(TAX UPDATE) Transfer Pricing Documentation Exemption? LHDN's New FAQs Finally Draw the Line

(TAX UPDATE) Transfer Pricing Documentation Exemption? LHDN's New FAQs Finally Draw the Line

Introduction

You own an Sdn Bhd. Last year you sold goods to a company your brother controls, paid a management fee up to the holding company, and lent RM2 million to an associate to help it through a slow quarter. Ordinary decisions for a group of companies. Then your accountant says two words that stop the conversation. Transfer pricing.

Suddenly you are looking at a compliance obligation you never budgeted for, and the questions come fast. Do I even need to prepare this documentation? If I do, how much? And what happens if I get it wrong?

For years the honest answer was that the guidelines read as though they were written for multinationals, not for a Johor family group. That has changed. LHDN has now released two Frequently Asked Questions documents on the Malaysian Transfer Pricing Guidelines 2024 ("MTPG 2024"), and between them they answer the questions SME owners have been asking since the guidelines landed. This is our plain reading of what they say and what it means for you.

First, know which of three buckets you are in

Every company with controlled transactions, meaning dealings with related parties, falls into exactly one of three buckets. Work through them in order.

Bucket one, exempt. You meet one of the exemptions in paragraph 1.5 of the MTPG 2024. You prepare no Contemporaneous Transfer Pricing Documentation ("CTPD") at all, although the arm's length principle and your Form C disclosures still apply.

Bucket two, minimum CTPD. You are not exempt under paragraph 1.5, but you also do not cross the full documentation thresholds in paragraph 1.7. You prepare a lighter set of documents.

Bucket three, full CTPD. You cross a paragraph 1.7 threshold. You prepare the complete documentation, dated before the due date for furnishing your tax return for that year of assessment ("YA").

The two FAQs deal with the borders of bucket one and bucket three. That is exactly where most SME disputes happen.

FAQ 1: When you are NOT required to prepare a CTPD

The first FAQ concerns paragraph 1.5 and comes with a flowchart. The single most useful thing it clarifies is that the exemption test is sequential.

You work through conditions (a) to (d) in that order. If you satisfy one, you are exempt. If you fail one, you move to the next and test that. You do not need to satisfy all of them. The conditions are:

a) individuals not carrying on a business;

b) individuals carrying on a business, including partnerships, who engage only in domestic controlled transactions;

c) a person whose controlled transactions total not more than RM1 million; or

d) a person who enters solely into domestic controlled transactions with another person, where both parties meet three further tests.

The RM1 million threshold, read carefully

Condition (c) is the one most SMEs reach for, and it is easy to underestimate. The RM1 million is the total value of all controlled transactions in a YA. It is not just your related party sales. It brings together :

operational transactions, such as the sale or purchase of goods, services and property; and

financial assistance, such as intercompany loans, advances and guarantees.

Add the loan to the management fee to the intercompany sales, and a group that felt small on paper can cross RM1 million faster than expected.

The domestic exemption, and its three unforgiving tests

Condition (d) is for purely domestic groups, and here the FAQ is strict. All three of the following must be true. Fail any one, and you lose the exemption.

First, no tax incentives held by either party. Tax incentives here means those under section 127, Schedules 7A and 7B of the Income Tax Act 1967 ("ITA 1967"), and the Promotion of Investments Act 1986. It counts even if the incentive is not actually claimed. It does not count unutilised allowances, or double, special and further deductions.

Second, the same headline tax rate for both parties, currently 24 percent. This is the trap. Preferential or lower rates, including the SME preferential rate and special regimes such as Labuan, do not count as the headline rate. So a normal company transacting with an SME on the lower rate cannot use this exemption, because the rates differ.

Third, no losses in two consecutive years. Neither party may have recorded a loss in the two years immediately before the transactions. "Loss" here means an accounting loss before interest and tax, measured over the two years immediately preceding the tested YAs, for each party. There is one concession. A dormant company's loss may be disregarded if it arises solely from minimum allowable expenses such as audit, secretarial and filing fees.

The practical message is blunt. The domestic exemption is real, but it is narrow, and a single incentive, a rate mismatch or a run of losses will close it.

FAQ 2: The thresholds that push you into full documentation

The second FAQ deals with Chapter 1 and the paragraph 1.7 thresholds. You must prepare a full CTPD if:

a) your gross business income is more than RM30 million in total and you engage in cross-border controlled transactions of RM10 million or more annually; or

b) you receive or provide controlled financial assistance of more than RM50 million annually.

