How to Prepare for a Transfer Pricing Audit: A 10-Point Checklist
In the last two years, the Inland Revenue Board of Malaysia (IRBM) has significantly intensified its transfer pricing audit activities. In recent months, taxpayers have received the Surat Memohon Dokumen dan Maklumat (SMDM), which is an official notice requiring the submission of transfer pricing documentation for up to four financial years, including the year ending 2024. Companies which previously adopted a passive “wait and see” stance now find themselves unprepared; facing the challenge of compiling information of controlled transactions and the submission of the complete Transfer Pricing Documentation within the strict 14-day deadline. The 14-day countdown begins from a day after the date of notice and it includes weekends and public holidays.
Transfer pricing is the pricing arrangements for the purchase and sale of property or services between entities of a group while transfer price is the price at which transactions between its entities take place. The transfer price is regulated by S140A(2) Income Tax Act 1967 (ITA 1967) where the transacted prices must fall within the arm’s length range or at the arm length price. The arm’s length range in Malaysia is between the 37.5 percentile and 62.5 percentile of the value of comparables. Simply put, the transfer price is the prevailing market price. The Inland Revenue Board of Malaysia has been actively conducting transfer pricing audits for a minimum of 4 years encompassing up to financial year 2024. Thus, it is crucial that companies ensure that they are compliant with the guidelines set in Income Tax (Transfer Pricing) Rules 2023 and Malaysia Transfer Pricing Guidelines 2024 issued by Inland Revenue Board of Malaysia (IRBM). Hence, preparing well for transfer pricing audits is imperative for any organization with multiple entities with controlled transactions.
Preparing for a transfer pricing audit in Malaysia requires a thorough understanding of regulatory expectations and a proactive compliance strategy. It’s important to note that the failure to do so may result in setback and punitive actions. This article outlines a practical 10-point checklist to help companies strengthen their transfer pricing framework and navigate audits with confidence in Malaysia. Whether you’re a director, CFO or a tax manager, navigating the evolving tax landscape in Malaysia with this checklist will help you have a well-planned structured approach towards impending transfer pricing audits.
1. Prepare Contemporaneous Transfer Pricing Documentation (CTPD)
The Malaysian transfer pricing rules, updated in the Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024), specify different documentation requirements based on the company’s reported revenue and the total cross border transactions amount or the aggregate financial assistance provided and received for the base year. Under the revised rules, taxpayers are required to prepare full Contemporaneous Transfer Pricing Documentation (CTPD) if they meet either of the following thresholds:
- a. Have a gross business income exceeding RM30 million and engage in total cross-border controlled transactions of RM10 million or more annually; or
- b. Receive or provide controlled financial assistance exceeding RM50 million annually.
Taxpayers who do not meet these thresholds are required to prepare a Minimum CTPD, subject to the exemptions outlined in Paragraph 1.5 of the Malaysian Transfer Pricing Guidelines (MTPG) 2024.
Taxpayers with related business establishments located in two or more tax jurisdictions outside Malaysia are required to prepare a Schedule 1 Report, which contains similar information in a Master File. This requirement applies regardless of whether the multinational enterprise (MNE) group prepares its consolidated financial statements.The term business establishment covers permanent establishments, dormant entities, newly incorporated companies, and inactive companies.
According to the Inland Revenue Board of Malaysia (IRBM) in its published FAQs, a Schedule 1 Report is mandatory irrespective of whether the parent company is incorporated in Malaysia and the subsidiary overseas, or vice versa. This obligation also applies even if the taxpayer only engages in domestic controlled transactions.
2. Contemporaneous Requirement for Transfer Pricing Documentation
It is mandatory for the Transfer Pricing Documentation (TPD) to be contemporaneous. The term “contemporaneous” is explained in paragraph 2.58 MTPG 2024. The TPD must be dated to indicate its completion date and must comply with the requirements in the Income Tax (Transfer Pricing) Rules 2023 (TPR 2023).
