Malaysia’s oil and gas industry is a cornerstone of the nation’s economy, contributing approximately 20% to GDP and playing a vital role in global energy markets. Led by PETRONAS, the national oil company, the sector encompasses upstream activities like exploration and production, as well as downstream operations such as refining and petrochemicals. In 2023, Malaysia exported 27.3 million tonnes of liquefied natural gas (LNG), making it the world’s fifth-largest LNG exporter, with PETRONAS generating RM343.6 billion in revenue. However, the industry’s extensive cross-border operations and complex intra-group transactions make it a prime target for transfer pricing scrutiny under Malaysia’s evolving tax regulations.
The Malaysian Transfer Pricing Guidelines 2024 (MTPG 2024), released on 24 December 2024, and Section 140A of the Income Tax Act 1967 (ITA 1967), revised up to 1 November 2023, enforce strict rules to ensure related-party transactions align with the arm’s-length principle. For oil and gas companies—many of which operate as part of multinational enterprises (MNEs) or joint ventures—these regulations pose challenges in pricing crude oil transfers, managing shared infrastructure costs, and meeting documentation requirements. Non-compliance risks severe penalties, including fines ranging from RM20,000 to RM100,000 per year, potentially totaling RM600,000 over a 6-year audit period.
This article provides 2025 insights for Malaysia’s oil and gas sector to ensure transfer pricing compliance. We’ll explore the regulatory landscape, highlight industry-specific challenges, outline penalties, and offer practical strategies to navigate Malaysia’s tax environment. Whether you’re an upstream operator in Sarawak or a downstream petrochemical producer in Johor, these insights will help you achieve compliance and thrive in a competitive global market.
The Oil and Gas Industry in Malaysia: A Transfer Pricing Focal Point
Malaysia’s oil and gas industry is a global powerhouse, with PETRONAS at its helm as Southeast Asia’s only Fortune Global 500 company. The sector spans upstream exploration and production in offshore fields like Sabah and Sarawak, midstream activities such as LNG processing at the Bintulu LNG Complex, and downstream operations including refining at facilities like the Pengerang Integrated Complex (PIC). In 2023, Malaysia produced 1.65 million barrels of oil equivalent per day, with LNG exports valued at RM57.2 billion. The industry’s economic significance is underscored by its contribution to government revenue, with PETRONAS paying RM85 billion in dividends in 2023.
The oil and gas sector’s global integration introduces transfer pricing complexities:
- Cross-Border Transactions
Oil and gas companies frequently transfer crude oil, LNG, or refined products between related entities. For example, PETRONAS may sell crude oil from its Malaysian fields to a Singapore trading arm, or export LNG to a Japanese affiliate. These transactions must reflect arm’s-length pricing, but volatile global oil prices (e.g., Brent crude averaged $80 per barrel in 2024, down from $100 in 2022) complicate benchmarking. - Shared Infrastructure Costs
MNEs and joint ventures often share infrastructure, such as pipelines or storage facilities, requiring cost allocation that complies with the arm’s-length principle. Pricing these intra-group services under the MTPG 2024’s guidelines is a challenge. - Financing Transactions
Intra-group loans or guarantees to fund exploration projects or refinery expansions are common, often exceeding the MTPG 2024’s RM50 million threshold for financial assistance, triggering detailed documentation requirements. - Export-Driven Operations
With 90% of Malaysia’s LNG production exported, the industry faces intense scrutiny from the Inland Revenue Board of Malaysia (IRBM) to prevent profit-shifting, a key concern under the OECD’s Base Erosion and Profit Shifting (BEPS) framework.
These factors position the oil and gas industry as a focal point for transfer pricing enforcement, requiring businesses to adopt robust compliance strategies to succeed in 2025.
Regulatory Framework: MTPG 2024 and Section 140A
The MTPG 2024 and Section 140A of the ITA 1967 form the foundation of Malaysia’s transfer pricing regulations, with specific implications for the oil and gas sector:
- Arm’s-Length Principle (Section 140A(2))
All related-party transactions—such as crude oil sales or shared infrastructure costs—must be priced as if between independent parties, ensuring profits are not shifted to low-tax jurisdictions. - Documentation Thresholds (MTPG 2024)
Businesses with annual gross income exceeding RM30 million and cross-border controlled transactions over RM10 million must prepare full Contemporaneous Transfer Pricing Documentation (CTPD). Large oil and gas firms like PETRONAS, with billions in export revenue, easily exceed these thresholds, requiring detailed functional and economic analyses. - Surcharge on Adjustments (Section 140A(3C) and 140A(3D))
A surcharge of up to 5% applies to income increases or deduction reductions from transfer pricing adjustments, with a reduced rate (0% to 4%) for voluntary disclosures. - Retrospective Application
The MTPG 2024 applies to the Year of Assessment (YA) 2023 onward, requiring oil and gas companies to update past documentation to align with new standards. - E-Invoicing Requirements (Section 82(2B))
The 2023 ITA revision mandates digital record-keeping for related-party transactions, impacting how oil and gas firms maintain auditable records.