Three clarifications in the FAQ change how you count.

"Annually" means the basis period for a YA. If your basis period is shorter or longer than 12 months, you still use the basis period. You do not annualise.

The RM30 million is total business turnover. It combines both your domestic and your cross-border activity, not only the cross-border slice.

Included controlled transactions under paragraph 1.7(a) are sales and purchases, services income and expenses, transfers of intangibles, and the purchase or sale of fixed assets.

Just as important is what the FAQ excludes from the threshold. Dividends are out, because they are profit distributions and not commercial transactions. Interest income and expense are out, because they are tied to the underlying financial assistance. And financial assistance itself is out of the paragraph 1.7(a) count, because it is tested separately under the RM50 million threshold in paragraph 1.7(b).

The RM50 million financial assistance rule, and four scenarios worth memorising

Intercompany funding is where groups most often trip. The RM50 million threshold looks at the total aggregated financial assistance provided or received during the basis period. Two mechanics matter.

Amounts received and amounts provided are added together. You cannot set one against the other. RM30 million received plus RM25 million provided is RM55 million, and you are over.

The count excludes interest income and expense, the opening and closing balances, and repayments.

The FAQ then works through four scenarios. They are the clearest guidance LHDN has given on this point.

Scenario A, repayment within the same YA. You take a loan above the threshold and fully repay it before year end. A full CTPD is still required. Settling early does not save you.

Scenario B, no new financial assistance. A loan from a prior year stays outstanding, but you provide no new financial assistance this YA. A full CTPD is not required. You must still be able to show that the interest charged is at arm's length.

Scenario C, fluctuating balances. Your gross loans advanced during the year exceed the threshold, but the year end balance is lower after partial repayments. A full CTPD is required. The year end balance is irrelevant. What matters is what moved through the year.

Scenario D, simultaneous receiving and providing. You both receive and provide financial assistance. The amounts are cumulated, not netted, and the combined total is tested against RM50 million.

Read those four together and one theme emerges. LHDN is testing the flow of funding across the year, not the snapshot on your balance sheet at year end.

Who counts as a related party, and yes, family counts

None of the above matters until you know which of your counterparties are "controlled". The FAQ confirms the order of the tests.

The primary test is section 139 of the ITA 1967, the more than 50 percent shareholding test. Where that does not catch the relationship, the fallback is section 140A(5A), which looks at a shareholding of at least 20 percent together with other conditions.

The FAQ also confirms something family groups should not ignore. A family relationship can become a controlled relationship. Transactions between family owned companies, or directly between family members, can be pulled inside the transfer pricing rules. For many Malaysian SMEs, this is the point that turns transfer pricing from a multinational concern into a family business concern.

KTP's View

Three practical takeaways for owners of Malaysian SME groups.

First, do the arithmetic before you assume you are exempt. The RM1 million exemption adds up loans, guarantees, services and sales, not just related party sales. Groups clear it more easily than they expect.

Second, the domestic exemption is a genuine relief, but it is fragile. One party on the SME rate, one incentive, one loss year, and it is gone. Do not build a documentation strategy on an exemption you have not tested against all three conditions.

Third, if intercompany funding is part of how your group operates, look at flows across the whole year, not the closing balance. Scenario A and Scenario C are the ones that surprise people, and they are the ones LHDN wrote down first.

Transfer pricing documentation is not paperwork for its own sake. Get the bucket wrong, and the exposure is real. Failure to furnish a CTPD carries penalties under the ITA 1967, and a transfer pricing adjustment can attract a surcharge of up to 5 percent on the adjustment itself, whether or not extra tax is payable. The FAQs have removed a lot of the guesswork. The next move is to place your group in the right bucket, and to keep the documents that prove it.

This article is general educational content on Malaysian tax rules and is not advice on the facts of any specific taxpayer.

Sources: Malaysia Transfer Pricing Guidelines 2024 (paragraphs 1.5 and 1.7), the LHDN FAQ on Paragraph 1.5 of MTPG 2024, the LHDN FAQ on MTPG 2024 Chapter 1 Scope and Application, the Income Tax (Transfer Pricing) Rules 2023 [P.U.(A) 165/2023], and section 140A of the Income Tax Act 1967. FAQs available at hasil.gov.my (International, Transfer Pricing).

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