Transfer Pricing and Foreign Currency Controls in Malaysia

Managing cross-border transactions in Malaysia requires mastering two critical yet interconnected regulatory frameworks: transfer pricing (TP) compliance and foreign exchange (FX) controls. 

Contributing Advisor

Marco Förster

Director, Operations

Malaysia’s fiscal and regulatory landscape reflects a decisive shift toward digitalisation, transparency, and global alignment. Through the concerted efforts of LHDN, BNM, and the MOF, the country is reinforcing its transfer pricing regime, strengthening audit enforcement, and embracing technology-driven compliance via e-invoicing. At the same time, continued liberalisation of foreign exchange policies supports Malaysia’s ambition to remain a competitive and investment-friendly jurisdiction in a rapidly evolving international tax environment.

What is transfer pricing?

Transfer pricing refers to the pricing of goods, services, intangible assets, and financial arrangements in transactions between related parties (also called "associated enterprises" or "controlled transactions") within a multinational group.

Example: A Malaysian subsidiary (ABC Sdn. Bhd.) purchases raw materials from its Singapore parent company at RM100 per unit. The price charged for this intercompany transaction is the "transfer price."

If the transfer price deviates significantly from what independent parties would charge in comparable circumstances (the "arm's length price"), it may result in:

• Profit shifting: Artificially reducing taxable income in Malaysia
• Tax avoidance: Eroding Malaysia's tax base
• Double taxation risk: Different jurisdictions adjusting the same transaction differently

Why it matters for cross-border and related-party transactions

Transfer pricing regulations ensure that profits are taxed where economic value is created, not where it can be artificially shifted for tax optimization. For Malaysian companies engaged in cross-border transactions:

• LHDN can adjust taxable income if TP is not at arm's length, resulting in additional tax, penalties, and surcharges.
• Without proper TP documentation and compliance, companies face the risk of being taxed in multiple jurisdictions on the same income.
• TP non-compliance signals weak governance and may trigger broader audits, impacting stakeholder confidence.
• Properly structured TP policies streamline intercompany transactions, reduce disputes, and improve cash flow predictability.

Transfer pricing regulatory framework

• Transfer pricing (TP) in Malaysia is governed by Section 140A of the Income Tax Act 1967, empowering the DGIR to adjust non–arm’s length transactions, disregard tax avoidance arrangements, and impose penalties.
• The Income Tax (Transfer Pricing) Rules 2023 require full or minimum contemporaneous TP documentation to be prepared by the tax return filing deadline and submitted within 14 days upon request, with penalties of RM 20,000 to RM 100,000 for non-compliance.
• The Inland Revenue Board of Malaysia (LHDN/IRBM) administers and enforces TP rules, issues guidelines, conducts audits, and manages Advance Pricing Arrangements (APAs).
• The Ministry of Finance sets overall tax policy and coordinates oversight with Bank Negara Malaysia on cross-border financial and foreign exchange compliance.
• The Malaysian Transfer Pricing Guidelines 2024 (effective YA 2023) replace the 2017 guidelines and refine rules on comparability, business restructuring, and intra-group services, including a narrower arm’s length range (37.5th–62.5th percentile) and preference for local comparables.
• Simplified treatment for low value-adding intra-group services (LVAS) allows a 5 percent markup, subject to enhanced documentation on service nature, cost allocation, provider capabilities, and demonstrable benefits to the recipient.

E-invoicing rollout and integration

Malaysia’s phased e-invoicing rollout, commencing August 2024, represents a pivotal shift in the digitalisation of tax compliance and TP oversight.

• Phase 1 (August 1, 2024): Companies with revenue > RM 100 million.
• Phase 2 (January 1, 2025): Companies with revenue > RM 25 million.
• Phase 3 (July 1, 2025): All remaining companies.

The integration of e-invoicing enhances real-time transaction visibility for LHDN, enabling automated monitoring of intercompany and cross-border transactions. E-invoicing data directly feeds into LHDN’s risk assessment algorithms, supporting targeted audits and improved compliance efficiency. 

Parallel to the LHDN’s TP and digitalisation reforms, BNM has continued liberalising Malaysia’s Foreign Exchange Policy (FEP) to facilitate cross-border business flexibility.

The Qualified Resident Investor (QRI) Program (July 2025–June 2028) introduces greater flexibility for Malaysian investors to reconvert repatriated funds into foreign currency for reinvestment abroad.

