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
 TRANSFER PRICING
- refers to intercompany pricing arrangement for
the transfer of goods, services & intangible
between associated person
 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)
 Chapter’s Outline

TP Guidelines issued Tax authorities’

by IRBM practices

Methods of Arm’s length

computation principle
acceptable by IRBM

Contemporaneous The importance

documentation of APA
 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.
 TRANSFER PRICING
Pricing system on transfer of goods, services and intangibles
between entities in a group of companies

This pricing system usually applies for MNCs with holding

companies in overseas and branches in Malaysia, and for
controlled transactions

The pricing adopted between related companies must be at

MARKET VALUE, reflecting the actual work done.
 CONTROLLED TRANSACTIONS =
Transactions that took places between associated persons

Individuals who are relatives

Associated 1 of each other
Persons
Person of whom has
2 control over the other

Person controlled by some

3 other person (3rd party)

 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
 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.
 TP Guidelines 2012
The TP Guidelines existing domestic legislation
seek to provide all
MNCs concerned
with information on 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
 ARM’S LENGTH PRICE

means - the price, which would have been determined if

such transactions were made between independent entities
under the same or similar circumstances.

• 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.
 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
 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.
 Comparability factors

Characteristics Functions Assets

of business performed employed

Contractual Economic
Risk assumed
terms circumstances

Business
strategies
Traditional transactional methods

Comparable
Cost Plus Uncontrolled
Price (CUP)

Resale Price
 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.

ARM’S LENGTH PRICE =

the selling price of similar products
between independent parties

• 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.
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.
 2. Resale Price Method
• RPM is used where a product is purchased products from its
related party and sell to the third party.

ARM’S LENGTH PRICE =

Resale Price – (Resale Price X Resale Price Margin)

* Resale Price Margin = Sales price – Purchase Price

Purchase Price

• 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.
 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.
 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.
 3. Cost-Plus Method
ARM’S LENGTH PRICE =
Cost + (Cost X Cost plus mark up)

*Cost plus mark up = Sales price – Cost

Cost

*Cost plus mark up must be comparable to mark-ups

earned by independent parties performing comparable
functions, bearing similar risks and using similar assets.
Transactional profit methods

Transactional
Profit Split
net margin
 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.
 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
 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.
 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.
 List of documentation

Organizational The controlled

Nature of the business
structure transaction

Strategies, assumptions
Comparability;
and information
functional and risk Selection of TP method
regarding the setting of
analysis
any pricing policies

Application of TP Other relevant

method documents
 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.
 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.
 Importance of APA
Because APA Provides certainty on the appropriate TPM to apply in pricing a covered
transaction thus enhancing the predictability of tax treatment on international
addresses transactions
future
transactions,
Avoids and eliminates potential double taxation through bilateral or
a taxpayer multilateral APA, ensuring that all profits are correctly allocated and taxed. A
stands to taxpayer is, thus, always encouraged to apply for a bilateral/multilateral APA
benefit from
an APA as Alleviates costly and time-consuming examination of transfer pricing issues in
follows: 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.