risks, determine arm’s length pricing, and prepare robust documentation.

Our services include:

Full transfer pricing documentation (Group & Entity level)
Transfer pricing benchmarking studies
Support in selecting appropriate pricing methods
Drafting or reviewing intercompany agreements
Assistance during LHDN audits or correspondence

We serve both SMEs and mid-sized companies, ensuring compliance without unnecessary complexity or cost.

When Should You Take Action?

If your company is engaged in any cross-border or intercompany transactions, the best time to act is now. Waiting for a letter from LHDN puts your business at risk.

Start by:

Reviewing all existing related party arrangements
Updating service or loan agreements
Conducting a pricing risk assessment
Consulting a specialist for tailored advice

Talk to Our Transfer Pricing Team Today

Don’t leave your compliance to chance. Contact USAFE today for a free initial consultation. We’ll help you evaluate your transfer pricing risks and get ahead of LHDN requirements with confidence.

Disclaimer: This article is for informational purposes only and does not constitute any professional advice. Feel free to contact us to consult with our professional advisors team for personalized advice and guidance.

Sources: https://www.hasil.gov.my/en/international/transfer-pricing/