Overview of Malaysia Transfer Pricing Guidelines 2024

The Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024) represents a landmark update in Malaysia's transfer pricing regulatory framework. Published by the Inland Revenue Board of Malaysia (LHDN) on December 24, 2024, these guidelines become effective from Year of Assessment 2023, providing comprehensive guidance on transfer pricing documentation, arm's length principle application, and compliance requirements for multinational enterprises operating in Malaysia.

The updated guidelines align closely with the OECD Transfer Pricing Guidelines Version 2022 and incorporate principles from BEPS (Base Erosion and Profit Shifting) Actions, ensuring Malaysia remains consistent with international best practices while addressing specific local regulatory requirements and economic conditions.

Key Changes from Previous Guidelines

Expanded Exemption Criteria

One of the most significant updates in MTPG 2024 is the expansion of exemption criteria for preparing Contemporaneous Transfer Pricing Documentation (CTPD). The new guidelines provide broader relief for qualifying taxpayers, reducing compliance burden for entities meeting specific criteria while maintaining robust documentation requirements for larger transactions.

Revised Documentation Thresholds

The guidelines introduce refined thresholds distinguishing between full-scope and minimum-scope Transfer Pricing Documentation requirements:

• Full Transfer Pricing Documentation: Required for entities with gross business income exceeding RM30 million and total cross-border related party transactions exceeding RM10 million annually
• Financial Assistance Threshold: Entities providing or receiving financial assistance exceeding RM50 million annually require comprehensive documentation
• Minimum Transfer Pricing Documentation: Applied to entities below full documentation thresholds but still engaged in controlled transactions

Low Value-Adding Intragroup Services (LVAS)

MTPG 2024 introduces a simplified approach for Low Value-Adding Intragroup Services, providing relief for routine administrative, management, and support services that do not require extensive economic analysis. This approach is applicable to Malaysian service providers and aligns with OECD simplified approach methodologies.

LVAS Qualifying Criteria:

• Services are of a supportive nature
• Services do not constitute the core business of the provider
• Services do not require unique valuable intangibles
• Services do not involve significant risks
• Markup applied is between 2% to 5% on costs

Contemporary Documentation Requirements

Timing Requirements

Under MTPG 2024, Transfer Pricing Documentation must be prepared contemporaneously - prior to the due date for filing the tax return. The documentation must clearly state the date of preparation, and entities have 14 days to provide documentation upon LHDN request.

Documentation Components

The guidelines specify comprehensive documentation requirements organized into three main schedules:

Schedule 1: Multinational Enterprise Group Information

• Organizational structure and ownership chart
• Description of business operations and markets
• List of controlled transactions
• Financial and tax position information
• Advance pricing agreements and rulings

Schedule 2: Taxpayer Business Information

• Local organization chart including headcount and department heads
• Controlled transactions description and pricing policies
• Comparability analysis and method selection rationale
• Material changes affecting pricing policies
• Supporting agreements and legal documentation

Schedule 3: Cost Contribution Arrangement Information

• Management and control of Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) activities
• Participant information and contribution details
• Cost sharing methodologies and allocation keys
• Valuation methods for contributions and transactions

Arm's Length Principle and Range Application

Arm's Length Range Determination

MTPG 2024 maintains the arm's length range approach introduced in Transfer Pricing Rules 2023, establishing that acceptable pricing falls between the 37.5th and 62.5th percentile of comparable data sets. This range provides certainty for taxpayers while allowing LHDN flexibility in assessment procedures.

Director General's Adjustment Authority

The guidelines clarify that even when controlled transaction prices fall within the arm's length range, the Director General retains authority to make adjustments to the median or any point above the median due to comparability defects that cannot be quantified or adjusted.

Business Restructuring Considerations

Enhanced DEMPE Analysis

MTPG 2024 places significant emphasis on accurate delineation of business restructuring arrangements, particularly focusing on the shift in functional profile and its alignment with profitability levels. The guidelines require comprehensive analysis of:

• Functions performed, assets used, and risks assumed before and after restructuring
• Options realistically available to parties involved in restructuring
• Compensation for transferred assets, functions, or risks
• Post-restructuring profit expectations and actual outcomes

Economic Substance Requirements

The updated guidelines emphasize substance over form in evaluating business restructuring arrangements, requiring demonstration that restructuring decisions were driven by valid commercial reasons rather than tax minimization objectives.

Compliance Implementation Strategy

Risk Assessment Framework

Organizations should implement comprehensive risk assessment procedures to identify transfer pricing exposures:

• Transaction Identification: Systematic review of all related party transactions
• Materiality Assessment: Quantitative analysis of transaction values against thresholds
• Documentation Gap Analysis: Comparison of existing documentation against MTPG 2024 requirements
• Economic Analysis Review: Validation of current transfer pricing methodologies

Documentation Preparation Process

Effective implementation requires structured approach to documentation preparation:

1. Data Collection: Gather financial, operational, and legal information
2. Economic Analysis: Conduct appropriate transfer pricing studies
3. Comparability Analysis: Identify and analyze comparable transactions or entities
4. Documentation Compilation: Prepare comprehensive TPD following prescribed format
5. Management Review: Ensure accuracy and completeness before finalization
6. Periodic Updates: Maintain current documentation reflecting business changes

Penalty Framework and Enforcement

Non-Compliance Penalties

MTPG 2024 maintains significant penalties for transfer pricing non-compliance:

• Documentation Failure: Up to RM100,000 per Year of Assessment for failure to provide TPD within 14 days of request
• Primary Tax Adjustments: Tax on additional income plus interest charges
• Secondary Adjustments: Deemed benefits and additional tax implications
• Prosecution Risk: Criminal penalties including imprisonment for serious non-compliance

