Why Malaysian SMEs Ignore Transfer Pricing—Until It’s Too Late
The dynamic world of Malaysian SMEs thrives on agility and growth. In this environment, the concept of transfer pricing compliance is often perceived as distant and unimportant. Most SMEs owners associate that the transfer pricing requirement is only applicable to multinational corporations or businesses which have a large volume of cross border transactions and do not see it as relevant to their own operations. applicable to my business. As a result, the term transfer pricing is commonly associated with phrases such as “big companies”, “MNCs” or “not for me”.
This perception is often reinforced by a long-standing mind-set among SME owners that transfer pricing is irrelevant to them because they operate as family-run businesses or have only limited dealings with overseas related parties. Many SMEs with occasional cross-border transactions, management fees, or support services within a group do not think they warrant formal transfer pricing consideration.
As a result, transfer pricing rarely receives attention during day-to-day business operations. For many SMEs, it only becomes a pressing issue when a Notice is issued by the Inland Revenue Board of Malaysia (IRBM), signalling the commencement of a tax audit—at a stage when compliance gaps have already been created and corrective actions may be both costly and disruptive. We explore further The common reasons why SMEs ignore Transfer Pricing compliance.
Transfer Pricing Is Not Seen as a Priority Compared to Other Compliance Requirements
Many directors and business owners do not view transfer pricing as an immediate priority, especially when compared to more visible and operationally urgent compliance matters such as e-invoicing. While some are generally aware of transfer pricing requirements, they consciously choose not to address them, often assuming that the risks are low or manageable.
There is also a common reliance on the belief that transfer pricing issues can be dealt with “wait and see” attitude and “if and when a tax audit arises”. In such cases, business owners expect their tax agents to handle discussions and negotiations with LHDN on their behalf. However, transfer pricing is not a compliance matter that can be “fixed” retrospectively. Once an audit begins, the absence of a defensible pricing policy and lacking contemporaneous documentation often places the business in a weak position, regardless of how experienced the tax agents may be.
Over-Delegation to Finance Teams Without Strategic Direction from Directors
In many SMEs, transfer pricing compliance is delegated entirely to the finance or account teams. While finance personnels play a crucial role in implementation and documentation, they are not responsible for determining the business strategy or pricing policies of the companies.
At its core, compliance with the arm’s length principle must stem from the business’s pricing policies, which is shaped by business strategies and leadership directions set by the directors or business owners. Directors decide how the group operates, where values are created and allocated across entities. Accountants and finance managers, on the other hand, are responsible for recording, reporting, and supporting those decisions—not creating them.
Without clear guidance from the board or business owners, finance teams are often left to justify pricing decisions which they did not make and leaving increasing exposure during an LHDN audit.
Limited Understanding and Insufficient Investment in Training
In some cases, directors may not fully understand the detailed requirements of transfer pricing compliance or how to navigate them in a practical manner. Despite this, they may choose not to invest in training—either for themselves or for their finance teams—due to cost concerns, time constraints, or the perception that transfer pricing is not a priority.
Additionally, certain HR policies such as requiring employees to be bonded after attending external training—may unintentionally discourage staff from participating in essential learning programmes. While these measures are often introduced to address employee retention concerns, they can result in under-skilled teams that lack the technical knowledge needed to manage transfer pricing risks effectively. Ultimately, business owners must recognise that it is the companies, rather than the employees, that bears the consequences of increased compliance exposure.
In an environment where LHDN continues to strengthen enforcement and audit frameworks, insufficient training and awareness can leave SMEs ill-equipped to respond to queries, explain pricing decisions, or defend their related party transactions.
Transfer Pricing Compliance Is Viewed as a Cost Rather Than an Operational Necessity
Many SMEs perceive transfer pricing compliance as a costly exercise and therefore choose not to factor it into their normal operating expenses. The cost of preparing transfer pricing documentation or engaging professional advisors is often seen as avoidable, particularly when compared to more immediate business priorities.
What is frequently overlooked, however, is that the true cost of non-compliance is significantly higher. When transfer pricing is not addressed upfront, SMEs often incur substantial time and internal resource costs during a tax audit, as they are required to reconstruct pricing justifications, retrieve historical records, and produce evidence to support the arm’s length nature of their related party transactions. This challenge is further exacerbated when documentation is not prepared on a contemporaneous basis, as required under the Malaysian transfer pricing framework.
In addition to operational disruption, SMEs may be exposed to tax adjustments, surcharges, and penalties imposed by LHDN. These can include additional taxes arising from transfer pricing adjustments, late payment charges, penalties for failure to comply with documentation requirements, and in certain cases, higher penalty rates where non-compliance is viewed as negligent. Such financial exposures can have a direct impact on cash flow and profitability, particularly for growing SMEs.
In practice, business owners and key personnel are often diverted from day-to-day operations to respond to audit queries, manage prolonged correspondence with LHDN, and engage advisors under significant time pressure. When combined, these hidden costs, lost management time, professional fees incurred during audits, tax adjustments, surcharges, and penalties frequently far exceed the original cost of embedding proper transfer pricing compliance as part of routine business operations.
Transfer pricing is not solely a concern for large multinational corporations. As Malaysian SMEs grow, expand regionally, or operate within group structures, transfer pricing considerations arise more frequently than many business owners realise.
In recent years, the Inland Revenue Board of Malaysia (IRBM) has increased its focus on related party transactions involving SMEs, particularly where profits appear to be shifted to tax incentive entities, low tax rate entities and related parties outside Malaysia with lower tax rate. The absence of formal transfer pricing documentation does not exempt an SME from scrutiny; instead, it increases the risk of tax adjustments, penalties, and prolonged audits.
More importantly, transfer pricing compliance is no longer something that can be addressed reactively. Once an audit begins, SMEs may face challenges in reconstructing documentation, justifying pricing decisions, or explaining the commercial rationale behind intercompany charges. What could have been managed through early planning often becomes a costly and time-consuming exercise. Learn more here.
In addition, the Inland Revenue Board of Malaysia (LHDN) has, in recent years, significantly intensified its transfer pricing enforcement and education efforts. This includes more explanation of requirements in the new Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024) , the Transfer Pricing Tax Audit Framework 2025, as well as the organisation of annual transfer pricing conferences and awareness programmes.
Importantly, transfer pricing compliance in Malaysia operates largely on a strict liability basis. This means that SMEs are required to ensure their related party pricing complies with the arm’s length principle regardless of industries or whether the threshold falls within the documentation exemptions under Paragraph 1.5 of the MTPG which exempts them from preparing any transfer pricing documentation however does not relieve them from the obligation to apply arm’s length pricing in their transactions.
As a result, SMEs can no longer assume that transfer pricing requirement is optional, informal, or only relevant when the business reaches a certain size. The regulatory landscape clearly signals that transfer pricing is a compliance requirement that applies across the board, and proactive alignment is essential to avoid adjustments, penalties, and prolonged disputes with LHDN.
Reach out to us at Treasure Advisory for more details on documentation.
At Treasure Advisory, our transfer pricing experts offer professional guidance and assist in preparation of transfer pricing documentation. In essence, effective transfer pricing compliance is both a safeguard and a strategy — protecting businesses from regulatory risk while enhancing their global value chain efficiency. With the right advisory support, Malaysian companies can achieve a balanced approach that satisfies tax authorities and strengthens their competitive edge in a globalised economy. For Transfer Pricing Advisory Services, contact us at Treasure Advisory.
Disclaimer: This article is written for general informational purposes only. The content should not be construed as professional tax, legal, or transfer pricing advice. Readers are encouraged to seek tailored guidance from qualified professionals before making any business or compliance decisions.