Transfer pricing in Malaysia isn’t just for large multinational corporations. Small and Medium-sized Enterprises (SMEs) involved in related party transactions must also navigate the Inland Revenue Board of Malaysia’s (LHDN) transfer pricing guidelines. While SMEs benefit from certain concessions, they still face important compliance requirements and practical challenges when it comes to preparing transfer pricing documentation (TPD).
This article breaks down the specific requirements and nuances of transfer pricing for SMEs in Malaysia, along with common hurdles they encounter.
Key Takeaways
- Malaysian SMEs engaged in related party transactions must comply with transfer pricing guidelines, even if simplified documentation is allowed.
- Thresholds exist to determine whether full or minimum transfer pricing documentation is required.
- Domestic transactions may be exempt under specific conditions, but the arm’s length principle still applies.
- Common challenges include lack of resources, data management difficulties, and limited access to benchmarking tools.
READ MORE: Why Transfer Pricing Benefits Malaysia SMEs
Transfer Pricing Documentation Requirements for Malaysian SMEs
While Malaysian SMEs benefit from simplified transfer pricing options, they are still subject to specific documentation thresholds, exemptions, and safe harbour provisions that require careful interpretation and compliance.
1. Full Contemporaneous Transfer Pricing Documentation (CTPD)
SMEs must prepare a full TPD if they meet either of the following thresholds:
- Gross business income exceeds RM30 million and total cross-border related party transactions exceed RM10 million annually; or
- Financial assistance (e.g., intercompany loans) received or provided exceeds RM50 million annually.
What’s required: A full set of documentation in line with OECD transfer pricing guidelines, including:
- Functional and risk analysis
- Benchmarking study
- Detailed application of the arm’s length principle
2. Minimum Transfer Pricing Documentation
For SMEs below the above thresholds, a minimum TPD is required, not optional.
Minimum documentation must include:
- A description of the global group structure
- A business overview and industry context
- Details of all related party transactions
- The method used to determine pricing
- Supporting analysis to show the transactions are arm’s length (e.g., internal comparables, public data)
3. Domestic Transaction Exemptions
Certain domestic related party transactions are exempt from TPD, provided:
- Both parties are taxed at the same rate
- Neither party enjoys tax incentives
- Neither has sustained tax losses in the two prior years
Important: Even when exempt, SMEs must still justify arm’s length pricing if audited. Contracts, pricing policies, and other supporting records should be maintained.
4. Low Value-Adding Intragroup Services (LVAS) Safe Harbour
Routine services (e.g., HR, accounting, IT support) may qualify for a 5% mark-up safe harbour if:
- The service is non-core, low-risk, and does not involve valuable intangibles
- Adequate cost breakdown and justification are documented
This provision helps SMEs avoid complex benchmarking for simple service transactions.
Common Transfer Pricing Documentation Challenges Faced by Malaysian SMEs
Limited resources and expertise
Despite the simplified documentation options available, many Malaysian SMEs find transfer pricing compliance to be a complex and resource-intensive exercise. One of the core hurdles is the scarcity of financial and human resources. Unlike larger companies, SMEs may not have the budget to engage external consultants specializing in transfer pricing.
This often leads to either minimal documentation being prepared or the task being handled internally by finance managers or business owners themselves, individuals who may be unfamiliar with the technical nuances of transfer pricing regulations and economic analysis. The result is often a documentation set that does not meet LHDN expectations, potentially exposing the business to audit risks and penalties.
Time constraints
Time is another critical constraint. Transfer pricing documentation must be prepared contemporaneously—that is, before the filing of the tax return. Yet many SMEs adopt a reactive approach, only initiating documentation efforts once an audit has been triggered. This not only places them in a non-compliant position from the start, but also creates significant stress when trying to compile adequate documentation within LHDN’s typical 14-day response window during an audit.
Data management difficulties
Data collection and analysis pose additional complications. Unlike larger firms with robust ERP systems, most SMEs operate with basic accounting tools that do not capture or segregate intercompany transaction data in a way that’s suitable for transfer pricing analysis. Extracting the required level of detail, such as cost allocation by entity or transaction type, becomes a highly manual process and increases the risk of errors or omissions.
Benchmarking and comparability issues
Yet another common stumbling block comes in the form of benchmarking. LHDN strongly prefers the use of local Malaysian comparables, but such data remains elusive for niche industries or private companies. Even when SMEs can access commercial databases, they often find the subscription costs prohibitive, and the technical expertise required to interpret the data—for example, applying the correct profit level indicators and conducting interquartile range analysis—is lacking internally.
LHDN’s agressive audit stance
While there are exemptions for SMEs, LHDN has shown an increased focus on transfer pricing audits across all taxpayer segments, including SMEs. They are increasingly scrutinizing related party transactions, even for domestic groups, and are quick to impose penalties for non-compliance with the arm’s length principle or documentation failures.
Navigating regulatory uncertainty and misconceptions
Finally, there’s the challenge of keeping up with Malaysia’s evolving transfer pricing regulations. With periodic updates to official sources of information such as the Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024) and Transfer Pricing Audit Framework 2024 (TPAF 2024), SMEs must find time to stay informed and correctly interpret the implications of these changes.
Unfortunately, many SMEs remain unaware that they are subject to transfer pricing requirements at all—particularly when it comes to domestic transactions or intercompany management fees. This lack of awareness, coupled with limited documentation, significantly heightens their exposure during an audit.
A Proactive Approach Pays Off
Transfer pricing documentation for SMEs in Malaysia requires more than just compliance—it demands awareness, planning, and strategic record-keeping. Even when full documentation isn’t required, SMEs should prepare a minimum TPD and maintain proper supporting documents to mitigate audit risks.
Start with an internal review of your related party transactions. Determine whether full or minimum TPD is required, and plan documentation efforts accordingly. For SMEs with limited internal capabilities, seeking targeted assistance from tax professionals can make all the difference to stay compliant with transfer pricing Malaysia regulations without compromising focus on core business growth.Need guidance on your transfer pricing documentation?
Get in touch with the Bispoint team to ensure your SME is fully compliant and audit-ready.
