(TAX UPDATE) Transfer Pricing Rules Amended : P.U. (A) 300/2026 Redraws On Offsetting Adjustment Is Not Automatic

(TAX UPDATE) Transfer Pricing Rules Amended : P.U. (A) 300/2026 Redraws On Offsetting Adjustment Is Not Automatic

If the Inland Revenue Board of Malaysia (LHDN) makes a transfer pricing adjustment on one company in a controlled transaction, the other related party is now permitted to request a corresponding offsetting adjustment to its own tax assessment. This mechanism is not automatic and is subject to the review and formal approval of the Director General of Inland Revenue

Introduction

You run an Sdn Bhd in Johor Bahru. Your brother runs the Singapore company. There is no holding company above the two of you, no consolidated accounts, and no auditor has ever asked you to prepare group financial statements.

For three years your transfer pricing documentation has carried one line where the Multinational Enterprise Group information should sit : not applicable.

On 19 August 2026, that line stopped being true. And it stopped being true retrospectively, back to year of assessment 2023.

The New Transfer Pricing Rules

The Income Tax (Transfer Pricing) (Amendment) Rules 2026 were gazetted as P.U. (A) 300/2026, made on 19 August 2026 by the Minister of Finance II under paragraph 154(1)(ed) read together with Section 140A of the Income Tax Act 1967.

The Rules amend the Income Tax (Transfer Pricing) Rules 2023 [P.U. (A) 165/2023], referred to in the amending instrument as the principal Rules.

Four provisions are touched. The commencement clause is the part most likely to be missed : the Rules are deemed to have effect from year of assessment 2023, which is the same starting point as the principal Rules. There is no transitional relief and no prospective-only carve-out.

Provision What changes Rule 3, definition of "service" Drafting correction. "facilities provided, or are to be provided" becomes "facilities, that are or to be, provided" Rule 4(4) The definition of Multinational Enterprise Group is replaced in full Rule 10(3) Deleted. The rule-specific meaning of a person and its associated person for cost contribution arrangements is removed Rule 13 New subrule (1A). An offsetting adjustment may be made on the other person in a controlled transaction, on request and with the Director General's approval

The amendment that matters : Rule 4(4)

Rule 4 is the contemporaneous transfer pricing documentation rule. Paragraph 4(2)(a) requires the CTPD to contain the Multinational Enterprise Group information set out in Schedule 1. Whether you are in an MNE Group therefore decides whether the entire Schedule 1 burden lands on you.

The old test in Rule 4(4) was an accounting test wrapped around a tax residence test. An MNE Group meant a collection of enterprises related through ownership or control which is required to prepare consolidated financial statements under the applicable accounting principles, or would be so required if equity interest in any of its enterprises were traded on a public securities exchange, and which includes either two or more enterprises with tax residence in different jurisdictions, or an enterprise resident in Malaysia taxed on business carried on through a permanent establishment elsewhere, or the reverse.

The new test is one sentence. An MNE Group means a group of associated enterprises that have business establishments in two or more jurisdictions.

Read those two side by side and count what has been taken out.

The consolidation gate is gone. You no longer need a parent required to consolidate, and you no longer need the hypothetical listing test. The tax residence limb is gone. The permanent establishment limb is gone.

What is left is association plus geography.

This is a widening, and for the Malaysian SME market it is a significant one. The structure that used to sit outside the definition is the common one in Johor : individuals who directly hold an operating Sdn Bhd here and a separate company across the Causeway, with no intermediate holding company and therefore no obligation under the applicable accounting principles to consolidate anything. Under the old Rule 4(4) there was a real argument that no MNE Group existed and that Schedule 1 was not applicable. Under the new Rule 4(4) the argument is much harder to run, because the enterprises are associated and they have business establishments in two jurisdictions.

Schedule 1 is not a light document. It asks for the group's worldwide organisational structure and ownership linkages, a description of the group's businesses, products, geographic markets, competitors, supply chains, business model, profit drivers and functional analysis of every entity, the group's intangible property strategy and agreements, the group's financing activities and central financing function, and the group's annual consolidated financial statements together with a list of unilateral advance pricing arrangements and other rulings.

Which produces an immediate practical tension. Schedule 1 paragraph 1(e)(i) still asks for the group's annual consolidated financial statements. A group that is now inside the MNE Group definition precisely because the consolidation gate was removed may have no consolidated financial statements in existence. The answer sits in Rule 4(3), which requires you to indicate the non-applicability of any information, data or document in the CTPD itself. Do not leave the item blank. State that it does not apply and state why.

Rule 13(1A) : Offsetting Adjustment

Rule 13 is the adjustment power. Subrule (1) lets the Director General substitute or impute a price where he has reason to believe the price in a controlled transaction is not at arm's length. Subrule (4) lets him impose the surcharge under Section 140A(3C) on that adjustment.

