Transfer Pricing in Malaysia

The legal framework

Malaysia's arm's length rule rests on one operative provision. Section 140A(2) of the Income Tax Act 1967 requires a person transacting with an associated person for the acquisition or supply of property or services to determine and apply an arm's length price; section 140A(3) lets the Director General of Inland Revenue substitute one wherever he has reason to believe the price applied was not arm's length. Since 1 January 2021, sections 140A(3A) and (3B) add a recharacterisation power: where economic substance departs from form, or the arrangement as a whole is not one commercially rational independent parties would have adopted and the structure obstructs pricing, the DGIR may disregard it and substitute what independent parties would have done.

The population caught is wider than a group test. Section 140A(5) covers control, relatives and common control; section 140A(5A), effective for basis periods from 1 January 2019, adds a 20% shareholding coupled with dependence on the counterparty's proprietary rights, its control over the person's purchases, sales, prices and supply terms, or its power to appoint a director.

The working detail sits below. The Income Tax (Transfer Pricing) Rules 2023 [P.U. (A) 165/2023], gazetted 29 May 2023, apply from YA 2023 and revoke the 2012 Rules; the Malaysia Transfer Pricing Guidelines 2024 were published on 24 December 2024 under section 134A, which since 2024 binds officers as well as taxpayers. The OECD Guidelines are persuasive only — MTPG 2024 states that the Act, the Rules and the guidelines carry the primary obligation, and that Malaysia departs from the OECD text where domestic conditions require.

Methods, comparables and benchmarking

Rule 6 requires the most appropriate method — CUP, resale price, cost plus, profit split or TNMM, or any other method the Director General allows which provides the highest degree of comparability between the transactions. There is no hierarchy, but rule 6(3) lets the DGIR replace the taxpayer's choice, with justification. For unique or highly valuable intangibles, rule 11(2) points to CUP or residual profit split.

The distinctively Malaysian feature is the range. Rule 13(5) fixes the arm's length range at the 37.5th to 62.5th percentile of the comparable set, with the median as its midpoint — materially narrower than the OECD interquartile range, and justified by IRBM on the basis that Malaysian comparables are scarce. A price outside the band is adjusted to the median. Rule 13(3) goes further: adjustment to or above the median is permitted even for a price inside the band, where the comparables are weaker or comparability defects cannot be identified, quantified or adjusted. The chronology invites comment. The High Court in KPHDN v Sandakan Edible Oils held in April 2023 that a median adjustment was arbitrary where the taxpayer's margin already fell within range; P.U. (A) 165/2023 was gazetted six weeks later.

Comparables practice follows the same instinct. IRBM prefers Malaysian comparables and accepts regional sets only on accurate, verifiable data with reasoned justification in the file; a foreign tested party is permissible in principle and frequently rejected on evidence. Comparables with turnover below 10% of the tested party's revenue are treated as less comparable — which itself exposes the taxpayer to a median adjustment. Rule 7(6) requires same-year comparison; multi-year data may inform selection, but averages are not accepted.

Documentation: what the Inland Revenue Board expects

Documentation is tiered. Paragraph 1.5 of MTPG 2024 exempts individuals not carrying on a business; individuals and partnerships with only domestic controlled transactions; persons whose controlled transactions total no more than RM1 million; and purely domestic cases where neither party enjoys incentives, both are taxed at the same headline rate, or neither was loss-making in the two preceding years. IRBM's June 2026 note confirms the conditions are tested in sequence, that the RM1 million ceiling aggregates operational transactions and financial assistance, and that the headline rate is 24% — so an SME taxed at 17% fails the same-rate limb.

Full contemporaneous documentation is mandatory where gross business income exceeds RM30 million and cross-border controlled transactions reach RM10 million, or where controlled financial assistance exceeds RM50 million annually; either limb alone triggers it. Those in between may elect a minimum file — group and organisational structure, key transaction detail and a written pricing policy, with no benchmarking — on IRBM's published template. A permanent establishment files its own full documentation regardless.

Malaysia does not legislate master and local files. Rule 4(2) requires Schedule 1 (MNE group information), Schedule 2 (the person's own business) and Schedule 3 (cost contribution arrangements); an OECD-format master file may substitute for Schedule 1.

Timing is unforgiving. The file must be complete and dated before the return filing deadline, and produced within 14 days of a rule 5(3) notice, which is served separately for each year of assessment. Searches may be refreshed every three years if operating conditions are unchanged, but financial data must be updated annually. Records are kept seven years, in Malaysia, in Bahasa Malaysia or English. Nothing is filed with the return: controlled transactions are declared in Form C, and from YA 2025 section 82B requires financial statements and computations through MITRS within 30 days of the filing deadline.

Audits, penalties and the enforcement climate

Cases are selected on risk indicators in controlled transactions, group restructurings, and information from third parties and foreign tax authorities. An audit should close within 450 days; a comprehensive review may reach back six years of assessment, and section 91(5) extends the assessment window to seven years where the shortfall follows a section 140A(3) determination — with no limit at all where there is fraud, wilful default or negligence.

