Transfer Pricing Documentation in Malaysia — What a Mid-Sized Company Must Prepare

The 14 days is the part that ruins people. LHDN serves a notice under rule 5(3) of the Income Tax (Transfer Pricing) Rules 2023, and fourteen days later the documentation is either complete and in their hands or it is not. There is no provision for an extension in the Rules. If it is late by a fortnight you are looking at RM60,000 for that year of assessment alone, and the penalty is per year, not per audit.

The other part that ruins people is the surcharge. Most owners assume that a company with unabsorbed losses has nothing to fear from a transfer pricing adjustment, because an adjustment that does not create tax cannot create a penalty. LHDN’s own FAQ says the opposite in terms: a surcharge is imposed on a s.140A adjustment “regardless of whether the taxpayer is in a loss position or a tax-exempt company”, because the 5 per cent is charged on the adjustment, not on the tax.

This article is written for the company at RM40 million turnover with one Singapore parent and a management fee — not for the group with an in-house tax function.

Who is caught, and who genuinely is not

Start with s.140A(5) and (5A) of the Income Tax Act 1967, because the transaction has to be controlled before any of this applies. A transaction is controlled where one party controls the other, the parties are individuals who are relatives, or both are controlled by a third person.

Control under s.140A(5A) is 20 per cent or more of the share capital — directly, or through a third person holding in both — plus at least one of:

• the business operations of one party depend on proprietary rights such as patents, unpatented know-how, trademarks or copyrights provided by the other;
• the business activities of one party, such as purchases, sales or the receipt or provision of services, are specified by the other, and prices and supply conditions are influenced by it; or
• one or more directors of one party are appointed by the other.

That is a lower shareholding bar than most people expect, and the three limbs describe a normal group subsidiary almost exactly.

Then apply paragraph 1.5 of the Malaysia Transfer Pricing Guidelines 2024. No contemporaneous documentation is required for:

• an individual not carrying on a business;
• an individual carrying on a business, including a partnership, who engages only in domestic controlled transactions;
• a person whose controlled transactions total not more than RM1 million; or
• a person entering solely into domestic controlled transactions with another person where both parties do not enjoy tax incentives, are taxed at the same headline rate, and have not suffered losses for two consecutive years before the transactions.

Paragraph 1.6 is the sting: exempted persons must still comply with the arm’s length principle and must still keep the documents supporting how prices were set. The relief is from the formal file, not from the standard.

Full documentation versus minimum documentation

Paragraph 1.7 sets the full-documentation thresholds. A person must prepare a full contemporaneous file if it:

• (a) generates gross business income of more than RM30 million in total and engages in cross-border controlled transactions totalling RM10 million or more annually; or
• (b) receives or provides controlled financial assistance of more than RM50 million annually.

The Guidelines’ own worked scenarios show how the limbs bite. A company with RM40 million income, RM9 million of cross-border transactions and RM10 million of domestic ones falls outside paragraph 1.7 — domestic transactions do not count towards the RM10 million. A company with only RM5 million of income but RM51 million of intercompany financing falls inside, through limb (b). And a company with RM20 million income, RM20 million of cross-border transactions and RM40 million of financing falls outside both limbs, because neither test is fully met.

If you are outside paragraph 1.5 and outside paragraph 1.7, paragraph 1.8 puts you in the minimum CTPD category. Minimum documentation carries reduced requirements, must be completed and dated before the return is submitted, and under paragraph 1.10 permits any method the Director General allows that demonstrates compliance with the arm’s length principle. LHDN publishes a minimum documentation template and explanatory notes on its transfer pricing page. You may always elect to prepare a full file instead.

One category has no threshold at all: a permanent establishment having a controlled transaction must prepare a full file regardless of paragraph 1.7.

What “contemporaneous” actually means

Rule 4(1) of P.U.(A) 165/2023: the documentation must be “brought into existence prior to the due date for furnishing a return in the basis period for a year of assessment in which a controlled transaction is entered into”.

So the deadline is the Form C due date, not the audit letter. A file dated the week the notice arrives is not contemporaneous, whatever it contains.

Rule 4(2) sets the contents:

Requirement	Rule 4(2)
Information on the multinational enterprise group	(a), Schedule 1
Information on the person’s own business	(b), Schedule 2
Cost contribution arrangement information	(c), Schedule 3
Index to the documents	(d)
The date the documentation was completed	(e)
Documents forming the foundation of, supporting, or referred to in the analysis	(f)
Information, data and documents used to determine the arm’s length price, including material changes in business conditions	(g)

Rule 4(3) requires you to state expressly where an item does not apply, rather than leaving it out silently. Rule 4(5) empowers the Director General to issue guidelines — which is where the 2024 Guidelines get their force.

Note rule 5(1): the arm’s length price must be based on the most current reliable information reasonably available at the time of determination. Paragraph 11.3 of the Guidelines then allows you to update the benchmarking during an audit with later comparable data without destroying contemporaneity — but warns that if the update produces an adjustment, a surcharge may be imposed on it.

Choosing a method, and LHDN’s power to change it

Rule 6(1) requires the most appropriate method: a traditional transactional method — comparable uncontrolled price, resale price or cost plus — a transactional profit method, being the profit split or the transactional net margin method, or any other method the Director General allows that gives the highest degree of comparability.

