New Requirements under the
Income Tax (Transfer Pricing)
Rules 2023

Income Tax (Transfer Pricing) Rules 2023
The new Income Tax (Transfer Pricing) Rules 2023 (“TP Rules 2023”) have been released and gazetted on May
29, 2023. The TP Rules 2023 are effective from the Year of Assessment (YA) 2023, while the Income Tax(Transfer Pricing) Rules 2012 will continue to be applicable prior to YA2023.
The key changes in the TP Rules 2023 are set out below:

Key Changes:
Definition of ContemporaneousTransfer Pricing Documentation(TPD)
Contemporaneous TPD shall bebrought into existence prior to thedue date for furnishing a return.

Date of Completion of TPD
The date on which completion of
the TPD is required to be
documented

Content of Contemporaneous TPD
Additional information includes:
1. Schedule 1 – Multinational
Enterprise Group Information
2. Schedule 2 – Taxpayer’s
Business Information
3. Schedule 3 – Cost Contribution
Arrangement Information
An indication of non-applicability ofinformation, data or documents in
the TPD is required (the checklistapproach).

Our Observations:Taxpayers must ensure that
contemporaneous TPD is readily
available prior to the due date offiling the tax return, i.e., sevenmonths after the financial year end.

The Inland Revenue Board ofMalaysia (IRB) is now able toensure that the TPD is preparedprior to the due date of tax return
filing. Failing to comply may resultin penalties ranging from
RM20,000 to RM100,000 per YA.

The inclusion of the additional
information from Schedule 1 ismainly covered in the master file.
Taxpayers who are part of a groupbut do not meet the master filerequirements, would also berequired to furnish this information
if they meet the full TPD
requirements.
Failure to indicate the nonapplicability of information results
in non-completeness of the TPD
and may be subject to the same
penalties as above (even if theTPD was submitted within 14
days of a request).

Key Changes:
Selection of the best method
A taxpayer shall determine thearm’s length price for a controlled
transaction by applying the mostappropriate method, supportedwith an explanation and reason forthe method selected.

Application of data
An arm’s length price shall bedetermined based on the mostrecent information available
publicly.
The use of prior years’ data isallowed for the purpose ofreviewing the impact of life
cycle/business cycle of theproperty or services in selecting
the comparables, but comparisonof results between the tested
party and the comparable
companies for the same basis year
in a YA is still required.

Our Observations:Taxpayers can now select the mostappropriate/best method thatprovides the highest degree ofcomparability instead of applying
the hierarchy of methods under the
Income Tax (Transfer Pricing) Rules
2012. However, it is also necessary
to consider the other methods andexplain why the selected method isthe best or most appropriate inpreference to other methods.

The latest year of financial data ofcomparable companies may not be
available at the point when thebenchmarking study is performed
and before the due date of tax returnfiling. This means that when the tax
return is due for filing, the single
year performance of the taxpayer isbenchmarked against the previous
year’s profitability of the comparablecompanies. Taxpayers are expected
to update the financial data of theselected comparables periodically as
the IRB has the right to refer to theyear-on-year results of thecomparable data in assessing thebenchmarking study. In practice, thisis an additional compliance burden
for taxpayers.
It would be more reasonable tobenchmark the single year
performance of the tested party
against the multiple year average
profitability of the comparable
companies in order to ensure a morereliable estimation of the arm’slength range.

Key Changes:
Arm’s length range
An arm’s length range is now
defined as a range of figures or asingle figure falling between thevalue of 37.5th percentile to62.5th percentile of the data set.
The median is the value at the midpoint of the arm’s length range.

Adjustment to the median
The IRB may adjust the arm’s
length price to the median or any
other point above the median if
the transfer price falls outside the(tighter definition of) arm’s lengthrange.

Our Observations:
The TP Rules 2023 have defined
the arm’s length range to be muchnarrower than the interquartile
range (i.e., 25th to 75th percentile).
In practice, this means that the IRB
will be able to raise additional
adjustments as the (single year)
profitability of more taxpayers may
fall below the narrower arm’s
length range. Taxpayers will needto monitor their financial
performance more closely andproactively in order to ensure thatthe transfer price falls within thistighter range of acceptable results.

Taxpayers should review carefully
the comparability of the selectedcomparables to ensure reliability of
the arm’s length range of results,
as the IRB still has the right toadjust the transfer price to themedian (or above median) of thearm’s length range. In this regard,
the IRB can seek to reject certain
companies or introduce newcompanies in the set ofcomparables, which leads to achange in the arm’s length rangeof results, and the IRB can exercise
its discretion to make anadjustment. Even though theburden of proof lies with the IRB tojustify any amendments to theselection of comparable
companies, taxpayers should
certainly dedicate more time andresources to ensure thecomparables selected are asreliable, robust and strong aspossible.

Key Changes:
Emphasis on DEMPE analysis
Notwithstanding the legal
ownership, the person whocontributes to the value of theintangible property (IP) throughdevelopment, enhancement,maintenance, protection andexploitation (DEMPE) is entitledto an arm’s length consideration.
The owner of IP is not entitled toany income attributable to that IP
if the legal owner is not involved
in DEMPE.

Offsetting adjustment
The provision of the offsetting
adjustment has been removed
under the TP Rules 2023.

Our Observations:Taxpayers who contribute to thevalue of the IP (regardless of legalownership) must document thedetailed information relating to
DEMPE of the IP in the TPD and/or reassess any existing DEMPEof the IP. This is an additionalcompliance burden for thetaxpayers to include suchextensive information in the TPD.

No offsetting adjustment will bemade on the assessment of theother party in a transaction for
any transfer pricing adjustmentthat is made by the IRB. The IRB
is also empowered to impose asurcharge of up to 5% on thetransfer pricing adjustment
based on Section 140A(3C) ofthe Income Tax Act 1967. It isalso important to note that
double taxation may occur due
to adjustments made to thepricing of transactions taking
place between Malaysian
related parties (domestictransfer pricing).

Conclusion
The key developments in the TP Rules 2023 have substantial implications for taxpayers in Malaysia. Thesechanges significantly enhance the IRB's ability to impose transfer pricing adjustments on taxpayers byintroducing a more stringent definition of the arm's length range, codifying a single year period of review, andproviding for the application of adjustments to the median. In addition, the financial impacts of a transfer pricing
adjustment are amplified due to the introduction of a 5% surcharge on the adjustment amount instead of on thetax arising on the adjustment itself, without any possibility of offsetting adjustments. Furthermore, for crossborder transactions, the 5% surcharge does not fall within the scope of "tax," rendering the mutual agreement
procedure (MAP) unavailable for resolving double taxation. MAP may only potentially apply to the tax paid on theadjustment, subject to the provisions of the relevant double tax treaty, if applicable. However, in practice,
pursuing MAP is challenging, costly, and carries an uncertain chance of success.
The key takeaway for taxpayers is to proactively seek to avoid transfer pricing adjustments on controlled
transactions by ensuring that they are in full compliance with the Malaysian transfer pricing documentation rules
and by diligently monitoring their financial performance relative to the now more stringent definition of “arm'slength range.”Our Contacts
Douglas Fone
Managing Director
Transfer Pricing
D: +65 9022 0247
E: douglas.fone@kroll.com

Beeli KeongVice President
Transfer Pricing
D: +65 6589 9032 / +603 2728 1166
E: beeli.keong@kroll.com

Aryn Nee
Senior Associate
Transfer Pricing
D: +603 2728 1166
E: aryn.nee@kroll.com

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