International tax

Global minimum tax (GMT)

Under an OECD Inclusive Framework, more than 140 jurisdictions agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar Two introduces a global minimum Effective Tax Rate (ETR) via a system where multinational groups with consolidated revenue over EUR 750 million are subject to a minimum ETR of 15% on income arising in low-tax jurisdictions.

The GMT will be effective for MNEs with financial years beginning on or after 1 January 2025. The provisions of the GloBE rules including the Qualified Domestic Top-up Tax (QDTT) rules have been incorporated into the Malaysian tax legislations, i.e. the Income Tax Act 1967 (ITA 1967), Petroleum (Income Tax) Act 1967 and Labuan Business Activity Tax Act 1990 (LBATA 1990). The provisions closely align with the OECD Model Rules which includes: 

• The Multinational Top-up Tax under the Income Inclusion Rule and QDTT on in-scope MNEs commencing on or after 1 January 2025 

• A substance-based income exclusion amount for all top-up taxes 

• A minimum tax rate at 15%

To mitigate the impact of GMT, it is proposed that existing tax incentives be streamlined, new non-tax incentives introduced, and the feasibility of strategic investment tax credits considered.

Country-by-Country Reporting (CbCR) 

The Income Tax (Country-by-Country Reporting) Rules 2016 and Labuan Business Activity Tax (Country-by-Country Reporting) Regulations (collectively “CbC Rules”) require Malaysian multinational corporation (MNC) groups with total consolidated group revenues of RM3 billion and above in the financial year preceding the reporting financial year to prepare and submit CbC Reports to IRB no later than 12 months after the close of each financial year. 

Malaysian entities of foreign MNC groups will generally not be required to prepare and file CbC Reports as the obligation to file will be with the ultimate holding company in the jurisdiction it is tax resident in. However, the Malaysian entities of the foreign MNC group will have an obligation to inform / notify the IRB if it is the holding company or has been appointed as the surrogate holding company. If it is neither the holding company nor surrogate holding company, the Malaysian entities must notify the IRB of the identity and tax residence of the entity responsible for preparing the CbC Report.  

Failure to comply with the CbC Rules may result in a fine of RM20,000 to RM100,000 or imprisonment of up to six months or both. In the case of Labuan entities, non-compliance with the CbC Rules may result in a fine of up to RM1 million or imprisonment of up to two years or both.  

Earnings stripping rules (ESR)

The ESR applies on interest expense (of more than RM500,000 in a basis period) in connection with or on any financial assistance granted in controlled transactions (as defined), whether directly or indirectly, to a person. The ESR guideline narrows the application of the prescribed rules to cross-border controlled transactions.

The prescribed rules specify that the maximum amount of interest deduction allowed is 20% of the Tax-EBITDA (an amount ascertained from a prescribed formula) from each of the sources of income consisting of a business. The interest expenses in excess of the maximum deduction allowed may be carried forward indefinitely to be deducted against future income. In the case of a company, the carry forward of the above-mentioned interest expenses would not be allowed if there is a substantial change in the company's shareholders.

Transfer pricing

1. Legislation

Malaysia’s transfer pricing (TP) legislation adopts the arm’s length principle espoused in the OECD Transfer Pricing Guidelines. 

Under the (ITA 1967), the DGIR is empowered to make adjustments on controlled transactions of goods, services or financial assistance based on the arm’s length principle or to disregard a structure which is commercially irrational.

The definition of ‘control’ is common shareholding of 20% of shareholding or more, and

• the operations of the affiliate depend on the proprietary rights of the shareholder of 20%, or its affiliate, or
• the shareholder / affiliate is able to influence decisions relating to the business activities of the company, including the receipt of services, and the pricing of the acquisition of such services, or
• one or more of the directors or members of the board of directors of a person are appointed by the shareholder / affiliate

The following rules and guidelines have been issued by the Inland Revenue Board (IRB):

• Income Tax (Transfer Pricing) Rules 2023 (“TP Rules”),
• Malaysian Transfer Pricing Guidelines 2024 (“TP Guidelines”)*, 
• Income Tax (Advance Pricing Arrangement) Rules 2023, and
• Advance Pricing Arrangement Guidelines 2024 (“APA Guidelines”).

The arm’s length requirement is also included in the LBATA 1990. The same definition of control under the ITA 1967 (including the expanded definition which captures entities with common shareholding of 20% or more where certain additional conditions are met) is applied in LBATA 1990.

^{* Effective from YA2023 onwards}

2. Documentation requirements

Taxpayers with intercompany transactions are required to prepare TP documentation on a contemporaneous basis. 

Documentation should be in place prior to the due date of filing the tax return and dated upon its completion. TP documentation needs to be submitted within 14 days of the tax authorities’ request.

The TP Rules set out prescriptive documentation requirements, supplemented by additional guidance under the Malaysian Guidelines. An index which references the items in the TP Rules is required.

