1. TAX667
ADVANCED TAXATION
TRANSFER PRICING
IRBM Transfer Pricing Guidelines 2023
IRBM Transfer Pricing Guidelines 2012
ADVANCE PRICING ARRANGEMENT
(APA)
IRBM Advance Pricing Arrangement
Guidelines 2012
2. TRANSFER PRICING
- refers to intercompany pricing arrangement for
the transfer of goods, services & intangible
between associated person
3. Learning Outcomes
• At the end of this chapter, students should be able
to:
– Explain the objectives of transfer pricing
guidelines
– Explain the tax authorities practice and the
methods acceptable by the IRBM
– Explain the meaning of arm’s length principle and
contemporaneous documentation
– Explain the importance of the advance pricing
arrangement (APA)
4. Chapter’s Outline
TP Guidelines issued
by IRBM
Tax authorities’
practices
Methods of
computation
acceptable by IRBM
Arm’s length
principle
Contemporaneous
documentation
The importance
of APA
5. Introduction to Transfer Price
• Ideally, the transfer price should not differ from the
prevailing market price.
– However, when business dealings are made between
such connected persons, they may not always reflect the
dynamics of market forces as would be expected if such
transactions were carried out by independent
enterprises.
– As with any tax administration, it is the duty of the IRBM
to ensure that the transfer pricing methodologies
adopted by multinational companies (MNCs) are
reasonable, and that their Malaysian subsidiaries are
paying their fair share of tax.
– In order to do so, MNCs involved must be able to provide
adequate documented proof to support their transfer
pricing policies.
6. The pricing adopted between related companies must be at
MARKET VALUE, reflecting the actual work done.
This pricing system usually applies for MNCs with holding
companies in overseas and branches in Malaysia, and for
controlled transactions
TRANSFER PRICING
Pricing system on transfer of goods, services and intangibles
between entities in a group of companies
7. Individuals who are relatives
of each other
Person of whom has
control over the other
Person controlled by some
other person (3rd party)
Associated
Persons
1
2
3
CONTROLLED TRANSACTIONS =
Transactions that took places between associated persons
Associated person refers to relationship of husband & wife; related
companies of holding & subsidiaries and relative.
Relative means parent, child, brother, sister, uncle, aunt, nephew, niece,
cousin, ancestor or linear descendant
8. TP as Audit Area
• TP is strictly monitored by IRBM because:
– A country with a higher rates of tax would sell goods at a
low profit margin to a low tax country so that a large
portion of profit will eventually tax at a lower tax.
– Since Malaysia income tax rate is relatively higher, IRBM
wants to ensure that TP is not arbitrary and no loss of
revenues for the government.
– IRBM has formulated TRANSFER PRICING GUIDELINES in
to ensure that all companies pay their fair share of tax,
based on prevailing market value of goods.
9. TP Guidelines 2012
The TP Guidelines
seek to provide all
MNCs concerned
with information on
existing domestic legislation
methodologies acceptable to IRB
that can be used in determining
ARM’S LENGTH PRICE
administrative regulations
including the types of records
and documentation expected
from taxpayers involved in
transfer pricing arrangements
10. • The arm’s length approach, which is internationally accepted
as the preferred basis for determining the transfer price of a
transaction between associated parties will be the basis
adopted by IRBM.
• This is consistent with the objective of minimizing the
possibility for double taxation.
means - the price, which would have been determined if
such transactions were made between independent entities
under the same or similar circumstances.
ARM’S LENGTH PRICE
11. TP methodology
• Is the benchmark used to derive arm’s length price
for a controlled transaction with associated person
• Para 5 of ITA (TP) Rules 2012 provides the
preferential method to determine as follows:
i. Comparable uncontrolled price (CUP) method
ii. Resale price method (RPM)
iii. Cost plus method
iv. Profit split method
v. Transactional net margin method
12.
13. TP methodology
• Although the taxpayer is given the right to
choose any method, the emphasis should be
on arriving at an arm’s length price.
• It is advised that transactional profit methods
be used only when traditional transactional
methods cannot be reliably applied or
exceptionally cannot be applied at all.
• This will depend heavily on the availability of
comparable data.
16. 1. CUP Method
• This method focuses directly on the price of the goods
or services transferred in a controlled transaction to the
price charged for the goods or services in a comparable
independent transaction.
• Some pricing adjustments would be made for product
differences, brand name, sales volume, market risk etc.
• The CUP method is ideal only if comparable products
are available, or if reasonably accurate adjustments
can be made to eliminate material product differences.
ARM’S LENGTH PRICE =
the selling price of similar products
between independent parties
17. Comparability analysis under the CUP method should
consider amongst others the following:
(a) Product characteristics such as physical features and
quality.
(b) If the product is in the form of services, the nature and
extent of such services provided.
(c) Whether the goods sold are compared at the same
points in the production chain.
(d) Product differentiation in the form of patented features
such as trademarks, design, etc.
(e) Volume of sales if it has an effect on price.
(f) Timing of sale if it is affected by seasonal fluctuations or
other changes in market conditions.
(g)Whether costs of transport, packaging, marketing,
advertising, and warranty are included in the deal.
