Tax Treatment on transfer pricing at Malaysia

XYZ company if want to purchase parts from its related companies, it need to consider about the transfer pricing between both country. In Malaysia, arm’s length prices is require for cross border transactions between related parties and it follow the Organization for Economic Co-operation and Development’s (OECD) guidelines. There are five methods could be utilized in evaluating the consistency of the transfer pricing with arm length principle. Those are:
a.) Comparable uncontrolled price method,
b.) Resale price method,
c.) Cost plus method,
d.) Profit split method, and;
e.) Transactional net margin method.
Inland Revenue Board (IRB) has clearly stated that comparable uncontrolled price method and resale price method should be attempted first before the transactional net margin methods are considered.

The comparable uncontrolled price method focuses directly on the price of the property or services transferred in a controlled transaction to the price charged for the property or services in a comparable independent transaction, however, the resale price method focuses on the gross margin obtained by the distributor.

There is no specific transfer pricing penalty provision had been set by IRB, but existing penalty provisions may apply to understatement of income, section 140 Income Tax Act 1967. Penalties may be imposed or mitigated at the discretion of the Director General of Inland Revenue.

Documentation contain that needed in transfer pricing transaction are company details, transaction details and determination of arm’s length price. Contain of those documents should have comparability based on adequate data from independent dealings, reliability taken into account in choice of comparables and application of method fully supported with contemporaneous documentation.