Month: November 2023

How to navigate transfer pricing in Malaysia: a guide for companies

How to navigate transfer pricing in Malaysia a guide for companies

How to navigate transfer pricing in Malaysia: a guide for companies

boardroomsuperadmin

For companies operating across multiple geographies in Asia, regulatory compliance stands as a strategic cornerstone for companies pursuing successful and sustainable growth. Therefore, keeping up to date with the local regulations in each region you operate is important. This includes learning about the transfer pricing rules as they apply to intercompany transactions.

In this article, we consult Cheong Woon Chee, Head of Tax Services for BoardRoom Malaysia, for an overview of transfer pricing in Malaysia, recent updates to reporting requirements and what businesses can do to ensure strong compliance.

What transfer pricing is

Transfer pricing is the setting of prices for the transfer of goods, services and intellectual property between associated parties.

In Malaysia, associated parties include entities within a multinational enterprise group, such as subsidiary companies and branches.

“These are parties who control one another or are under the common control of another party, either directly or indirectly,” Woon Chee says. Transfers between these entities are referred to as related party transactions.

“Transfer pricing exists because every country has a different tax rate,” Woon Chee explains. “For example, in Malaysia, our corporate tax rate is 24%, but in Singapore it’s 17%. Considering this huge difference, companies can use transfer pricing to save on tax.”

In addition, transfer pricing can support transparent transactions between related parties. However, a potential drawback of this transparency is that it may cause conflict internally.

“If the price is higher or lower than the market price, one of the entities may feel their interests are being sacrificed and deem it unjustifiable,” Woon Chee says.

Transfer Pricing in Malaysia

An overview of transfer pricing guidelines in Malaysia

Transfer pricing is strictly regulated by the Inland Revenue Board of Malaysia (IRBM). Companies must abide by the Malaysian Transfer Pricing Guidelines, which provide detailed standards and rules on how businesses should handle transfer pricing in accordance with Section 140A of the Income Tax Act 1967 and the Transfer Pricing Rules 2023.

The arm’s length principle

Central to these regulations is the arm’s length principle, which dictates that transactions between related entities should be priced as if they were conducted between independent parties.

“Ideally, the transfer price should not be very different from the market price,” Woon Chee says. “So companies must do benchmarking to understand whether the mark-up they apply as part of their transfer pricing is at the median range for their industry.

“If your pricing is too high or low, you will need to justify this when you make the transfer to your related party.”

Transfer pricing documentation

Transfer pricing documentation requirements

Malaysian regulations require taxpayers to prepare and keep transfer pricing documentation if their company:

  • makes over RM 25 million in gross income, and the total amount of related party transactions exceeds RM 15 million; or
  • provides financial assistance exceeding RM 50 million (this does not apply to transactions involving financial institutions).

“This documentation is simply a report to show how the transfer price was determined and justify why these prices are comparable to the price that would be applied to a third party in a similar situation,” Woon Chee says. “It enables the IRBM to ensure that the transactions between related parties were priced at arm’s length.”

The documents must be detailed and contemporaneous, meaning they should be prepared at the same time as transfer pricing policies are developed or implemented.

New transfer pricing rules introduced in May 2023 require companies to complete their contemporaneous documentation before their tax return for the year of assessment is due.

“In Malaysia, the timeline to file your corporate tax return is seven months after you close your financial year end,” Woon Chee says.

Companies that fall below the threshold are held to less scrutiny and can prepare a limited (simplified) version of transfer pricing documentation instead.

The following table shows the different types of information required for detailed and simplified transfer pricing documentation:

Analysis RequiredFull TPDSimplified TPD
Organisation structure
Nature of the business or industry and market conditions
Controlled transaction
Pricing policies
Assumption, strategies and information regarding factors that influence the setting of pricing policies
Comparability, functional and risk analysis
Selection of the transfer pricing metho
Application of the transfer pricing method
Financial information

Why compliance is vital

Taxpayers in Malaysia must supply their transfer pricing documentation upon request by the IRBM. You will only have 14 days to do so. Fail to provide your documents in time, and you may be subject to a fine between RM 20,000 and RM 100,000, or imprisonment of up to six months.

Common compliance challenges

If you are a company with multiple entities in the APAC region and looking to establish a local business in Malaysia, navigating transfer pricing regulations can be challenging. However, prioritising compliance is essential to avoid financial penalisation, potential imprisonment and reputational harm.

Without professional support, businesses often struggle with:

    Understanding their obligations
    Malaysia’s regulatory system is complex and constantly evolving, so it can be difficult to understand which rules and requirements apply to your company throughout its lifecycle.
    Maintaining robust documentation
    Preparing exhaustive transfer pricing documentation can be time-consuming and usually requires at least one month to complete.
    Conducting accurate benchmarking
    Conducting quality benchmarking ahead of transactions is not a simple process. A wealth of accurate, relevant data must be gathered before meaningful comparisons can be drawn.
    Resource constraints
    Many growing businesses lack the resources to establish robust transfer pricing practices and update them regularly.