Two penalty streams run in parallel. Section 113B makes failure to produce contemporaneous documentation within the 14-day window a criminal offence: RM20,000 to RM100,000, up to six months' imprisonment, or both, per year of assessment. Where no prosecution follows, section 113B(4) allows the same range administratively, and the 2025 Audit Framework prices lateness in RM20,000 steps, from RM20,000 for up to seven days to RM100,000 beyond 28 days — applied equally where the file submitted is incomplete.

Section 140A(3C) then allows a surcharge of up to 5% of the increase in income or reduction in a deduction or loss. It attaches to the adjustment, not the tax, so it is payable even where losses absorb the adjustment and no assessment issues. IRBM's revised FAQ of 31 July 2025 confines it to basis periods beginning on or after 1 January 2021; earlier periods attract the section 113(2) penalty, applied in practice at 15%, 30% and 45% for first, second and subsequent offences.

Voluntary disclosure is the meaningful mitigation: made after the filing deadline but before an audit begins, on IRBM's form and with the full evidence pack, it brings the surcharge into a 0% to 4% band.

Dispute resolution and advance certainty

Appeals against an assessment go to the Special Commissioners by Form Q within 30 days of service, with extensions available under section 100; a section 113B(4) penalty follows the same route. A section 140A(3C) surcharge does not — the only recourse is a written application to the issuing branch for reduction or remission, a structural weakness worth factoring into audit strategy. Where a Form Q and a MAP request run together, the appeal is held until the MAP outcome is known. IRBM also operates an internal dispute resolution process and a Tax Corporate Governance Framework as a cooperative compliance route.

MAP operates under Article 25 and section 132 on the 2023 guidelines, with a three-year window running from first notification. It is not a fast lane: five new cases in 2024, two closed, and an inventory of 21 at year end.

The APA programme is smaller still. Unilateral APAs are available only where the counterparty sits in a non-treaty country; otherwise bilateral or multilateral. The gates are high — more than RM100 million of taxable business income from the relevant operations, plus covered transactions above 50% of sales, 50% of purchases or RM25 million. Terms run three to five years, rollback of up to three years is bilateral-only, fees are RM5,000 or RM10,000, and the DGIR's costs are recharged. Two applications in 2024, none granted, eleven concluded in eight years: plan in years, not months.

Pillar Two and what changes in 2026

Malaysia enacted the GloBE rules as Part XI of the ITA, inserted by the Finance (No. 2) Act 2023. Sections 157 to 197 apply to financial years beginning on or after 1 January 2025. Section 159 charges Domestic Top-up Tax on low-taxed Malaysian constituent entities and sections 160 to 162 charge Multinational Top-up Tax under the income inclusion rule, for groups at or above EUR 750 million in two of the four preceding years. Section 157(1) writes the OECD Model Rules, Commentary and Administrative Guidance into the statutory definition — giving OECD material a firmer domestic footing than the Transfer Pricing Guidelines enjoy. IRBM says work continues to have the domestic top-up tax recognised as a QDMTT.

Two 2026 developments matter more day to day. On 30 July 2026 IRBM published intra-group loan guidelines supplementing MTPG Chapter 9 — delineation, debt-versus-equity recharacterisation, credit rating and implicit group support, and pricing — together with an elective simplified method treating designated Bank Negara Malaysia rates as arm's length without benchmarking: the deposit rate domestically, the average lending rate cross-border, each subject to a RM50 million aggregate cap and unavailable for back-to-back structures. That is Malaysia's first real safe harbour outside low value-adding services.

Amount B remains undecided, with no announcement since IRBM's impact assessment was flagged. Separately, P.U. (A) 193/2025 allows a deduction for the cost of preparing contemporaneous documentation, within a RM50,000 annual cap shared with other qualifying spend, from YA 2024 to YA 2027.

How practitioners should respond

Three priorities follow. First, treat the 14-day notice as the operative deadline. The penalty scale runs from the expiry of that window and the burden of proof is the taxpayer's, so the file must be complete and dated before the return is filed, and retrievable — in Malaysia, in an accepted language — the day the notice arrives.

Second, price to the middle. Where an adjustment to or above the median is available even inside a 37.5 to 62.5 percentile band, aiming at the lower part of a range is no longer defensible. Test outcomes against the median, show why each comparable survives the 10% turnover screen, and record the justification for any foreign comparable or foreign tested party in advance of the audit, not during it.

Third, model the asymmetry. There are no secondary adjustments and no automatic relief: downward year-end adjustments are refused, a corresponding domestic adjustment needs a written claim and a further audit, and the surcharge cannot be taken to the Special Commissioners. The cheapest correction remains a voluntary disclosure at 0% to 4% before the audit letter lands. On financing, the new simplified Bank Negara rates deserve early testing — and section 140C's interest limitation still applies to a rate that is perfectly arm's length. Berjaya's pending judicial review is the case to watch.