Malaysia’s manufacturing industry stands as a pillar of the nation’s economy, contributing 23.8% to GDP and accounting for 82.6% of total exports, valued at RM1.31 trillion in 2023. The electronics and electrical (E&E) sector, in particular, drives this success, with global giants like Intel, Infineon, and Western Digital operating manufacturing hubs in Penang and Johor. However, the industry’s reliance on cross-border supply chains and intra-group transactions makes 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 manufacturing companies—many of which are subsidiaries of multinational enterprises (MNEs)—these regulations pose challenges in pricing imported components, managing shared services, 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 manufacturing industry to ensure transfer pricing success. We’ll explore the regulatory landscape, highlight industry-specific challenges, outline penalties, and offer practical strategies for compliance. Whether you’re an E&E manufacturer in Penang or an automotive assembler in Shah Alam, these insights will help you navigate Malaysia’s transfer pricing rules and thrive in a competitive global market.
The Manufacturing Industry in Malaysia: A Transfer Pricing Focal Point
Malaysia’s manufacturing sector is a cornerstone of its export-driven economy, with the E&E industry leading the charge. In 2023, the sector contributed RM1.31 trillion in exports, driven by the production of semiconductors, circuit boards, and consumer electronics. Penang, often dubbed the “Silicon Valley of the East,” hosts over 300 MNEs, including Intel and Broadcom, which leverage Malaysia’s skilled workforce and strategic location for global supply chains. The automotive manufacturing sector, with companies like Proton and Perodua, also plays a significant role, contributing RM40 billion annually through vehicle assembly and parts production.
The manufacturing industry’s global integration introduces transfer pricing complexities:
- Cross-Border Supply Chains
E&E manufacturers import components (e.g., semiconductors, chips) from related entities in Taiwan, Japan, or the US, and export finished products to affiliates in Europe or China. These transactions must reflect arm’s-length pricing, but fluctuating raw material costs (e.g., silicon prices rose 15% in 2024 due to global shortages) complicate benchmarking. - Intra-Group Services
MNEs often provide shared services—such as R&D, IT support, or logistics—to their Malaysian subsidiaries. Pricing these services under the MTPG 2024’s guidelines, including the 5% mark-up safe harbor for low value-adding services (LVAS), requires careful documentation. - Royalty and Licensing Fees
Automotive manufacturers pay royalties for intellectual property (e.g., brand usage, technology licenses) to parent companies, necessitating justification during audits. - Export-Driven Operations
With 82.6% of manufactured goods 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 manufacturing 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 manufacturing industry:
- Arm’s-Length Principle (Section 140A(2))
All related-party transactions—such as importing components or paying for shared services—must be priced as if between independent parties. This ensures profits are not artificially 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). Many E&E manufacturers, with export values in the billions, 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, meaning manufacturers must 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 manufacturers maintain auditable records.
The MTPG 2024 also introduces a 5% mark-up safe harbor for LVAS, simplified documentation for smaller businesses, and guidance on business restructuring, all of which are relevant for manufacturers navigating global supply chains and operational shifts.
Transfer Pricing Challenges for the Manufacturing Industry in 2025
The manufacturing industry faces several transfer pricing challenges under Malaysia’s regulatory framework. Let’s examine the most critical issues:
1. Pricing Intra-Group Component Transfers
E&E manufacturers frequently import components from related entities, such as semiconductor chips from a Taiwanese parent company, and export finished products to affiliates in the US. The arm’s-length principle requires these transactions to reflect market prices, often using the Comparable Uncontrolled Price (CUP) or cost-plus method. However, global supply chain disruptions—such as the 2024 chip shortage, which increased silicon prices by 15%—make benchmarking difficult. Manufacturers must justify their pricing against volatile market rates, a task that requires robust documentation and access to reliable comparables.