Additionally, from November 2024, Multilateral Development Banks (MDBs) and Development Financial Institutions (DFIs) are permitted to issue ringgit-denominated debt instruments and provide ringgit financing, reflecting Malaysia’s ongoing efforts to deepen and liberalize its financial markets.

OECD guidelines and Malaysia's alignment

Malaysia's TP framework is fully aligned with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (most recent version 2022), particularly:

• Arm's Length Principle (Article 9 of OECD Model Tax Convention).
• Five OECD-recommended TP methods.
• BEPS Actions 8-10 (intangibles, risks, capital).
• BEPS Action 13 (Country-by-Country Reporting - CbCR).

Malaysia is not an OECD member, but voluntarily adopts OECD standards to:

• Enhance international tax cooperation.
• Attract foreign direct investment through transparent, predictable tax regimes.
• Participate in global initiatives like the Inclusive Framework on BEPS.

The Arm's Length principle explained

The arm's length principal mandates that the price charged in a controlled transaction should be comparable to the price that would be charged between independent parties under similar circumstances.

Who must comply?

All persons (companies, partnerships, individuals carrying on business) entering into controlled transactions must comply with the arm's length principle under Section 140A. The following are exempt from preparing contemporaneous TP documentation:

• Individuals not carrying on business.
• Individuals/partnerships with only domestic controlled transactions.
• Persons with controlled transactions totaling ≤ RM1 million annually.
• Persons with solely domestic controlled transactions where both parties:
• Do not enjoy tax incentives.
• Are taxed at the same headline rate.
• Have not suffered losses for two consecutive years prior.

Exempted persons must still comply with the arm's length principle and retain supporting documentation. In a TP audit, they bear the burden of proving arm's length pricing. Taxpayers must prepare full CTPD if they meet either of the following:

Taxpayers falling below full CTPD thresholds may prepare minimum CTPD, which requires documentation only on:

• Worldwide group structure.
• Organizational structure.
• Key controlled transactions (related to principal activity or constituting ≥20 % of operating revenue).
• Pricing policy for key transactions.

Controlled transactions subject to TP regulations

Transfer Pricing Documentation requirements (TPD)

Revised thresholds for full-scope and minimum-scope TPD

Full CTPD Thresholds 

Contents of Full CTPD:

• Group structure and ownership.
• Business activities and competitive environment.
• All controlled transactions (domestic and cross-border).
• Functional analysis (FAR).
• TP methods selected and rationale.
• Comparability analysis and benchmarking.
• Financial information and reconciliations.

Taxpayers not meeting full CTPD thresholds but entering into controlled transactions > RM 1 million may prepare minimum CTPD, which containing:

• Worldwide group structure.
• Organizational structure.
• Key controlled transactions only (defined as transactions related to principal activity or ≥20 % of operating revenue).
• Pricing policy for key transactions.

IRB may subsequently request full comparability analysis even for minimum CTPD taxpayers during audits.

Exemption criteria for SMEs and dormant entities

Controlled transactions ≤ RM1 million annually are exempt from CTPD preparation (but must still comply with arm's length principle), while entities with no business operations and no controlled transactions (except statutory compliance activities) are exempt from TP compliance. Entities with solely domestic controlled transactions are also exempt if:

• Neither party enjoys tax incentives.
• Both taxed at same headline rate.
• Neither has incurred losses for two consecutive years prior.

Penalties for late or missing TPD submission

Dispute resolution: APA, MAP, and appeal process

Advance Pricing Arrangement (APA)

Pre-approved agreement between taxpayer and LHDN (and potentially foreign tax authority) on TP methodology for specified transactions over a specified period.

Types:

• Unilateral APA: Agreement with LHDN only.
• Bilateral APA (BAPA): Agreement between LHDN and foreign Competent Authority.
• Multilateral APA (MAPA): Agreement involving multiple jurisdictions.

Benefits:

• Certainty: Pre-agreed TP methodology eliminates audit risk.
• Time savings: Avoids lengthy audits and disputes.
• Double taxation relief: BAPA/MAPA ensures consistent treatment across jurisdictions.

Minimum thresholds:

• Unilateral APA: Controlled transactions ≥ RM50 million annually.
• BAPA/MAPA: Controlled transactions ≥ RM100 million annually.

Process:

• Pre-filing meeting with LHDN;
• Formal APA application submission;
• Negotiation and evaluation (12-36 months);
• APA agreement execution; and,
• Annual compliance reporting.

Covered Period: Typically 3-5 years prospectively; may include rollback to prior years.

Fees: LHDN may charge application fees and expenses.

