(TAX UPDATE) Why So Many SMEs Still Ignore Transfer Pricing Rules

From 11 to 22 August, LHDN is auditing 103 corporations in a nationwide crackdown on aggressive tax planning.

The message is clear and sharp : "Check your compliance before LHDN checks you."
[Source (The Star 11 August 2025) : https://lnkd.in/dbts8fjH]

This is no longer just a warning for multinationals. The ripple will reach SMEs especially those with related party transactions and no transfer pricing documentation in place.

Yet, many Malaysian SMEs still brush it off with “It doesn’t apply to us.”

Until the tax audit letter arrives. By then, the cost of fixing the issue, penalties, adjustments, stress, is often far worse than the cost of being compliant from the start.

So why do so many SMEs still ignore transfer pricing rules? Here’s a clearer, practical look,

1. “I Didn’t Know I Had To” The Awareness Gap

A large number of SMEs are still unaware that related party transactions within Malaysia also fall under transfer pricing rules. Many think it only applies if money crosses borders.

But under Malaysian law, both domestic and cross-border transactions between related companies are covered. That includes management fees, intercompany loans, service charges, and even rental.

It doesn’t help that awareness surveys by the authorities show that many business owners don’t fully understand transfer pricing, or think it’s someone else’s problem until they get audited.

2. It’s Complicated (and Costly)

Preparing transfer pricing documentation isn’t just filling in a form. It involves:

Functional analysis
Group structure
Benchmarking study
Justification of pricing policies

The truth? It’s expensive especially for SMEs.

Some companies are shocked that the transfer pricing report costs more than preparing their tax return. Many quietly weigh the cost versus the perceived risk and decide to take their chances.

3. No Need to Submit, So Why Bother?

Here’s the catch: You don’t need to submit your TP documentation with your tax return.

It’s only required when the Inland Revenue Board (IRB) asks for it.

So many companies procrastinate, only scrambling to prepare documents when they get the audit letter—which gives you just 14 days to respond.

At that point, it’s usually a rush job … if it can even be done on time. Worse, you might be hit with penalties ranging from RM20,000 to RM100,000 for failing to prepare it on time.

Yes, you read that right. The penalty is not just for wrong documentation but for not having it at all when requested.

4. It Feels Like Overkill (But It's Not)

For SMEs doing, say, RM2 million in intercompany services, spending RMxxx on a TP report sounds like overkill.

That’s why some directors ask: “Why not just pay the tax if kena?”

The problem is, tax isn’t the only cost. If your pricing is challenged, and you can’t justify it with documentation, the penalties and adjustments can snowball.

Some SMEs choose to pay quietly during audit disputes, assuming it’s cheaper than fighting back. But without documentation, you lose your right to defend your pricing even if it’s actually reasonable.

5. The Threshold Myth

A common excuse we hear: “We’re too small for this.”

Not quite.

Yes, full documentation is required if your company hits RM30 million turnover and RM10 million in cross-border related transactions. But simplified documentation is still required even if you exceed just RM1 million in related party transactions.

That means even a small SME paying related party service fees, interest on a loan from a shareholder, or buying goods from a related company could still be in the net.

6. Not Enough Internal Firepower

Let’s be honest … most SMEs don’t have a transfer pricing expert in-house.

Even for larger finance teams, TP is often parked under “deal with it later” pile. Between GST, SST, payroll, audit, and tax filings, TP documentation often ends up being no one’s job until the audit starts.

That’s when we get called.

7. False Comfort From Past Experience

Some SMEs think: “We’ve never been audited before. We’re too small. TP doesn’t apply to us.”

But enforcement is changing. IRB has become more aggressive, and TP audits are no longer just for multinationals.

We’re seeing more cases involving Malaysian companies with local related parties, especially those with high revenue or suspicious pricing patterns.

The excuse of “I didn’t know” doesn’t work anymore.

Final Word

Transfer pricing is not about being big. It’s about being related.

If you have intercompany transactions, you’re in the game. And if you don’t prepare documentation on time, you could face real tax risks—even if your pricing is fair.

What can you do?

Know your related party transactions.
Understand the threshold.
Prepare your documentation in advance.
Get advice if you're not sure.

Don't wait until the IRB comes knocking.

At KTP, we’ve helped SMEs—from family businesses to regional groups—put their documentation in place before trouble starts.

Read Our Past Transfer Pricing Blog Post

📅 24 July 2025 - Transfer Pricing 2025: Are You Audit-Ready Under Malaysia’s New Rules?https://www.ktp.com.my/blog/transfer-pricing-malaysia/24july2025

📅 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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