The new subrule (1A) provides that an adjustment made under subrule (1) on one person in a controlled transaction may be reflected by an offsetting adjustment on the assessment of the other person in that controlled transaction, upon request by that other person and subject to the approval of the Director General.

Read carefully, this is domestic relief. For an offsetting adjustment to be possible, the other person must have a Malaysian assessment capable of being adjusted. Where the counterparty is a non-resident with no Malaysian assessment, there is nothing for the Director General to offset, and the route remains the mutual agreement procedure under the relevant double taxation agreement.

Where both parties are Malaysian taxpayers, this is a genuine improvement. Take the group management fee that gets marked up on audit. The fee income imputed to the service provider used to sit there on its own, with no corresponding increase in the payer's deduction, and the group paid tax on income that never economically existed at group level. Rule 13(1A) now provides an express route out of that.

Three limitations deserve emphasis before anyone celebrates.

It is permissive, not automatic. The word is "may", and the offsetting adjustment is subject to the approval of the Director General.

The request must come from the other person. It does not follow the adjusted taxpayer's appeal. If the counterparty does not ask, nothing happens.

The surcharge is untouched. Rule 13(4) is not amended. The Section 140A(3C) surcharge is charged on the amount of the transfer pricing adjustment and applies whether or not there is additional tax payable. A group can therefore end up economically neutral on tax after an offsetting adjustment and still carry the surcharge on the gross adjustment.

The two new Rules - Service & Cost Contribution Arrangement

The Rule 3 change to the definition of "service" is a drafting correction. The clause now reads more cleanly. We do not read it as altering the scope of what constitutes a service.

The deletion of Rule 10(3) is more interesting than it looks. Rule 10 governs cost contribution arrangements. Subrule (3) supplied a meaning for a person and its associated person specific to that rule, covering persons where one has control over the other, individuals who are relatives of each other, and persons both controlled by some other person.

With that subrule deleted, the associated person question for cost contribution arrangements falls back on the associated person and control concepts in Section 140A of the Act and on the Malaysia Transfer Pricing Guidelines 2024. Note that the express reference to individuals who are relatives of each other has gone from the rule text. For family owned groups, that limb was often the one doing the work.

Read together with the new Rule 4(4), which introduces the undefined expression "associated enterprises", the direction of travel is towards a single definitional anchor in the Act rather than a set of rule-level definitions. That is defensible drafting policy. It also means the guidelines carry more weight than before, and the guidelines are administrative, not law.

Retrospective to YA 2023 : what to do this month

The effect date is the sting. Four practical steps.

First, re-run the MNE Group test for YA 2023, YA 2024 and YA 2025 on the new definition, not the old one. If your CTPD for those years marked Schedule 1 as not applicable on the strength of the consolidation gate, that conclusion needs revisiting.

Second, remember the production deadline. Rule 5(3) allows the Director General to require the CTPD in writing within fourteen days from the date of service of the notice. Fourteen days is not enough time to build a Schedule 1 from nothing.

Third, keep Section 113B in view. Failure to furnish the CTPD on time, and non-compliance with the CTPD requirements, carry a fine of not less than RM20,000 and not more than RM100,000, or imprisonment, or both, per year of assessment.

Fourth, review closed and current transfer pricing audits from YA 2023 onwards. Where an adjustment was made on one Malaysian entity and the counterparty is also Malaysian, the counterparty now has an express basis on which to request an offsetting adjustment. Whether the ordinary time limits in the Act allow that request to be given effect for the earliest years is a separate question, and one on which the amendment is silent.

KTP's View

The headline reads like housekeeping. Four short amendments, two of them drafting. It is not housekeeping.

Rule 4(4) has quietly moved the boundary of Malaysia's transfer pricing documentation regime outwards, and it has moved it backwards in time to YA 2023. The Malaysian SME group that owns a Singapore or Indonesian company without a formal group structure was the population sitting just outside the old definition. It is now, on the plain words, inside.

Rule 13(1A) is the balancing item, and it is welcome. But it is discretionary, it must be triggered by the counterparty, and it does not touch the surcharge. Treat it as relief you apply for, not relief you receive.

The practical action is unglamorous. Pull your last three years of transfer pricing documentation, find the Multinational Enterprise Group section, and read it against the new definition rather than the one it was drafted under. If Schedule 1 is thinner than the new Rule 4(4) now requires, the time to fix that is before a fourteen day notice arrives, not after.

This article is prepared as general information on Malaysian tax law and not advice on any specific taxpayer's circumstances. Speak to licensed tax agent before acting on it.

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