The MTPG 2024 also introduces a 5% mark-up safe harbor for low value-adding services (LVAS), simplified documentation for smaller businesses, and guidance on business restructuring, all of which are relevant for oil and gas companies navigating global operations and joint ventures.
Transfer Pricing Challenges for the Oil and Gas Sector in 2025
The oil and gas industry faces several transfer pricing challenges under Malaysia’s regulatory framework. Let’s examine the most critical issues:
1. Pricing Crude Oil and LNG Transfers Amid Volatility
Oil and gas companies frequently transfer crude oil or LNG between related entities. For example, PETRONAS may sell crude oil from its Kimanis field in Sabah to a Singapore affiliate for trading, or export LNG from Bintulu to a Japanese subsidiary. The arm’s-length principle requires these transactions to reflect market prices, often using the Comparable Uncontrolled Price (CUP) method. However, global oil price volatility—Brent crude dropped from $100 per barrel in 2022 to $80 in 2024 due to oversupply and weaker demand—makes benchmarking difficult. Companies must justify their pricing against fluctuating market rates, requiring robust documentation and access to reliable comparables.
2. Managing Shared Infrastructure and Intra-Group Services
Oil and gas operations often involve shared infrastructure, such as pipelines, storage tanks, or LNG terminals, used by multiple related entities or joint venture partners. For instance, the PETRONAS LNG Complex in Bintulu serves multiple affiliates, requiring cost allocation for shared usage. The MTPG 2024’s 5% safe harbor rule for LVAS simplifies pricing for routine services like administrative support, but high-value services—such as technical support for drilling operations—require full benchmarking studies. Determining whether a service qualifies as “low value-adding” can be ambiguous, increasingcompliance complexity.
3. Meeting Documentation Thresholds
The MTPG 2024 thresholds—RM30 million in gross income and RM10 million in cross-border transactions—are easily surpassed by large oil and gas companies. PETRONAS, with RM343.6 billion in revenue, and other firms exporting LNG worth RM57.2 billion annually, must prepare full CTPD, including functional analyses (detailing the Malaysian entity’s role in the global supply chain) and economic analyses (justifying crude oil pricing). Smaller operators below these thresholds must still comply with the arm’s-length principle and retain basic documentation to substantiate pricing during audits, creating a compliance burden across the sector.
4. Financing Assistance Transactions
Oil and gas projects, such as offshore exploration or refinery expansions, often require significant capital, funded through intra-group loans or guarantees. The MTPG 2024 requires full CTPD for controlled financial assistance exceeding RM50 million annually. For example, a loan to develop a new gas field in Sarawak could trigger this requirement, necessitating detailed documentation of interest rates and terms. A forthcoming IRBM document on financing assistance transactions (release date unspecified) will add further complexity, leaving companies uncertain for 2025.
5. Business Restructuring and Operational Shifts
The MTPG 2024 provides guidance on transfer pricing for business restructuring, focusing on shifts in functions, assets, and risks. Oil and gas companies restructuring their operations—such as shifting refining to a regional hub in Singapore—must document these changes to reflect the new economic reality. The 2023 ITA revision’s capital gains tax (CGT) provisions under Section 15C, effective from 1 January 2024, further complicate restructuring by increasing scrutiny on cross-border asset disposals, such as transferring drilling equipment to an affiliate.
6. Joint Ventures and Cost Sharing
Joint ventures (JVs) are common in the oil and gas sector, with companies like ExxonMobil and Shell partnering with PETRONAS in offshore projects. JVs often involve cost-sharing agreements for exploration, production, or infrastructure, requiring arm’s-length pricing. For example, sharing the cost of a pipeline between JV partners must be documented to ensure fair allocation, a complex task given the high value and technical nature of these assets.
Penalties for Non-Compliance: A High-Stakes Risk
Non-compliance with transfer pricing rules poses significant risks for oil and gas companies, with penalties outlined in the MTPG 2024 and ITA 1967:
- Fine for Late Submission of CTPD
RM20,000 to RM100,000 per year of assessment for failing to submit CTPD within 14 days upon request during an audit. Over a 6-year audit period (e.g., FY 2018–2023), this could total RM120,000 to RM600,000, depending on the IRBM’s discretion. Recent audits suggest a typical penalty of RM40,000 per year, totaling RM240,000 over 6 years, as observed by Crowe Malaysia PLT in 2025. - Surcharge on Adjustments
Up to 5% on transfer pricing adjustments, adding to the financial burden. For example, a RM10 million adjustment could incur a RM500,000 surcharge. - Imprisonment
Up to 6 months under Section 113B for non-submission of CTPD, a severe consequence for egregious violations.
