(TAX UPDATE) SME Bosses, Transfer Pricing Is No Longer Just Big Company Problem

Why growing Malaysian SMEs with multiple entities need to act on transfer pricing before the Inland Revenue Board does.

Introduction

Transfer pricing has long been viewed as the exclusive domain of multinational corporations. It has been treated as a compliance matter for groups with cross-border operations, intercompany licensing arrangements, and regional treasury structures. That perception is now out of date.

With the introduction of the Income Tax (Transfer Pricing) Rules 2023 [P.U.(A) 165/2023] and the subsequent release of the Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024), the Inland Revenue Board of Malaysia (IRBM) has materially widened the scope, tightened the documentation standard, and hardened the penalty regime.

These developments have brought a broader population of taxpayers, including many owner-managed SMEs, squarely within the transfer pricing compliance net.

For SME owners operating more than one company, this is no longer a theoretical concern.

When does transfer pricing apply?

The transfer pricing provisions under Section 140A of the Income Tax Act 1967 are triggered by any controlled transaction between associated persons. The concept of "associated persons" is drawn broadly, and captures a range of arrangements commonly seen within Malaysian SME groups, including:

Inter-company loans, advances, or movement of funds between companies under common ownership
Management fees charged between a holding company and its operating subsidiaries
Shared services arrangements covering administrative, marketing, IT, or human resource functions
Intra-group sales of goods, leasing of assets, or licensing of intellectual property
Cost-sharing arrangements between entities within the same group

Crucially, controlled transactions between two Malaysian entities, that is, purely domestic related-party dealings, are within scope. The common misconception that transfer pricing applies only to cross-border transactions no longer holds.

The arm's length principle

Where a controlled transaction exists, the pricing applied must be consistent with the arm's length principle, namely the price that would have been agreed between independent parties transacting under comparable conditions.

Under the TP Rules 2023, the IRBM has adopted a tighter arm's length range, benchmarked between the 37.5th and 62.5th percentile of the comparables dataset. Where a taxpayer's transfer price falls outside this range, the Director General is empowered to adjust the price to the median, or in certain circumstances, to any point above the median within the range.

Documentation requirements

The TP Rules 2023 and MTPG 2024 prescribe two tiers of Contemporaneous Transfer Pricing Documentation (CTPD).

Full TPD is required where a taxpayer generates gross business income exceeding RM30 million and engages in cross-border controlled transactions of RM10 million or more in a financial year, or where financial assistance of RM50 million or more is provided.

Minimum TPD applies to taxpayers who fall below the full TPD thresholds but continue to engage in controlled transactions. The minimum TPD requirement is substantive. It is not a reduced formality, and the IRBM has published a prescribed template setting out the expected content.

Documentation must be prepared contemporaneously, meaning prior to the due date for filing the tax return, with the date of preparation recorded on the document itself.

Penalties under the new regime

The enforcement posture has changed markedly. Under Section 113B of the Income Tax Act 1967, failure to furnish CTPD within 14 days of a written notice from the IRBM is a criminal offence, carrying:

A fine of between RM20,000 and RM100,000 per year of assessment, or
Imprisonment of up to six months, or both

In addition, a surcharge of up to 5% may be imposed on any transfer pricing adjustment made by the Director General, effective from 1 January 2024. This surcharge is levied independently of whether additional tax is payable as a result of the adjustment.

The Transfer Pricing Tax Audit Framework 2024 (TPAF 2024) further formalises the audit process, tiering penalties based on the duration of delay in producing documentation.

Why reactive compliance is no longer viable

In our experience, transfer pricing enquiries typically arise in one of two ways.

The first is a request for documentation during a routine tax audit.

The second is a targeted transfer pricing audit initiated off the back of a risk indicator, often an intra-group management fee, a loan without interest, or a recurring loss-making entity within an otherwise profitable group.

By the time either occurs, the 14-day statutory clock has already started.

Documentation prepared after the fact is, by definition, not contemporaneous, and is unlikely to withstand scrutiny under the MTPG 2024 standard. The penalty and surcharge exposure compounds quickly.

KTP's View

For any Malaysian SME operating through more than one entity, whether structured for succession planning, risk segregation, or operational reasons, transfer pricing is now a standing compliance obligation rather than an optional exercise.

We recommend that business owners take three practical steps in the current year of assessment:

Map all controlled transactions across the group, including informal arrangements such as shared staff, pooled resources, and inter-company balances.
Assess the documentation tier that applies, whether full TPD, minimum TPD, or exemption, based on the quantitative thresholds and the nature of the transactions.
Prepare the documentation contemporaneously, before the filing of the next tax return, with appropriate benchmarking to support the arm's length position.

The cost of proactive compliance is meaningfully lower than the cost of responding to an IRBM enquiry without documentation in hand.

If you would like to discuss how the transfer pricing regime applies to your group, please contact KTP's tax advisory team.

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