Mutual Agreement Procedure (MAP)

This method is usually used to resolve TP disputes resulting in double taxation.

Process:

• Taxpayer applies to LHDN within 3 years of receiving assessment;
• LHDN engages with foreign Competent Authority under Double Taxation Agreement (DTA);
• Negotiation to reach mutual agreement; and,
• Timeline: Typically 24-36 months.

Appeal process

Domestic Appeal Route:

• Objection to Director General (within 30 days of assessment)
• Appeal to Special Commissioners of Income Tax (if objection rejected)
• Appeal to High Court (on questions of law)
• Appeal to Court of Appeal and Federal Court (final appeal)

Why Malaysia maintains selective capital and FX controls

Malaysia imposed capital controls during the 1997-98 Asian Financial Crisis to stabilize the ringgit and prevent capital flight. While controls were largely lifted post-crisis, selective measures remain to:

• Prevent speculation by limiting offshore ringgit trading to reduce volatility.
• Monitor capital flows to track foreign portfolio investments and external borrowing.
• Support export competitiveness and encourage repatriation and conversion of export proceeds.
• Preserve monetary policy independence by managing interest rates without full capital account convertibility constraints.

Malaysia ranks among the more liberal FX regimes in Asia, with most restrictions targeting non-residents' ringgit activities rather than restricting residents' legitimate FX needs.

Businesses affected

BNM Foreign Exchange Policy (FEP)

Since April 2021, Malaysia has progressively liberalized its foreign exchange framework by removing the 75 percent export conversion requirement, allowing exporters to retain foreign currency proceeds in Trade Foreign Currency Accounts and manage FX exposure more flexibly.

Further measures permit settlement of domestic trade in foreign currency within global supply chains and extend the export proceeds repatriation period from 6 to 24 months in exceptional cases without prior Bank Negara Malaysia approval, subject only to bank notification. The forthcoming Qualified Resident Investor Programme (2025–2028) will further ease cross-border investment flows by allowing Malaysian corporates to repatriate and reconvert foreign investment income without additional approvals.

Permitted foreign currency accounts and settlement rules

Investment abroad and borrowing in foreign currency

Residents investing abroad:

Residents borrowing in foreign currency:

• From licensed onshore banks: Permitted for any purpose
• From non-residents: Permitted with no limit if proceeds used for investment abroad
• For domestic use: Borrowing from non-residents subject to limits (individuals: RM100 million; companies: RM500 million equivalent per calendar year)

How transfer pricing and FX controls intersect

Transfer Pricing Perspective:

Intercompany loans must meet the arm's length principle:

• Interest rate should reflect credit risk, loan tenure, currency, collateral.
• Use comparable uncontrolled transactions (bank lending rates, corporate bonds).
• Implicit support from parent group may justify lower rates if appropriately analyzed.

FX Control Perspective:

Resident borrowing from non-resident (in FX):

• No limit if proceeds used for investment abroad
• Subject to limits (individuals: RM100 million; companies: RM500 million per year) if for domestic use
• Interest payments to non-residents permitted, subject to withholding tax (15 %, reduced under DTAs)

Example:

• Malaysian subsidiary borrows US$10 million from Singapore parent at 5 percent interest
• TP issue: Is 5 percent arm's length? (Compare with bank rates for similar credit profile: 4-6 % typical)
• FX issue: Borrowing for domestic expansion exceeds RM500 million? (US$10M ≈ RM42M, within limit)
• WHT issue: 15 percent WHT on interest (or 10 % under Malaysia-Singapore DTA)

Risk: LHDN adjusts interest rate to 3 percent (arm's length), denies excess interest deduction; meanwhile, BNM penalties if FX borrowing limits exceeded or not properly reported.

TP Compliance Impact on Foreign Remittance Approval

Scenario: Malaysian subsidiary seeks to remit management fees to foreign parent

TP Requirement:

• Fees must be arm's length (benchmarked against independent service charges)
• CTPD must document services rendered, FAR analysis, pricing methodology

FX Requirement:

• Payment for genuine services permitted
• Licensed onshore bank verifies documentation:
• Service agreement
• Invoice
• Proof of service delivery
• TP documentation (increasingly requested)

Intersection:

• Lack of TP documentation may cause bank to delay or reject FX remittance
• LHDN audit adjustment disallowing excess fees triggers retrospective FX issues (overpaid, potentially recoverable)

Avoiding double penalties — LHDN vs. BNM oversight

Overlapping jurisdiction risks:

FX violation penalties under BNM FEP