Malaysian TP documentation comprises the following:

• Multinational Enterprise (MNE) Group information - Broadly similar to the content of OECD master file but now forms part of the Malaysian TP documentation. Non-inclusion of this information in the TP documentation or submission at a later date will be considered as non-compliance. Provides an overview of the multinational group’s business, value drivers, intangibles, financing arrangements, and supply chain, specific to the supply chain in which the Malaysian taxpayer operates. This information is required only if the entity is part of an MNE Group i.e. the Group has constituent entities (including permanent establishments (PE)) that operate in two or more different tax jurisdictions.
• Local business information - Information on the local taxpayer’s business, including standard components of an OECD local file, and source documents / supporting documents referred to in preparing the TP analysis.
• Cost contribution arrangements (CCA) - Prescriptive disclosure requirements for taxpayers with intragroup CCAs.

3. Thresholds 

The TP Guidelines exempt the following categories of taxpayers from preparing contemporaneous transfer pricing documentation:

• Individuals not carrying on a business,
• Individuals carrying on a business (including partnerships) who only engage in domestic controlled transactions, 
• Person who entered into controlled transactions with a total amounting to not more than RM1 million, or
• Person who entered solely into domestic controlled transactions with another person where both parties:
  • Do not enjoy tax incentives,
  • Are taxed at the same headline tax rate, or
  • Do not suffer losses for two consecutive years prior to the controlled transactions.

Exempted taxpayers are still required to justify that transactions are at arm’s length upon receiving queries from the tax authorities.

• Where a taxpayer is not exempted, the TP Guidelines allows taxpayers to opt to prepare limited documentation if they fall below the following thresholds*:
• Gross income exceeding RM30 million, and total amount of cross-border related party transactions exceeding RM10 million.
• Financial assistance where the principal exceeds RM50 million.

^{* Not applicable to PE. PEs are required to prepare full documentation regardless of revenue or transaction value}

4. Determination of the arm’s length range

Data for the same basis period as the year of assessment (YA) of the Malaysian taxpayer should be used for assessment of the arm’s length range. Where data is not available, the next latest financial year should be used as comparison. 

Malaysia has a defined arm’s length range, ranging from the 37.5th percentile to the 62.5th percentile. 

The DGIR may make an adjustment to the midpoint of the arm’s length range if the results of the intercompany transaction fall outside the arm’s length range.

5. Penalties for non-compliance

Taxpayers are required to submit documentation within 14 days of the IRB’s request. The IRB treats failure to submit documentation within the timeframe as non-compliance with the contemporaneous requirement under the TP Rules. Refer to “Offences & penalties” in the Income Tax chapter.

A fine ranging from RM20,000 to RM100,000 per YA, or imprisonment not exceeding six months, or both, may apply to taxpayers who fail to furnish contemporaneous TP documentation. 

The IRB may apply a surcharge of up to 5% on TP adjustments, for assessments from YA 2021 onwards. Prior to YA 2021, standard penalties under section 113 will apply. The surcharge and penalties on additional tax payable under section 113 are mutually exclusive.

Advance pricing arrangement (APA)

Taxpayers with cross border transactions may apply for an APA under the ITA 1967, subject to the following requirements:

• the taxpayer is a company assessable and chargeable to tax under the ITA 1967 (also includes PEs),
• has a turnover value exceeding RM100 million for the business involving the proposed covered transaction(s), and 
• the value of the proposed covered transaction is
  • for sales, exceeds 50% of turnover,
  • for purchases, exceeds 50% of total purchases, or
  • for other transactions, the total value exceeds RM25 million*. 

^{* For financial assistance, if the principal value exceeds RM50 million.}

• For taxpayers who have just commenced business operations, the taxpayer should be in operation for not less than 36 months, and
• The business involving the proposed covered transaction(s) should be in operation for not less than 12 months

Where the counterparty of the transaction is from a country that has a double tax agreement with Malaysia, the taxpayer may only apply for a bilateral APA or multilateral APA. Unilateral APAs are applicable only for taxpayers that transact with a counterparty in a jurisdiction that does not have a double tax agreement with Malaysia. 

All covered transactions must relate to income that is chargeable and not income which is exempted. 

Rollbacks may be considered for a period not exceeding three years immediately preceding the covered period. 

For APAs where there is no change in functions performed, assets employed and risks assumed (FAR) by the Malaysian entity, the proposed benchmarking analysis for the APA should not result in a reduction in operating margin that is more than 3% of the average weighted margin: (i) for the last five years in the case of existing business, or (ii) at least three years for cases involving newly commenced operations.

For APAs involving a change in FAR by the Malaysian entity, a reduction of equal to or more than 5% in operating margin may not be acceptable if there is no transfer of intangible properties or major shift in FAR or transfer of significant people functions.  

Withholding tax

Withholding tax is a method of collecting taxes from non-residents who have derived income from Malaysia. A tax resident who is liable to make specified types of payments to a non-resident is required to deduct withholding tax at prescribed rates from the gross payment and remit it to the Malaysian Inland Revenue Board within one month of paying or crediting.

_{¹Status pending
²TECO - means the area represented by the Taipei Economic and Cultural Office in Malaysia
³Malaysia also has a limited double tax treaty covering air transport operations with Saudi Arabia}

_Notes:

• _{Argentina and the United States of America – Limited double tax treaty covering air and sea transport operations in international traffic.}

• _{There is no withholding tax on dividends paid by Malaysian companies.}