Audit Defense Strategies

Robust documentation serves as the primary defense against transfer pricing audits:

• Comprehensive economic analysis supporting pricing decisions
• Contemporary preparation demonstrating good faith compliance
• Regular updates reflecting business evolution
• Professional advisory support during preparation and audit phases

Industry-Specific Considerations

Manufacturing and Trading

Manufacturing entities must address complex value chain analysis, including:

• Toll manufacturing arrangements and conversion margins
• Distribution models and marketing function analysis
• Intellectual property licensing within integrated operations
• Supply chain optimization and transfer pricing implications

Financial Services

Financial institutions face specific challenges under MTPG 2024:

• Intragroup financing arrangements and capital adequacy
• Guarantee fee structures and credit enhancement benefits
• Service fee arrangements for processing and administrative functions
• Risk management and treasury function documentation

Technology and Digital Services

Technology companies must address evolving transfer pricing landscape:

• Digital services and user-generated value considerations
• Intellectual property development, ownership, and exploitation
• Cost contribution arrangements for research and development
• Data and digital asset valuation methodologies

LVAS Implementation for Malaysian Entities

Service Provider Requirements

Malaysian entities providing LVAS must ensure compliance with simplified approach criteria:

• Service categorization and qualification assessment
• Cost pool identification and allocation methodology
• Markup determination within prescribed range
• Documentation requirements specific to LVAS arrangements

Service Recipient Compliance

Malaysian entities receiving LVAS from related parties must verify:

• Provider jurisdiction adoption of OECD simplified approach
• Service necessity and benefit demonstration
• Arm's length pricing validation for non-qualifying arrangements
• Documentation requirements for cross-border LVAS transactions

Documentation Maintenance and Updates

Three-Year Refresh Cycle

MTPG 2024 allows for three-year cycles for comparable search updates, provided operational conditions remain unchanged. However, financial data and comparability assessments require annual review to ensure continued reliability of arm's length pricing determinations.

Change Management Procedures

Entities must establish procedures for managing documentation updates:

• Business change identification and impact assessment
• Documentation revision requirements and triggers
• Version control and historical record maintenance
• Management approval processes for significant changes

Technology Solutions for Compliance

Documentation Management Systems

Modern transfer pricing compliance benefits from integrated technology solutions:

• Automated data collection and validation procedures
• Centralized documentation repositories with access controls
• Workflow management for preparation and review processes
• Integration with financial reporting and tax compliance systems

Economic Analysis Tools

Advanced analytics support robust transfer pricing analysis:

• Database access for comprehensive comparable searches
• Statistical analysis tools for range determination
• Scenario modeling for business restructuring analysis
• Benchmarking capabilities for ongoing monitoring

Cross-Border Compliance Coordination

Master File and Country-by-Country Reporting

MTPG 2024 coordinates with other international reporting requirements:

• Master File preparation for multinational groups
• Country-by-Country Reporting for entities exceeding RM3 billion consolidated revenue
• Local File requirements integrated with TPD schedules
• Coordination with other jurisdictions' documentation requirements

Mutual Agreement Procedures

The guidelines recognize dispute resolution mechanisms:

• Advance Pricing Agreement applications and procedures
• Mutual Agreement Procedure availability for double taxation cases
• Coordination with tax treaty provisions
• OECD MAP statistics reporting and resolution tracking

Future Developments and Trends

Pillar Two Impact

As Malaysia implements Global Minimum Tax provisions, transfer pricing documentation must consider:

• Income inclusion rules and transfer pricing interactions
• Undertaxed Profits Rule implications for related party transactions
• Qualified Domestic Minimum Top-up Tax coordination
• Substance-based income exclusion calculations

Digital Economy Considerations

Evolving digital economy creates new transfer pricing challenges:

• Digital services tax coordination with transfer pricing rules
• Value creation and profit allocation in digital businesses
• Data and user contribution valuation methodologies
• Cross-border digital services documentation requirements

Best Practice Recommendations

Proactive Compliance Strategy

Successful MTPG 2024 implementation requires proactive approach:

• Regular policy review and update procedures
• Integrated business and tax planning processes
• Continuous monitoring of regulatory developments
• Professional advisory engagement for complex issues

Documentation Quality Standards

High-quality transfer pricing documentation should demonstrate:

• Economic substance and commercial rationale
• Comprehensive analysis supporting pricing decisions
• Contemporary preparation and regular updates
• Professional presentation and logical organization

Conclusion

Malaysia's Transfer Pricing Guidelines 2024 represent a significant evolution in the country's transfer pricing regulatory framework, introducing enhanced documentation requirements while providing practical relief through expanded exemption criteria and simplified approaches for routine services. Successful compliance requires comprehensive understanding of the new requirements, proactive implementation of robust documentation procedures, and ongoing monitoring of business changes affecting transfer pricing positions.

Organizations operating in Malaysia must adapt their transfer pricing policies and procedures to align with MTPG 2024 requirements, ensuring contemporary documentation preparation, appropriate economic analysis, and systematic compliance monitoring. The guidelines' alignment with international best practices positions Malaysia as a jurisdiction committed to preventing base erosion and profit shifting while maintaining an attractive environment for legitimate business operations.

Professional advisory support remains essential for navigating the complexities of transfer pricing compliance, particularly for multinational enterprises with significant related party transactions or complex business structures. Early preparation and proactive compliance strategies will minimize audit risks and ensure sustainable transfer pricing positions under Malaysia's updated regulatory framework.