For a large firm like PETRONAS, a RM240,000 penalty might be manageable, but for smaller operators or JV partners, it could be crippling. The 14-day submission window exacerbates the risk, as gathering historical records (e.g., crude oil pricing data from 2018) within this timeframe is challenging, especially amidst global price volatility.
Strategies for Ensuring Transfer Pricing Compliance in 2025
To ensure transfer pricing compliance, oil and gas companies in Malaysia can adopt the following strategies:
Benchmark Crude Oil and LNG Prices Regularly
Use the CUP method to benchmark crude oil and LNG prices against market data from sources like Platts or Argus Media. Document monthly price fluctuations (e.g., Brent crude’s drop from $100 to $80 per barrel from 2022–2024) to justify intra-group pricing during audits. For example, a Malaysian entity selling crude oil to a Singapore affiliate should compare its transfer prices to third-party crude oil prices monthly.
Leverage the 5% Safe Harbor for LVAS
For routine intra-group services like administrative support or logistics, apply the 5% mark-up safe harbor rule to simplify compliance. Ensure services qualify as low value-adding to avoid benchmarking requirements. High-value services, such as technical support for drilling, should be supported with detailed benchmarking studies.
Prepare Contemporaneous Documentation
Maintain CTPD in real-time, including functional analyses (e.g., detailing the Malaysian entity’s role in LNG production) and economic analyses (e.g., justifying crude oil pricing). Smaller operators below thresholds can use the IRBM’s Minimum Transfer Pricing Documentation Template to reduce compliance costs.
Adopt Digital Record-Keeping
Comply with the 2023 ITA revision’s e-invoicing requirements by maintaining digital records of all related-party transactions. This ensures quick access during audits, helping meet the 14-day submission window. For example, a digital database of LNG sales invoices can streamline audit responses.
Document Joint Venture Cost Sharing
For JVs, document cost-sharing agreements for shared infrastructure (e.g., pipelines, terminals) to ensure fair allocation. Use market data to justify pricing, and maintain detailed records of each partner’s contributions and usage.
Monitor Restructuring Impacts
If restructuring operations, document shifts in functions, assets, and risks to align with MTPG 2024 guidance. Account for CGT implications under Section 15C for cross-border asset transfers, such as relocating drilling rigs to a regional hub.
Seek Expert Advice for Financing Transactions
Until the IRBM releases its financing assistance document, consult transfer pricing experts to price intra-group loans or guarantees, especially if exceeding RM50 million annually. For example, a loan to fund a new gas field should have an arm’s-length interest rate, supported by market comparables.
Critical Considerations for 2025 and Beyond
The oil and gas industry faces a complex transfer pricing landscape in 2025. The MTPG 2024’s retrospective application to YA 2023 requires companies to update past documentation, a task complicated by global oil price volatility. The lowered cross-border transaction threshold (RM10 million) captures more oil and gas firms, while the 14-day submission window during audits increases pressure to maintain contemporaneous records. The RM20,000 to RM100,000 per-year penalty range (potentially RM600,000 over 6 years) is a significant risk, though recent audits suggest a typical penalty of RM40,000 per year (RM240,000 over 6 years).
On the positive side, the 5% safe harbor for LVAS offers relief for routine services, and the IRBM’s Minimum Transfer Pricing Documentation Template helps smaller operators comply affordably. However, the lack of clarity on financing assistance transactions leaves companies uncertain, and the e-invoicing mandate requires investment in digital infrastructure—a challenge for smaller operators.
From a critical perspective, the IRBM’s one-size-fits-all approach may disproportionately burden smaller oil and gas firms, which lack the resources of giants like PETRONAS to manage compliance. The 14-day submission window seems overly punitive, especially given global oil price volatility, which complicates historical benchmarking. However, these regulations align with global BEPS standards, ensuring Malaysia remains competitive while protecting its tax base. The IRBM could consider more flexible timelines or scaled penalties for smaller firms to balance enforcement with fairness.
Conclusion: Achieving Transfer Pricing Compliance in Oil and Gas
Transfer pricing compliance in Malaysia’s oil and gas sector requires careful navigation of the MTPG 2024 and Section 140A of the ITA 1967. Challenges like pricing volatile crude oil transfers, managing shared infrastructure costs, and meeting documentation thresholds are significant, but they can be addressed through proactive strategies. By benchmarking prices, leveraging safe harbor rules, preparing contemporaneous documentation, and adopting digital record-keeping, oil and gas companies can ensure compliance and avoid penalties in 2025.
