Exploring Special Regimes and Rules in Malaysian Transfer Pricing

Introduction

In addition to the general transfer pricing regulations, Malaysia has specific regimes and rules that apply to certain situations. This blog post delves into two of these special regimes: Permanent Establishments (PEs) and Small and Medium Enterprises (SMEs). Understanding these specialized frameworks is crucial for businesses operating in Malaysia to ensure compliance with transfer pricing regulations and optimize their tax positions.

Permanent Establishments

Under Malaysian transfer pricing guidelines, transactions between a PE and its head office or other related branches are within the scope of the transfer pricing rules. For the purposes of these guidelines, the PE is treated as a distinct and separate enterprise from its head office or other related branches. Profits attributable to a Malaysian PE are determined based on the "functionally separate entity" approach, which is consistent with the approach outlined in the OECD Model Tax Convention and commentary. All transactions between a PE and its head office or other parts of the same legal entity must be priced at arm's length.

Income derived from a place of business in Malaysia is considered to be derived from Malaysia and is subject to Malaysian tax, subject to any relevant provisions in double tax agreements.

Public Ruling No. 9/2019, issued on 6 December 2019, provides detailed guidelines on the tax residence status of companies and bodies of persons, replacing Public Ruling No. 5/2011. Generally, branches of foreign corporations in Malaysia are treated as non-residents, unless the management and control of the business are exercised within Malaysia.

Small and Medium Enterprises

The Income Tax (Transfer Pricing) Rules 2012 specifically apply to businesses that exceed the limits for SMEs. The definition of an SME in Malaysia has undergone changes over time.

Since 1 January 2014, an SME is defined as a manufacturing business with sales up to MYR 50 million or up to 100 employees. For service businesses, the threshold is sales up to MYR 20 million or up to 25 employees.

Prior to 1 January 2014, an SME was defined as an enterprise with gross income above MYR 25 million, and the total amount of related party transactions exceeded MYR 15 million. In the case of a person providing financial assistance, the rules only apply if the financial assistance exceeds MYR 50 million.

The transfer pricing rules set out in the Income Tax (Transfer Pricing) Rules 2012 are not applicable to SMEs that fall within the defined limits. However, it is important for SMEs to ensure that their related party transactions are conducted on an arm's length basis, as the IRB may still review and scrutinize such transactions for transfer pricing compliance.

Conclusion

The special regimes and rules in Malaysian transfer pricing provide tailored guidelines for specific situations. Understanding the nuances of these regimes is essential for businesses to comply with transfer pricing regulations and optimize their tax positions.

For Permanent Establishments, the transfer pricing guidelines treat the PE as a separate entity from its head office or related branches. Transactions between the PE and other parts of the same legal entity must adhere to the arm's length principle, and income derived from the PE is subject to Malaysian tax.

Regarding Small and Medium Enterprises, the Income Tax (Transfer Pricing) Rules 2012 apply to businesses that exceed the defined limits. SMEs falling within the thresholds are not subject to these specific rules, but they must ensure arm's length transactions with related parties.

By navigating these special regimes and rules, businesses operating in Malaysia can ensure compliance with transfer pricing regulations, mitigate the risk of disputes, and optimize their tax positions within the designated frameworks.