(TAX UPDATE) Transfer Pricing 2025: Are You Audit-Ready Under Malaysia’s New Rules?

(TAX UPDATE) Transfer Pricing 2025: Are You Audit-Ready Under Malaysia’s New Rules?

Dear Clients,

Transfer pricing (TP) has become a critical area of tax compliance and risk management for businesses operating in Malaysia. With the introduction of the Income Tax (Transfer Pricing) Rules 2023, the Transfer Pricing Guideline 2024 and the Transfer Pricing Audit Framework 2024, the Inland Revenue Board (IRB) has significantly raised expectations on documentation, transparency, and audit readiness.

Our Advisory Manager at KTP, Chong Yew Jia, recently attended the CTIM Workshop on Navigating Transfer Pricing Complexities, where key regulatory changes and practical enforcement issues were discussed in depth.

This newsletter summarises the main takeaways and highlights why SMEs must now treat TP as a core business issue, not merely a tax formality.

1. Transfer Pricing Documentation (TPD) – No Longer Optional

Properly prepared TP documentation offers more than statutory compliance. It plays a strategic role in:

  • Minimising the risk of IRB audit and disputes

  • Establishing and defending the taxpayer’s position on pricing methodology

  • Reducing penalties in the event of audit adjustments

  • Ensuring tax return declarations remain accurate and defensible

  • Avoiding instances of double taxation for cross-border transactions

  • Supporting internal governance, financial planning, and cost management

  • Enhancing financial reporting quality and consistency

Effective from YA 2023, taxpayers must complete and finalise their TPD before filing the tax return, and must be ready to submit it within 14 days upon request by the IRB.

2. Key Updates under Transfer Pricing Rules 2023

The TP Rules 2023, which replaced the 2012 rules, introduced several material changes with immediate implications for compliance:

a. Revised Thresholds for Contemporaneous TPD (CTPD):
Businesses are now required to prepare CTPD if they exceed updated thresholds for gross income or specific categories of related-party transactions, such as financial assistance or intangible assets.

b. Narrowed Arm’s-Length Range:
The acceptable arm’s-length range has been tightened to the 37.5th to 62.5th percentile. Any pricing falling outside this range may be adjusted to the median by the IRB.

c. Mandatory Completion Date:
CTPD must now explicitly state a completion date that is on or before the statutory tax filing deadline. This formalises the contemporaneous nature of the documentation.

d. Expanded Disclosure Obligations:
Taxpayers must now disclose any non-availability of key data or documents, together with reasonable justifications.

e. Use of Multi-Year Data:
To support comparability and defend pricing positions, taxpayers are expected to use and explain multi-year data analysis where relevant.

f. Significant Penalty Increases:
Failure to submit TPD within the 14-day timeframe will result in tiered penalties:

  • 1–7 days late: RM20,000

  • 8–14 days late: RM40,000

  • 15–21 days late: RM70,000

  • More than 21 days late: RM100,000

3. Practical Considerations for SMEs

Many SMEs continue to assume TP does not apply to them. However, the following common scenarios are increasingly under scrutiny:

a. Intragroup Services:
Service fees between related entities must be substantiated. The service must be rendered, and the provider must demonstrate relevant expertise and actual performance.

b. Low-Value-Adding Services:
The commonly used 5% mark-up is not an automatic safe harbour. It must be justified with supporting documentation, including benchmarking or cost-plus analysis.

c. Interest-Free Loans:
Interest-free advances to related parties remain high-risk. The IRB may impose deemed interest and tax the corresponding income, triggering additional tax and penalties.

4. Upcoming Transfer Pricing Audit Framework 2024

Effective 24 December 2024, the new TP audit framework is expected to extend the scope and depth of tax audits. Notable changes include:

  • Audit coverage period up to 7 years

  • Increased focus on the completeness of financial, commercial, and benchmarking documentation

  • Closer alignment with OECD best practices and domestic enforcement guidelines

Taxpayers should anticipate more detailed queries and expect higher documentation standards to defend their positions.

5. The Role of E-Invoicing in Transfer Pricing Compliance

With the phased implementation of e-Invoicing in Malaysia, intercompany transactions will become more transparent and traceable. The impact on TP includes:

  • Enhanced consistency in transaction-level reporting

  • Reduced ability to adjust or delay documentation

  • Increased scrutiny of related-party arrangements by LHDN via cross-system verification

It is essential that TP documentation aligns with e-Invoice disclosures to avoid mismatches and audit red flags.

6. Recommendations

Given the evolving regulatory environment, we recommend all clients:

  • Perform a comprehensive review of related-party transactions

  • Determine whether thresholds for CTPD are triggered

  • Evaluate current transfer pricing methods and arm’s-length positions

  • Prepare or update TP documentation prior to filing the tax return

  • Maintain all supporting records, including benchmarking reports, intercompany agreements, and group TP policies

  • Align internal controls to meet e-Invoicing and TP reporting requirements

Conclusion

Transfer pricing enforcement in Malaysia has entered a new phase of maturity. The regulatory focus has shifted from education to compliance and audit. SMEs with domestic and cross-border related-party transactions must now act proactively to ensure that their TP positions are defensible, documented, and aligned with commercial reality.

Should you require assistance with preparing or reviewing your TP documentation, understanding your obligations under the new TP Rules, or planning your response to e-Invoicing implementation, please contact our team.

Our advisory professionals are ready to support you in managing your TP risks effectively.

Read Our Past Transfer Pricing Blog Post

📅 28 Mar 2025 - Is Charging Management Fees Really a Smart Way to …
https://www.ktp.com.my/blog/management-fee-lhd/28mar2025

📅 15 Jan 2025 - Transfer Pricing Guidelines 2024
https://www.ktp.com.my/blog/transfer-pricing-guideline-2024/15jan2025

📅 29 Aug 2024 - Interest-Free Loans – Are You at Risk?
https://www.ktp.com.my/blog/interest-free-loans-are-you-at-risk/29aug2024

📅 09 May 2024 - Understanding Transfer Pricing (TP): A Basic Guide
https://www.ktp.com.my/blog/understanding-transfer-pricing-tp-a-basic-guide/09may2024

📅 24 Jan 2024 - What Is The Surcharge For Transfer Pricing (TP) Malaysia?
https://www.ktp.com.my/blog/what-is-the-surcharge-for-transfer-pricing-malaysia/24jan24

📅 05 Dec 2023 - Malaysia’s 2023 Transfer Pricing Rules Update
https://www.ktp.com.my/blog/malaysias-2023-transfer-pricing-rules-update/05dec23

📅 22 Aug 2023 - Transfer Pricing Rule 2023
https://www.ktp.com.my/blog/transfer-pricing-rule-2023/22aug23

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