Transfer Pricing in Malaysia: A 2025 Guide to the New Penalty Framework and Compliance Requirements

The New Reality of Transfer Pricing Compliance in Malaysia for 2025

In 2025, the landscape for transfer pricing (TP) in Malaysia has fundamentally changed. The days of treating TP documentation as a year-end compliance formality are over. With the introduction of a severe new penalty framework and a more sophisticated audit approach from the Inland Revenue Board of Malaysia (LHDN), proactive and robust TP compliance has become one of the most critical tax issues for businesses with related-party transactions.

The Core Requirement: Contemporaneous TP Documentation (CTPD)

Under Section 140A of the Income Tax Act 1967, all companies that engage in controlled transactions (i.e., transactions with related parties) are required to demonstrate that these transactions are conducted at arm's length. The primary way to do this is by preparing and maintaining contemporaneous transfer pricing documentation (CTPD). The key word here is "contemporaneous," which means the documentation must be prepared and finalized by the due date for the filing of the company's corporate tax return (Form C).

The Game Changer: The New Penalty Framework under Section 113B

The most significant development in TP compliance is the introduction of a new penalty framework under Section 113B of the Income Tax Act 1967. This has transformed TP documentation from a recommendation to a strict legal obligation with severe consequences for non-compliance:

• Criminal Offense: Failure to furnish CTPD to the LHDN within 14 days of a written request is now a criminal offense.
• Severe Penalties: Upon conviction, a company can face a fine of between RM20,000 and RM100,000, imprisonment for a term not exceeding six months, or both.
• Surcharge on Adjustments: In addition to these penalties, any TP adjustments made by the LHDN as a result of an audit will be subject to a surcharge of up to 5%.

This new reality means that a "wait and see" approach is no longer viable. Companies must have their CTPD ready and available for submission at all times.

Navigating the New Guidelines: MTPG 2024 and TPTAF 2025

The LHDN has also issued new guidelines and a new audit framework that provide a clearer, but also more stringent, set of rules for TP compliance:

• Malaysian Transfer Pricing Guidelines (MTPG) 2024: These guidelines provide detailed guidance on the application of the arm's length principle and the preparation of CTPD. Key features include a two-tiered documentation framework (Full CTPD and Minimum CTPD) with specific thresholds, and a stricter definition of the arm's length range (37.5th to 62.5th percentile).
• Transfer Pricing Tax Audit Framework (TPTAF) 2025: This framework outlines the LHDN's risk-based approach to selecting companies for a TP audit and the procedures that will be followed during the audit. It signals a more targeted and in-depth approach to TP enforcement.

Practical Compliance Steps for 2025

For any business with related-party transactions in Malaysia, the following steps are essential for ensuring TP compliance in 2025:

1. Identify All Controlled Transactions: Conduct a thorough review of all transactions with related parties, both domestic and cross-border.
2. Prepare Contemporaneous TP Documentation: Ensure that your CTPD is prepared and finalized before the due date for your corporate tax return.
3. Ensure Robust and Defensible Documentation: Your CTPD must be comprehensive and well-supported by benchmarking studies and other evidence to demonstrate that your transfer prices are at arm's length.
4. Be Ready to Submit: Have your CTPD ready for submission to the LHDN within the 14-day deadline upon request.
5. Declare in Form C: You are now required to declare in your annual Form C whether you have prepared CTPD.

Conclusion

The message from the LHDN is clear: transfer pricing is a major focus area for tax audits, and non-compliance will be met with severe penalties. In the new landscape of 2025, a proactive, robust, and well-documented transfer pricing strategy is not just a matter of best practice—it is an absolute necessity for mitigating risk and ensuring the long-term tax health of your business.