Financial Crime World

Regulatory Requirements for Cross-Border Transactions in Malaysia

Malaysia’s rapid economic growth has led to an increasing number of cross-border transactions, highlighting the need for clear regulatory requirements to ensure fair and transparent business practices. The country’s export-oriented economy has seen a significant boost, with export values reaching US$27 billion in February 2024 alone.

Transfer Pricing: A Crucial Aspect of Cross-Border Transactions

What is Transfer Pricing?

Transfer pricing refers to setting prices for transactions between related parties, such as subsidiaries or affiliates, at arm’s length. This ensures that these transactions are not used to shift profits or avoid taxes.

Regulatory Framework

In Malaysia, transfer pricing regulations are governed by the Income Tax Act 1967 and the Income Tax (Transfer Pricing) Rules of 2023.

Key Regulatory Requirements

The following are key regulatory requirements for businesses involved in cross-border transactions:

  • Arm’s Length Principle: All controlled transactions must comply with the arm’s length principle, which means that prices should be determined based on market conditions and not influenced by any personal relationships or agreements.
  • Transfer Pricing Documentation: Businesses involved in controlled transactions are required to maintain transfer pricing documentation, which includes information about the transaction, pricing policies, assumptions, strategies, and factors influencing pricing decisions.
  • Simplified Transfer Pricing Documentation: Smaller businesses with limited complexity may be exempt from preparing detailed transfer pricing documentation.
  • Penalties for Non-Compliance: Failure to comply with transfer pricing regulations can result in penalties, fines, and imprisonment.

Transfer Pricing Methods

The Income Tax (Transfer Pricing) Rules of 2023 prescribe five major methods for determining an arm’s length price:

Methods for Determining Arm’s Length Price

  • Comparable Uncontrolled Price Method (CUP): This method compares prices charged in controlled transactions to those charged in comparable uncontrolled transactions.
  • Resale Price Method (RPM): RPM starts with the price at which a product purchased from an associated enterprise is resold to an independent one.
  • Cost Plus Method (CPM): CPM is useful for transactions involving semi-finished goods, joint facility agreements, contract manufacturing, or service provision.
  • Profit Split Method: This method divides the combined profits of associated enterprises based on their contributions.
  • Transactional Net Margin Method (TNMM): TNMM assesses net profit margins relative to an appropriate base.

Risks and Consequences

Non-compliance with transfer pricing regulations can result in significant financial penalties, fines, and imprisonment. Businesses must ensure that they comply with the arm’s length principle and maintain accurate transfer pricing documentation to avoid these risks.

In conclusion, regulatory requirements for cross-border transactions in Malaysia are complex and require careful attention from businesses involved in controlled transactions. By understanding these requirements and adhering to them, businesses can ensure compliance with tax laws and avoid potential penalties and reputational damage.