2. Managing Intra-Group Services
MNEs in the manufacturing sector often provide shared services to their Malaysian subsidiaries, such as R&D for new semiconductor designs or IT support for production systems. The MTPG 2024’s 5% safe harbor rule for LVAS simplifies pricing for routine services, but high-value services—like R&D involving unique intangibles—require full benchmarking studies. For example, an E&E firm developing proprietary chip technology may need to conduct a detailed analysis to justify R&D fees, increasing compliance costs and 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 E&E manufacturers. For instance, a Penang-based semiconductor plant exporting RM500 million annually to its US parent company must prepare full CTPD, including functional analyses (detailing the Malaysian subsidiary’s role in the supply chain) and economic analyses (justifying component pricing). Smaller manufacturers 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. Royalty and Licensing Fees in Automotive Manufacturing
Automotive manufacturers like Toyota or Proton, which assemble vehicles in Malaysia, often pay royalties to parent companies for brand usage or technology licenses. These payments must be arm’s-length, requiring benchmarking against comparable third-party agreements. The IRBM closely scrutinizes royalty payments to ensure they don’t serve as a mechanism for profit-shifting, adding pressure on manufacturers to maintain detailed documentation.
5. Business Restructuring and Supply Chain Shifts
The MTPG 2024 provides guidance on transfer pricing for business restructuring, focusing on shifts in functions, assets, and risks. Manufacturers restructuring their supply chains—such as relocating assembly operations to Vietnam to reduce costs—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 machinery to an affiliate.
6. Financing Assistance Transactions
Manufacturers often rely on intra-group loans or guarantees to fund operations, such as expanding production capacity to meet global demand. The MTPG 2024 requires full CTPD for controlled financial assistance exceeding RM50 million annually. A forthcoming IRBM document on financing assistance transactions (release date unspecified) will add further complexity, leaving manufacturers uncertain for 2025.
Penalties for Non-Compliance: A High-Stakes Risk
Non-compliance with transfer pricing rules poses significant risks for manufacturers, 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 RM1 million adjustment could incur a RM50,000 surcharge. - Imprisonment
Up to 6 months under Section 113B for non-submission of CTPD, a severe consequence for egregious violations.
For a large E&E manufacturer exporting RM500 million annually, a RM240,000 penalty might be manageable, but for smaller manufacturers, it could be crippling. The 14-day submission window exacerbates the risk, as gathering historical records (e.g., component pricing data from 2018) within this timeframe is challenging, especially amidst supply chain disruptions.
Strategies for Transfer Pricing Success in 2025
To ensure transfer pricing success, manufacturers in Malaysia can adopt the following strategies:
Benchmark Component Prices Regularly
Use the CUP method to benchmark component prices against market data from sources like industry reports or commodity exchanges. Document price fluctuations (e.g., the 15% rise in silicon prices in 2024) to justify intra-group pricing during audits. For example, an E&E firm importing chips from a Taiwanese affiliate should compare its transfer prices to third-party chip prices monthly.
Leverage the 5% Safe Harbor for LVAS
For routine intra-group services like IT 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 R&D for proprietary technology, should be supported with detailed benchmarking studies.
Prepare Contemporaneous Documentation
Maintain CTPD in real-time, including functional analyses (e.g., detailing the Malaysian plant’s role in assembly) and economic analyses (e.g., justifying chip pricing). Smaller manufacturers 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 component invoices can streamline audit responses.
Document Royalty Payments Thoroughly
Automotive manufacturers paying royalties should benchmark their rates against comparable third-party agreements. Maintain contracts and market data to justify payments during IRBM audits, reducing the risk of adjustments.
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 machinery 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, an E&E firm securing a loan to expand its Penang plant should ensure the interest rate reflects arm’s-length terms.
Critical Considerations for 2025 and Beyond
The manufacturing 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 supply chain disruptions like the 2024 chip shortage. The lowered cross-border transaction threshold (RM10 million) captures more manufacturers, 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 firms 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 resource-constrained manufacturers.
From a critical perspective, the IRBM’s one-size-fits-all approach may disproportionately burden smaller manufacturers, which lack the resources of MNEs to manage compliance. The 14-day submission window seems overly punitive, especially given global supply chain 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 Success in Manufacturing
Transfer pricing in Malaysia’s manufacturing industry requires careful navigation of the MTPG 2024 and Section 140A of the ITA 1967. Challenges like pricing intra-group component transfers, managing shared services, 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, manufacturers can ensure compliance and avoid penalties in 2025.