    According to Woon Chee, the most effective way businesses can overcome the challenges of transfer pricing in Malaysia is by partnering with a knowledgeable corporate services provider.

    “Businesses often don’t have time to monitor all the developments in Malaysia’s rapidly changing tax regulations,” she says. “So it can be helpful to have an expert always on hand to advise on these updates.”

    Premium providers not only have extensive knowledge of local regulations but also maintain open communication with local authorities and industry bodies. This means, armed with their extensive knowledge, they serve as invaluable navigators, assisting your business to adeptly steer through the complex landscape of compliance and governance.

    Another benefit of having a skilled external team support your compliance is that it frees up your executive staff to focus on what really matters to your business.

    “Those running the business have more time to focus on revenue-generating operations,” Woon Chee says. “Why not leave it to the experts so that you can save time and also manage your risk?”

    Tailored support with transfer pricing in Malaysia

    Tailored support with transfer pricing in Malaysia

    BoardRoom provides a full suite of customised business solutions to help your company flourish in the Asia-Pacific region. Our highly sought-after service offerings include Corporate Secretarial, Company Incorporation, Accounting & Bookkeeping and Payroll, among others. With in-depth knowledge of the local tax and regulatory landscapes and a host of resources such as webinars on tax and Budget updates, our specialist Tax Advisory & Filing team can provide quality, customised support to enhance your financial planning and compliance.

    Let us manage transfer pricing compliance for you so you can concentrate on taking your business to new heights.

    Contact BoardRoom for more information:

    Woon Chee MY TAX

    Cheong Woon Chee

    Head of Tax Services for BoardRoom Malaysia

    E: [email protected]

    T: +60-3-7890 4800

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    From ratings to reporting requirements: an overview of ESG in Malaysia

    From ratings to reporting requirements_ an overview of ESG in Malaysia

    From ratings to reporting requirements: an overview of ESG in Malaysia

    boardroomsuperadmin

    With global markets increasingly focused on sustainability and responsible practices, growing businesses must embrace environmental, social and governance (ESG) factors if they are to survive and thrive. Companies that demonstrate a real commitment to reducing their environmental footprint, maintaining positive stakeholder relationships and improving their ways of operating are more likely to attract investors and position themselves for long-term success.

    New methods of measuring and showcasing corporate ESG action and achievements are emerging throughout the Asia-Pacific region.

    The Bursa Malaysia stock exchange encourages action around ESG in Malaysia through the FTSE4Good Bursa Malaysia (F4GBM) Index, an ESG rating system maintained in collaboration with FTSE Russell. The Index is designed to help guide investor decisions, increase the profile of high-performance companies, encourage transparency and support the move to a sustainable economy.

    To help businesses leverage ESG practices and reporting as investment strategies, Bursa Malaysia has also announced it will introduce a new framework on ESG standards by the end of 2023.

    Ahead, we consult Tina Thomas, Head of ESG for BoardRoom, to learn more about ESG frameworks and sustainability ratings in APAC and how businesses can demonstrate high-level compliance.

    Understanding the enhanced ESG framework

    ESG reporting requirements for APAC businesses differ from region to region. In Malaysia, public listed companies are having to adapt to tighter rules enforced by the Bursa Malaysia stock exchange.

    Since ESG reporting was made compulsory for listed companies in 2016, companies have had the flexibility to use the reporting framework of their choosing. Now, Bursa Malaysia is introducing more stringent reporting requirements in a phased, multi-year approach, with the view to bolster the resilience of listed companies and encourage more investment.

    “If you look at the reports that were done prior to last year, every report looked different, as it was up to companies to decide what to report,” Tina says. “From this year onwards, every company has to report against a mandatory set of factors.”

    The new enhanced Sustainability Reporting Framework will support businesses to adopt international best practices for ESG-related disclosures. It will require companies to report against common indicators, thus promoting standardisation of reporting in the region and boosting investor confidence.

    Understanding the enhanced ESG framework

    About ESG ratings

    The evolution of Malaysia’s ESG reporting requirements has also bolstered the significance of ESG ratings in the region.

    “One way that ratings agencies assess a company is by looking at their sustainability reports,” Tina says. “Because companies have to disclose ESG information annually, ratings agencies can easily compare listed companies and rate them accordingly.

    “They will look at a company’s commitments under their sustainability strategy and check their website to see if the information there aligns with their comments in the report.”

    ESG ratings can be a useful tool in the pursuit of enhanced corporate sustainability.

    “It’s an opportunity for companies to understand how they’re performing against their peers and improve their ESG credentials,” Tina says. “So the ratings can help encourage a culture of change within companies.

    “If a company has a poor ESG rating, it means that some elements of ESG have not been managed well. These elements might critically impact operations and, therefore, indicate a level of risk that a company is facing.

    “This gives companies an opportunity to implement actions to mitigate that risk.”

    The challenges of ESG ratings in Malaysia

    While ESG ratings may be a promising tool on the path towards sustainability, the challenges they pose for Malaysian businesses are as follows:

    • Ratings are limited to large-cap companies
    • Scoring methodologies differ
    • One rating for ESG may not be sufficient
    • Quality ESG reporting can be difficult.
    Ratings are limited to large-cap companies
    Currently, only large-cap companies are rated on their ESG efforts, meaning that small-to-medium enterprises (SMEs) miss out.

