CHAPTER 7

Transfer Pricing and Advance Pricing Arrangement

7.0 Topic Outcomes

At the end of the topic, students will be able to

 Explain the objectives of the Transfer Pricing Guidelines

 Explain the tax authorities practice and the methods acceptable by the Inland
Revenue Board.
 Explain the meaning of Arm’s length principle and contemporaneous
documentation.
 Explain the importance of the Advance Pricing Arrangement.

7.1 Sources of information

7.1.1 Transfer Pricing Guidelines 2012

7.1.2 Advance Pricing Arrangement 2012

7.2 Definition of Transfer Pricing (TP)

Pricing of goods, services,

Associated Company A Associated Company B
tangibles

Cross border transactions or local transactions

7.3 Objectives of TP Guidelines

7.4 Application of TP Guidelines

7.5 Acceptable Methods

 Comparable Uncontrolled Price Method (CUP)

 Resale Price Method
 Cost Plus Method Method
 Transactional Net Margin Method (TNMM)
 Profit Split Method

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 Arm’s length pricing methodologies

Traditional methods Other methods

Based on comparable transactions Based on profit derived

Comparable Resale price Cost plus Profit split Transactional

uncontrolled method method method net margin
price method method

Comparable Adjust on Adjust sale Combined Uses margin

products purchase price profit divided approach
price between with
Direct price between related contributions
comparison related companies of each
companies.Ap enterprise
propriate if Sale of semi
finished
final
transaction is goods
with Joint venture
independent projects
distributor
(3rd party)

7.6 Advance Pricing Arrangements (APA)

An APA is basically an arrangement made to determine, in advance of controlled

transactions, an appropriate set of criteria (such as method, comparables and
appropriate adjustment thereto, critical assumptions as to future events) to ascertain the
arm’s length transfer pricing of those transactions over a fixed period of time. Generally,
an APA will cover a minimum period of three (3) to five (5) years maximum.

An APA would enables multinational corporations to avoid tax disputes and costly
litigation. Essentially, an APA allows associated companies in two or more countries to
agree in advance the price of a future transaction with the tax authorities in those
countries. In Malaysia, the future years (ie, covered period) can be between three and
five years.

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 A taxpayer planning to make an APA submission should be prepared to submit a
comprehensive set of documents to the IRB. These would include:

 Transfer pricing documentation with respect to the covered transactions;

 Group & shareholding structure;
 Inter-company agreements; and
 Other relevant supporting documents.

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