Income Tax (Transfer Pricing) Rules 2023

The Income Tax (Transfer Pricing) Rules 2023 (“TP Rules 2023”) have been gazetted on 29 May 2023 and will take effect from year of assessment (“YA”) 2023 and subsequent YAs. TP Rules 2023 replaces the Income Tax (Transfer Pricing) Rules 2012 (“TP Rules 2012”). TP Rules 2012 remains applicable for prior YAs. 

Key Changes

The key changes introduced under TP Rules 2023 are outlined below. 

Definition of contemporaneous transfer pricing documentation

Under the new TP Rules 2023, a transfer pricing documentation is considered contemporaneous when it is brought into existence prior to the due date for furnishing a return in the basis period for a year of assessment. 
The existing TP Rules 2012 require documentation to be brought into existence at the point of the transaction being developed or implemented. 
The revised ‘contemporaneous’ definition provides clarity as to the transfer pricing documentation to be prepared and updated prior to the income tax return filing. 

Additional contents of transfer pricing documentation

The new TP Rules 2023 outline key additional requirements for the contents of the local transfer pricing documentations. 
Information of the Multinational Enterprise Group (Schedule 1) which is similar to the content of the Master File. Details of information provided in Schedule 1 are similar to the content of the Master File. Based on informal feedback from the Inland Revenue Board of Malaysia (“IRB”) it was clarified that Malaysian taxpayers under MNE Groups which are subject to the Master File requirement may replicate the content in their local transfer pricing documentation report or make reference to the Master File of the Group provided that the content of information in the Master File is similar to the one in Schedule 1. Where the information in the Master File is insufficient, additional information as set out in Schedule 1 must be included in the TP Documentation. Taxpayers that fall outside the scope, i.e., taxpayers that are required to prepare minimum transfer pricing documentation report are not required to disclose the information required under Schedule 1. 
Other information regarding the person’s business (Schedule 2) as well as information and documents regarding a cost contribution arrangement (Schedule 3) capture the requirements as outlined under the Malaysian Transfer Pricing Guidelines.

Requirement to date the transfer pricing documentation 

Starting YA 2023, taxpayers are required to include the date on which the contemporaneous transfer pricing document is completed. This additional requirement further enforces the requirement for contemporaneous transfer pricing documentation to be prepared before the income tax return filing. 

Notice to furnish the contemporaneous transfer pricing documentation

In the new TP Rules 2023, the IRB will issue a separate ‘notice’ for taxpayers to furnish the contemporaneous transfer pricing documentation within 14 days from the date of service. As per Section 113B of the Income Tax Act, taxpayers that fail to submit the transfer pricing documentation within 14 days upon request by the IRB will be subject to penalty of MYR20,000- 100,000 per YA. 

Indicate the applicability of information, data or other documents

Taxpayers are required to indicate if any information, data or other documents per the requirement are not applicable. The enforcement of penalty of MYR20,000 - MYR100,000 per YA is also applicable for non- compliance of the TP Rules 2023 in terms of the quality of documentation / content of the report. 

Application of multiple year data

For the purpose of comparability, the TP Rules 2023 indicate that the results of taxpayers shall be compared against the comparables´results at the same basis YA. The IRB may allow the application of prior years’ data for the selection of comparables to prove the effect of the life cycles or business cycles and not for the use of multiple year averages for comparison purposes.
When performing an external benchmarking study within the contemporaneous period, practically there would be insufficient financial data of comparables for same period. However, the IRB expects taxpayers to update the results of comparables periodically. 

Definition of the arm’s length range and TP adjustment

The TP Rules 2023 define the arm’s length range in as a range of figures or a single figure falling between the value of 37.5 percentile to 62.5 percentile of the data set.
If the transfer price is within the arm’s length range, such price shall be regarded as arm’s length. However, if the price falls outside the arm’s length range, an adjustment shall be made to the median. The IRB may adjust the transfer price to the median or any other point above median within the arm’s length range if the comparables have a lesser degree of comparability or comparability defects.   

Key takeaway for taxpayers: 

Taxpayers are required to prepare the transfer pricing documentation report on a contemporaneous basis with comprehensive contents in line with the requirement outlined in the TP Rules 2023 as to avoid penalty under Section 113B of the Act (with an emphasis made on the contemporaneous basis and quality of documentation). 
Taxpayers should review and reassess their pricing policy as the arm’s length range is now narrower as compared to other jurisdictions (i.e. between 25th percentile to 75th percentile). 
Additionally, the degree of comparability of selected comparables also need to be reviewed to ensure a reliable arm’s length range is applied and prevent further scrutiny by the IRB on comparability defects.

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