    “The Malaysian market is dominated by SMEs, but they are not being rated because there’s no huge investor interest,” Tina says. “So if you think about who’s being tracked and that the majority of companies in Malaysia are SMEs, there’s a big gap.”

    Many SMEs are eager to elevate their ESG performance, but the lack of ratings in their bracket makes peer-to-peer assessment and benchmarking difficult.
    Scoring methodologies differ
    The FTSE Russell ESG ratings methodology, used by Bursa Malaysia, is only applicable to a small portion of the market (large-cap companies), with independent ratings agencies free to employ any scoring system of their choosing.

    “So we’re seeing considerable differences in how companies are being rated,” Tina confirms.

    The absence of a universal ratings methodology means that many businesses are finding it hard to set meaningful targets.
    One rating for ESG may not be sufficient
    Environmental, social and governance factors are distinct domains requiring different strategies and approaches. Therefore, a single ESG rating may not provide an accurate picture of a company’s sustainability efforts.

    “For example,” Tina says, “an oil and gas company might look after their people well and invest in training. It might be well-run and have really good practices. But when it comes to the environmental aspect, it doesn’t fare well.

    “This is one of the reasons that the credibility of ratings is being challenged. Personally, I feel that ESG should not be grouped together.”

    Having separate ratings for environmental, social and governance would help investors to:

    • understand specific areas where a company excels or needs improvement; and
    • make better decisions based on their specific interests and concerns.
    Quality ESG reporting can be difficult
    Without professional support, many businesses struggle to produce impactful sustainability reports.

    “One of the challenges is understanding what to measure, what good data looks like and how to report it effectively,” Tina says. “Also, businesses often ask what good targets look like and how they might achieve net zero.”

    Robust reporting involves the collection and analysis of vast amounts of data. Often, businesses lack the processes, resources and expertise to execute these tasks in an effective and timely manner.

    In addition, as listed companies are only required to report annually, the prospect of generating an accurate, meaningful report incorporating a year’s worth of data can seem daunting at best – and impossible at worst.

    “Sometimes the numbers are not current or just made up,” Tina says.

    How to strengthen your ESG compliance

    Wherever your business is located, proper compliance with ESG reporting requirements can have a variety of benefits. It can help attract investment, improve your corporate reputation, minimise your risk of penalties for non-compliance and more.

    Remember, ESG ratings agencies look to sustainability reports as part of their assessment process. So, if you want to improve your rating, your reports can be valuable for communicating your efforts, achievements and commitments.

    The first step to strengthening your ESG compliance is to partner with a reputable corporate services provider with comprehensive ESG services.

    A skilled provider can help you to:

    Review all business practices and operations to identify the environmental, social and governance areas that are material to your company
    Identify the specific data you need to track based on your material topics
    Establish clear and compelling ESG targets and metrics based on your business values and goals, peer benchmarking and the latest reporting standards
    Develop a tailored ESG strategy containing measurable goals, key performance indicators and a clear roadmap for the years ahead
    Conduct stakeholder consultations to understand their expectations and involve them in your strategy development
    Implement robust data collection and management systems to ensure the accuracy and reliability of information
    Leverage a purpose-built digital platform such as BoardRoom’s ESG Access to automate and streamline your processes for data collection, analysis and reporting
    Integrate ESG principles and values into your business strategy and structure to encourage a culture that embraces sustainability practices and reporting
    Understand which ESG regulations apply to your company and what you need to do to comply
    Produce compliant sustainability reports that effectively communicate your company’s ESG wins and goals to shareholders, staff, investors and the public

    A specialist team will collaborate with key personnel in your organisation to execute these tasks and ensure the best outcomes. According to Tina, they can also assist with briefing directors on your company’s ESG progress and direction, a requirement in Malaysia.

    “The directors’ briefing is important because the directors are ultimately responsible for ESG reporting,” Tina says. “At the briefing, we go through what your last year’s metrics looked like, what your peers are doing and what you need to consider over the next few years.

    “It’s an opportunity to influence your next steps as a business.”

    Elevate your ESG performance

    Elevate your ESG performance

    ESG is a transformative force shaping the future of business in APAC. Understanding the intricacies of ESG frameworks and ratings is essential for business executives navigating this evolving landscape.

    If you are expanding operations into Malaysia, our experienced company incorporation and ESG teams can work together to embed strong ESG practices and values into your business from the beginning. Our knowledgeable company secretarial specialists can also help ensure the corporate governance aspect of your ESG strategy exceeds expectations.

    BoardRoom’s end-to-end ESG service provides customised solutions and support to help you emerge as a leader in the sustainability space. Contact us to get started.

    Contact BoardRoom for more information:

    Tina Thomas_profile

    Tina Thomas

    Head of Environmental, Social and Governance

    E: [email protected]

    T: +60-3-7890 4800

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