Key changes arising from the 2023 TP Rules
Definition of arm's length range (ALR) and use of median
The ALR is now defined as a range of figures or a single figure falling between the 37.5 percentile to 62.5 percentile of the benchmarking data set.
Where the price of the controlled transaction is within the ALR, such price may be regarded as the arm's length price (ALP). However, the Inland Revenue Board of Malaysia (IRBM) may still adjust the price of the controlled transaction to the median or any other point above the median within the ALR where they essentially find issues with the comparability of the uncontrolled transaction.
Where the price of the controlled transaction falls outside the ALR, the ALP shall be taken to be the median.
Use of previous year data and weighted averages
Previous year data which meets certain prescribed conditions is limited in its application only to assist in the selection of comparables and cannot be used for the use of multiple-year data (i.e., weighted averages). Instead, the controlled transaction must be compared with data from an uncontrolled transaction in the same basis year for a YA.
Changes to documentation
Transfer pricing documentation (TPD) must now be dated, prepared and brought into existence prior to the due date for furnishing a return in a YA.
The 2023 TP Rules have also outlined the content required for TPD in the following three schedules of the 2023 TP Rules:
- Schedule 1 - Extensive information regarding the Multinational Enterprise Group (MNE Group) is required. This essentially captures most of the content required in a Master File (e.g., the MNE Group's organizational structure, a description of the MNE Group's business, detailed information regarding intangibles and etc.).
- Schedule 2 - Information regarding the person's business - this contains most of the information typically found in TPD (e.g., organizational structure, industry analysis, functional analysis, selection of transfer pricing method, etc.).
- Schedule 3 - Detailed information regarding any cost contribution agreement entered into by the taxpayer.
Method to determine ALP
The 2023 TP Rules do not use a hierarchy system to determine the most appropriate transfer pricing method for calculating the ALP of a controlled transaction. This is in contrast to the previous transfer pricing rules which had a preference for traditional methods over transactional methods.
Furthermore, under the 2023 TP Rules, the IRBM is empowered to review the method selected by a taxpayer and if the IRBM has reason to believe that the selected method is not appropriate, it may replace the selected method with the most appropriate method.
Alignment with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines
The 2023 TP Rules intends to align Malaysian legislation with the Transfer Pricing Guidelines issued by the OECD by amongst others,
- Updating the rule on intangibles with the DEMPE approach adopted by the OECD (i.e., only those who contribute to the development, enhancement, maintenance, protection or exploitation of the intangible property should be entitled to an arm's length return in respect of their contributions).
- Requiring delineation of the controlled transaction before selection of comparables.
The 2023 TP Rules result in the following implications:
- The emphasis is on taxpayers to ensure that quality comparables are selected:
- The narrowing of the ALR makes it particularly sensitive to changes. The narrow requirements may mean that if the taxpayer's ALP falls outside the ALR, a corresponding alignment of the ALP to the median may be effected.
- Even where the ALP falls within the ALR, the price of the controlled transaction may be subject to an adjustment to the median or any other point above the median.
- With effect from 1 January 2021, the IRBM may impose a surcharge of up to 5% on any increase in income or reduction of any deduction / loss arising from these adjustments.
- Prohibiting the use of weighted averages makes the ALR more susceptible to volatile changes to comparables.
- TPD must now be dated, prepared and brought into existence prior to the due date for furnishing a return for that YA (generally seven months from the date following the close of a company's accounting period).
- While the 2023 TP Rules no longer use a hierarchy system to determine the most appropriate transfer pricing method, the taxpayer is still expected to support the selection of their method with an explanation and reasons.
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