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TP FAQs 5: Guide on How to Prepare a Limited Transfer Pricing Document

Updated: Sep 27, 2022

Who should prepare Transfer Pricing Documentation?

The Transfer Price Guidelines 2012 provide additional clarification that the requirements for the preparation of contemporaneous transfer pricing documentation that the TP Rules mandate would be limited to the following:

  • for a person carrying on a business, where the gross income exceeds RM25 million, and the total amount of related party transactions exceeds RM15 million; or

  • in relation to financial assistance, where such financial assistance exceeds RM50 million (the Guidelines do not apply to transactions involving financial institutions).

Any person who falls outside the scope above
  1. may opt to fully apply all relevant guidance as well as fulfil all Transfer Pricing Documentation requirements in the Guidelines; or

  2. alternatively may opt to comply with TP Documentation requirements under paragraphs 25.4(a), (d) and (e) only:-

  3. organisational structure;

  4. Controlled transactions; and

  5. Pricing policies.

In this regard, the person can apply any method other than the five described in the Guidelines, provided it results in or best approximates arm's length outcomes.

Guide on How to prepare a Simple Limited Transfer Pricing Document

Today we'll look at how to prepare a simplified or limited transfer pricing document.

You are the accountant of Ever Bright Sdn. Bhd. and the Group CFO has asked you to prepare a transfer pricing document for the company.

You understand that this group comprises three companies, i.e. Ever Bright Sdn. Bhd., Everlasting Pte Ltd and Whatever Corporation Ltd.

Step 1:

You first need to determine whether the relationship between the three companies is an associated company under s 140A of the Income Tax Act 1967 or not.

You find that Whatever Corporation Ltd has the power to appoint one or more directors or BODs in Everlasting Pte Ltd and Ever Bright Sdn. Bhd.

Whatever Corporation Ltd also directs Everlasting Pte Ltd to buy finished goods from Ever Bright Sdn. Bhd.

Therefore you conclude that they are associated persons.

Step 2:

You are going to need to recognise several terms right now:

Transfer price is the price at which related parties transact with each other,

Transactions between related parties (more specifically known as associated persons) are referred to as “controlledtransactions", as distinct from “uncontrolled” transactions between independent companies.

According to the arm's length principle, a transfer price is acceptable if all transactions between associated parties are conducted at the arm's length price. Arm's length price is the price which would have been determined if such transactions were made between independent entities under the same or similar circumstances.

Step 3:

Next, you need to determine whether you need to prepare a detailed transfer pricing document as required by Rule 4(2) of the Income Tax (Transfer Pricing) Rules 2012 or whether you can choose to prepare a simplified version of the transfer pricing document as provided by the Transfer Pricing Guidelines 2012.

As a result of your inquiry, you discover the sale of Ever Bright Sdn. Bhd. is RM9,578,571, and the transaction with a related party is RM9,177,141; consequently, following the transfer pricing guidelines, you have the option of preparing a simplified version of the transfer pricing document.

Step 4: Get Ready

What you need to prepare are:-

  • Organisational Structure;

  • Controlled Transactions; and

  • Pricing Policies.

1. Organisational Structure

It would help if you described Ever Bright Sdn. Bhd.'s worldwide organisational and ownership structure (including a global organisation chart and any substantial changes to the relationship, if any), covering all associated persons whose transactions directly or indirectly affect the pricing of the documented transactions.

It would help if you also described Ever Bright Sdn. Bhd.'s Company organisation chart.

Even though a product description does not need to be included in the simplified transfer pricing documentation for it to be legitimate, a description of the product can make it much simpler for an Inland Revenue officer to comprehend what the company is selling.

2. Controlled Transactions

  • Description of details of the property or services to which the international/domestic transaction relates; any intangible rights or property attached to it, the participants, the scope, timing, frequency, type and value of the controlled transactions (including all relevant related party dealings in relevant geographic markets);

  • Names and addresses of all associated persons, with details of the relationship with each such associated person;

  • The nature, terms (including prices) and conditions of international transactions (where applicable) entered into with each associated person and the quantum and value of each transaction;

  • An overview description of the business, as well as a functional analysis of all associated persons with whom the taxpayer has transacted;

  • All commercial agreements setting forth the terms and conditions of transactions with associated persons as well as with third parties;

  • A record of any forecasts, budgets or other financial estimates prepared by the person for the business and each division or product separately.