It was further clarified by the Inland Revenue Board of Malaysia (IRBM) in its published FAQs that to satisfy the “contemporaneous” requirement, two key elements must be met:
- a. The TPD must be completed before the submission date of the tax return Form C for the relevant year of assessment; and
- b. The information contained in the TPD must be comprehensive, in accordance with Rule 4 of the Income Tax (Transfer Pricing) Rules 2023.
Even if one of the two elements is not met, the prepared TPD is considered as non contemporaneous
3. Ensure the Contemporaneous Transfer Pricing Documentation (CTPD) is updated annually
The CTPD must be prepared and updated on an annual basis. This requirement is derived from Rule 4(1) of the Income Tax (Transfer Pricing) Rules 2023 (TPR 2023), which explicitly states that the documentation must be prepared and completed before the due date for filing the tax returns for the year of assessment in which the controlled transactions occurred.
This clause is supported by explanations in FAQs published by IRBM and guidance documents clarifying that contemporaneous documentation means that the TPD is brought into existence before the filing deadline, ensuring it is periodically updated for each relevant year.
4. Review Related Party Transactions (RPTs)
Taxpayers are encouraged to perform reviews on their controlled transactions regularly on a quarterly basis or at least annually to ensure compliance with arm’s length principle. These reviews are essential to mitigate the risk of tax adjustments, penalties, and fines imposed by IRBM, while also ensuring the accurate reporting of income. Incorrect information including understatement or omission of income as a result of audit findings will attract penalty under S113B Income Tax Act 1967.
During the review process, necessary adjustments can be made, allowing for a smoother and more accurate year-end closing of accounts with minimal errors. This helps ensure that, in the event of a transfer pricing audit, all relevant and accurate information is readily available for submission to the IRBM.
5. Keeping Benchmarking Analyses Current
In the last two years, the Inland Revenue Board of Malaysia transfer pricing by comparing the business conditions and prices of controlled transactions against independent entities under comparable circumstances. It provides evidence supported by qualitative and quantitative data to justify that the transfer prices comply with the arm’s length principle during transfer pricing audits in Malaysia.
The benchmarking analysis is conducted using the most current and reliable data reasonably available at the time of determining the arm’s length price of the transactions.
Rule 6 of the Income Tax (Transfer Pricing) Rules 2023 (TPR 2023) further emphasizes that the results of controlled transactions must be compared with those of uncontrolled transactions for the same basis year. This requirement underscores the importance of updating the transfer pricing documentation with the latest benchmarking results once the comparable data becomes available at a later date.
IRBM allows the benchmarking comparable searches to be performed at least every three years while the financial data of the selected comparable companies must be reviewed and updated every year.
Local comparables from Malaysia to establish the arm’s length range are preferred by IRBM over foreign comparables.
6. Testing of Arm’s Length Outcomes
While conducting a transfer pricing audit, the IRBM tests for arm’s length outcomes to ensure that transactions between associated parties are priced at market standards. This encompasses a functional and comparability analysis leading to the selection of the most appropriate transfer pricing method.
The IRBM accepts both traditional and transactional transfer pricing methods depending on what’s most appropriate for the case, determined by the availability of reliable data for comparability analysis. The arm’s length price can either be determined by using the traditional transactional methods such as the Comparable Uncontrolled Price Method (CUP), Resale Price Method (RPM) or Cost Plus Method (CPM). In addition, the transactional profit methods such as the Profit Split Method (PSM) and the Transactional Net Margin Method (TNMM) which, based on profits may instead be applied.
The Malaysia Transfer Pricing Rules 2023 (TPR 2023) have done away with the traditional hierarchy of transfer pricing methods that previously required taxpayers to apply the traditional transactional methods first before considering transactional profit methods.
This change is explicitly reflected in Rule 6 of the TPR 2023, which states that a person shall determine the arm’s length price for a controlled transaction by applying the most appropriate methods as follows:
a. The traditional transactional method,
b. The transactional profit method, or
c. Any other method allowed by the Director General that provides the highest degree of comparability.
The hierarchy approach is replaced by the most appropriate method that provides taxpayers the flexibility to choose the most appropriate method that best provides the most reliable measure of an arm’s length result.