Rule 6(2) then puts a documentation burden on the choice itself. You must explain why the selected method and profit level indicator are appropriate as a better approximation of the arm’s length price, and ground that on the facts and the economically relevant characteristics of the transaction as accurately delineated.

Rule 6(3) is the part small filers underestimate: the Director General may review the method you selected and replace it with another of the listed methods if he has reason to believe yours was not the most appropriate. A file that asserts a method without justifying it invites that substitution, and the resulting adjustment carries the surcharge below.

The section 113B penalty, in the amounts LHDN actually uses

Section 113B(1) makes default a criminal offence: on conviction, a fine of not less than RM20,000 and not more than RM100,000, or imprisonment up to six months, or both. Section 113B(2) puts the burden of proving the documentation was furnished on the accused. Section 113B(3) lets the court order compliance within 30 days.

Section 113B(4) is the one you will meet. Where there has been no prosecution, the Director General may by written notice, or in the notice of assessment, require payment of a penalty of not less than RM20,000 and not more than RM100,000. Paying it bars prosecution on the same facts.

The Transfer Pricing Audit Framework effective 31 July 2025 sets the amounts. Lateness is measured from the expiry of the 14-day period until complete documentation reaches LHDN:

Lateness beyond the 14 days	Penalty under s.113B(4)
Up to 7 days	RM20,000
More than 7 days up to 14 days	RM40,000
More than 14 days up to 21 days	RM60,000
More than 21 days up to 28 days	RM80,000
More than 28 days	RM100,000

The framework applies the penalty separately for each year of assessment, at the closing stage of the audit, where documentation was furnished late or where what was furnished is incomplete as measured against P.U.(A) 165/2023 and the prevailing Guidelines. Prosecution is reserved for taxpayers who do not respond at all.

There is a transitional concession. The framework disapplies the s.113B(4) penalty for accounting periods that began before P.U.(A) 165/2023 was gazetted on 29 May 2023. Its own examples: a financial period 1 June 2022 to 31 May 2023 gets relief; 1 June 2023 to 31 May 2024 does not; the calendar year 2023 gets relief; the calendar year 2024 does not.

A s.113B(4) notice can be appealed to the Special Commissioners within 30 days, as if it were a notice of assessment.

The surcharge that lands with no tax attached

Section 140A(3C) lets the Director General require payment of a surcharge of not more than 5 per cent of the increase in income, or the reduction in any deduction or loss, resulting from a price substitution under s.140A(3) or a disregard of structure under s.140A(3A).

Four points decide how much it costs:

It is charged on the adjustment, not on tax. LHDN’s FAQ answers the loss-case question directly — a surcharge is imposed where the taxpayer fails to comply with the arm’s length principle whether or not an assessment or additional assessment results. The framework repeats it: the surcharge may still be imposed even where no assessment is raised.

The general rate is 5 per cent. The FAQ as amended on 31 July 2025 says there is no published scale, that the final rate varies on the merits, and that a lower rate is offered for voluntary disclosure. The framework puts voluntary disclosure at 0 to 4 per cent.

It only reaches basis periods commencing on or after 1 January 2021. For adjustments in earlier basis periods LHDN applies the s.113(2) penalty on tax undercharged instead, at 15 per cent for a first offence, 30 per cent for a second and 45 per cent thereafter under the framework, with the s.124(3) discretion to reduce or remit.

It is collected as tax but is not tax. Section 140A(3D): the surcharge is collected as if it were tax payable, but is not treated as tax for any provision of the Act other than ss.103 to 106. It therefore attracts the 10 per cent increase on late payment and the recovery machinery, but does not feed the computation.

The surcharge follows a Mutual Agreement Procedure outcome — if the adjustment is reduced under a MAP, the FAQ confirms the surcharge is adjusted with it.

Common mistakes

Believing domestic transactions are safe. Only the specific carve-out in paragraph 1.5(d) exempts purely domestic dealings, and it fails the moment one side has an incentive, a different headline rate, or two consecutive loss years. A management fee from a loss-making Sdn Bhd to a profitable sister company is squarely in scope.

Reading the RM30 million threshold as the entry point. It is the entry point to full documentation. The entry point to documentation at all is RM1 million of controlled transactions.

Counting domestic transactions towards the RM10 million. Paragraph 1.7(a) says cross-border.

Ignoring intercompany loans. Interest-free director or shareholder funding above RM50 million triggers full documentation on its own, with no income threshold, under paragraph 1.7(b).

Treating a group master file as sufficient. It can replace Schedule 1 information where it contains everything required, but Schedule 2 — the Malaysian entity’s own business, functions, and benchmarking — has to be prepared locally.

Assuming a loss position is protection. It is not, and this is the single most common misconception in the mid-market.

Dating the file after the return. That alone makes it non-contemporaneous, regardless of quality.

What’s next

Two things, in order. First, work out which paragraph you fall into — 1.5, 1.7 or 1.8 — using this year’s figures rather than last year’s, because thresholds are tested annually. Second, if you are in 1.7 or 1.8, fix the completion date to your Form C deadline and work backwards, since the whole penalty regime keys off a file that already existed when the notice arrived.

If your group is above EUR 750 million or RM3 billion in consolidated revenue, read cbcr-and-master-file as well — the reporting duties there run on separate clocks. If the counterparty is a foreign parent operating through people in Malaysia, permanent-establishment covers the risk that the group has a Malaysian taxable presence quite apart from its pricing.