(h)Whether the products are sold in places where the
economic conditions are the same.
18. 2. Resale Price Method
• RPM is used where a product is purchased products from its
related party and sell to the third party.
• The usefulness of the method largely depends on how much
added value or alteration the reseller has done on the product
before it is resold, or the time lapse between purchase and
onward sale.
ARM’S LENGTH PRICE =
Resale Price – (Resale Price X Resale Price Margin)
* Resale Price Margin = Sales price – Purchase Price
Purchase Price
19. 2. Resale Price Method (RPM)
• Resale price margin must be comparable to margins earned
by other independent enterprises performing similar
functions, bearing similar risks and employing similar assets.
• This method focuses on the gross margin obtained by the
distributor.
• This method is suitable where a product is purchased from
an associated person and then resold to an independent
distributor.
20. 3. Cost-Plus Method
• The cost plus method is often useful in the case of
semi-finished goods which are sold between associated
parties (related party distributor) or
when different companies in an MNE have concluded
joint facility arrangements or
when the manufacturer is a contract manufacturer or
where the controlled transaction is the provision of
services.
21. 3. Cost-Plus Method
*Cost plus mark up must be comparable to mark-ups
earned by independent parties performing comparable
functions, bearing similar risks and using similar assets.
*Cost plus mark up = Sales price – Cost
Cost
ARM’S LENGTH PRICE =
Cost + (Cost X Cost plus mark up)
23. 1) Profit Split Method
• The transactional profit split method provides an
alternative solution for cases where no
comparable transactions between independent
parties can be identified.
• This would normally happen when transactions
are highly integrated that they cannot be
evaluated separately.
• Profit split method is based on the concept that
the combined profits earned in a controlled
transaction should be equitably divided between
associated persons involved in the transaction
according to the functions performed.
24. 2)Transactional Net Margin Method (TNMM)
• The TNMM is similar to the cost plus and resale price
methods in the sense that it uses the margin approach.
• This method is useful in instances where it is difficult to
compare at gross profit margin such as in situations where
different accounting treatments are adopted.
• Transactional net margin method is more accurate where:
– Profit is derived from comparable uncontrolled
transactions between same taxpayer and independent
parties
– Net profit that would have been earned in comparable
transactions by an independent enterprise is available
25. TP Documentation
• Taxpayers are required to keep sufficient records for a period of
seven years from the end of the year to which income from the
business relates, as provided for under paragraph 82(1)(a) of the
ITA, to enable the DG to ascertain income or loss from the business.
• Subsection 82(7) further provides that all records relating to any
business in Malaysia must be kept and retained in Malaysia.
'Records' under subsection 82(9) include books of accounts,
invoices, vouchers, receipts and other documents necessary to
verify entries in any books of accounts.
• For transfer pricing purposes, adherence to the following
documentation and record keeping requirements will be
advantageous to the taxpayer as it reduces the risk of a tax audit
and subsequent adjustments under section 140, which will be made
according to what the DG thinks are reasonable transfer prices.
26. TP Documentation
• Transfer pricing documentation is not required
to be submitted with the annual Return
Forms. However, the documentation should
be made available to the IRBM within 30 days
upon request.
• All relevant documentation must be
in/translated into the Malay or English
language, prepared at the time the transfer
price is established, and contain particulars
(where applicable, depending on the type of
transaction) as stated under paragraph 10.3.
27. List of documentation
Organizational
structure
Nature of the business
The controlled
transaction
Strategies, assumptions
and information
regarding the setting of
any pricing policies
Comparability;
functional and risk
analysis
Selection of TP method
Application of TP
method
Other relevant
documents
28.
29. ADVANCE PRICING ARRANGEMENT
(APA)
APA is an arrangement made to determine in
advance the appropriate set of criteria to ascertain
the arm’s length transfer prices of a cross-border
transaction.
30. Advance Pricing Arrangement (APA)
To determine the basis of transfer pricing methodology of
future apportionment of income or deduction to ensure arm’s
length transfer prices are applied.
With effect from 1.1.2009, any person who carries out a cross
border transaction with an associated person can apply to the
DG:
To enter into an advance pricing arrangement (APA) with
the DG in Malaysia, or
Competent authorities (relevant overseas tax authorities)
in overseas
This APA assists to resolve any future dispute among the two
countries’ tax authorities on the appropriate profit
attributable to the two countries.
31. Importance of APA
Because APA
addresses
future
transactions,
a taxpayer
stands to
benefit from
an APA as
follows:
Provides certainty on the appropriate TPM to apply in pricing a covered
transaction thus enhancing the predictability of tax treatment on international
transactions
Avoids and eliminates potential double taxation through bilateral or
multilateral APA, ensuring that all profits are correctly allocated and taxed. A
taxpayer is, thus, always encouraged to apply for a bilateral/multilateral APA
Alleviates costly and time-consuming examination of transfer pricing issues in
the event of an audit, and lessens the possibility of protracted and expensive
litigation
Places the taxpayer in a better position to predict costs and expenses,
including tax liabilities
Reduces record keeping burden as the taxpayer will know in advance the
required documentation to be kept to substantiate the agreed TPM.