7. Documenting Intragroup Services
Intragroup services are frequently scrutinized by the IRBM during transfer pricing audits. Malaysian taxpayers must demonstrate that the services were genuinely rendered by the related party providing them and actually received by the counterpart entities.
To substantiate this, taxpayers should maintain comprehensive supporting documents such as intercompany service agreements, invoices, correspondence, work reports, and evidence of benefits received. Proper documentation helps establish that the intragroup services were necessary, provided at arm’s length, and delivered with commercial substance, thereby reducing the risk of transfer pricing adjustments.
Taxpayers must also demonstrate that the service charges adhered to the arm’s length principle. Under the new Malaysian Transfer Pricing Guidelines 2024, a 5% mark-up on the service cost is considered arm’s length for qualifying low value-adding services (LVAS)
8. Review Intercompany Agreements (ICA)
An intercompany agreement (ICA) is a contract between two or more legally related entities within a corporate group. It establishes binding terms between parent companies, subsidiaries, sister companies, and other affiliates.
In Malaysia, having a written ICA is essential for transfer pricing compliance. These agreements formalize how related entities operate and serve as documented evidence that controlled transactions are conducted at arm’s length.
A well-drafted ICA clearly outlines the functions performed, assets employed, and risks assumed by each party in the related party transactions provide evidential justification to Inland Revenue Board (IRB) that the controlled transactions possess genuine commercial value and are aligned with the arm’s length principle in the course of business operations.
Comprehensive and properly maintained ICAs also support the taxpayer’s transfer pricing policy and help minimize the risk of adjustments by the Director General of Inland Revenue (DGIR) under the Malaysia regulations.
9. Preparing Annual Summary Decks to Support TP Reviews
It is important for taxpayers to prepare a presentation deck annually that summarizes business information related to their controlled transactions. Preparing these materials early helps reduce stress and the need to extract information directly from the CTPD later on. As staff turnover may occur over time, maintaining updating the presentation each year ensures continuity and accuracy of information.
In the event of a transfer pricing tax audit, these slides can be readily produced and submitted to the Inland Revenue Board of Malaysia (IRBM) within seven (7) days upon request, as stipulated in the Transfer Pricing Tax Audit Framework 2025
According to the Transfer Pricing Tax Audit Framework (TPTAF) 2024 published by the Inland Revenue Board of Malaysia (IRBM), taxpayers must prepare present the following information for the audit visit:
- a. Company background,
- b. Business operations including global operations,
- c. The management structure and functions,
- d. Record-keeping and accounting control systems,
- e. A focus on the controlled transactions under audit.
During the audit visit, the slides will be presented and form part of the documentation to facilitate the understanding and assessment of the taxpayer’s transfer pricing practices.
10. Ensuring Availability of all Supporting Documents
Taxpayers are responsible for providing documents which are selected by the audit officer either in hard copy or electronically. It is crucial to ensure all the supporting documents to justify the pricing adopted with the arm’s length principle. Documents which are commonly requested are as follows:
- a. Intercompany agreements (ICAs) – signed and dated
- b. Invoices and payment records for intercompany charges
- c. Service reports, deliverables, or correspondence showing the nature of services rendered
- d. Cost allocation workings and basis of charge
- e. Benchmarking data and comparables used in analysis
- f. Board minutes, internal memos, or management reports supporting business rationale
- g. Proof of benefits received for intragroup services
Treasure Advisory (TASB) specializes in providing transfer pricing services, not limited to Contemporaneous Transfer Pricing Documentation (CTPD), Related Party Transactions (RPTs) review, Benchmarking Analysis, drafting of Intercompany Agreement (ICA) to support your transfer pricing compliance. We understand the complexities involved in preparing CTPDs as it is a highly technical field. We offer report compilation, consultancy services and training that will help you adhere to compliance and regulatory mandates.
At Treasure Advisory Sdn Bhd, we utilise comparable data sourced through SPEEDA, our trusted database provider, to conduct robust and high-quality benchmarking analyses for our clients.
Don’t wait for an audit notice to start preparing. Strengthen your transfer pricing framework today with Treasure Advisory. Explore our full range of services at treasureadvisory.com and safeguard your business. Contact us for your Transfer Pricing requirements.
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.