Malaysia’s oleochemical industry, a cornerstone of the nation’s palm oil sector, plays a pivotal role in the global market, contributing 20% of the world’s oleochemical capacity. With an export value of RM37.2 billion in 2022 and a projected market size of RM157.59 billion by 2026, this industry is a vital economic driver, transforming palm oil and palm kernel oil into high-value products like fatty acids, glycerin, and surfactants for use in cosmetics, pharmaceuticals, and industrial applications. However, as a heavily export-oriented sector with significant cross-border transactions, the oleochemical industry faces unique transfer pricing challenges under Malaysia’s evolving regulatory landscape.
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 on 1 November 2023, set stringent rules for related-party transactions to ensure tax fairness. For oleochemical companies—many of which are subsidiaries of multinational enterprises (MNEs) or part of global supply chains—these regulations introduce complexities in pricing raw materials, managing intra-group services, and complying with documentation thresholds. Non-compliance risks severe penalties, such as fines ranging from RM20,000 to RM100,000 per year, potentially totaling RM600,000 over a 6-year audit period.
This article explores the transfer pricing challenges specific to Malaysia’s oleochemical industry in 2025, covering regulatory updates, documentation requirements, penalties, and practical strategies for compliance. Whether you’re an MNE producing oleochemicals in Johor or an SME supplying fatty acids to international markets, understanding these challenges is crucial to navigating Malaysia’s tax landscape and achieving success through compliance.
The Oleochemical Industry in Malaysia: A Transfer Pricing Hotspot
Oleochemicals are chemicals derived from natural oils and fats, primarily palm oil and palm kernel oil in Malaysia. The country’s position as the second-largest palm oil producer globally, with 5.67 million hectares of oil palm plantations and 423 mills as of 2022, makes it a leader in oleochemical production. Malaysia’s 19 oleochemical plants process palm-based feedstocks into products like fatty acids, fatty alcohols, and glycerin, which are exported to over 120 countries, generating RM37.2 billion in 2022 alone. The industry’s significance is underscored by its role in adding value to palm oil, a commodity prone to price volatility, with palm oil prices averaging RM3,800 per tonne in 2024.
However, the oleochemical industry’s global reach introduces transfer pricing complexities:
- Cross-Border Transactions
Many oleochemical companies in Malaysia are part of MNEs, sourcing raw materials (e.g., crude palm oil or palm kernel oil) from related entities in Indonesia or supplying finished products to affiliates in Europe, the US, or China. These transactions must adhere to the arm’s-length principle, ensuring prices reflect market rates as if the parties were independent. - Intra-Group Services
MNEs often provide shared services (e.g., R&D, marketing, or administrative support) to their Malaysian oleochemical subsidiaries. Pricing these services correctly under the MTPG 2024’s guidelines, such as the 5% mark-up safe harbor for low value-adding services (LVAS), is a challenge. - Raw Material Pricing Volatility
Palm oil prices are volatile, influenced by global supply-demand dynamics, weather conditions, and geopolitical factors. For example, palm oil prices dropped from a peak of RM7,750 per tonne in March 2022 to RM3,800 per tonne in 2024 due to increased supply and weaker demand. This volatility complicates the benchmarking of arm’s-length prices for intra-group raw material transfers. - Export-Driven Nature
With 80% of Malaysia’s oleochemical production exported, the industry faces scrutiny from the Inland Revenue Board of Malaysia (IRBM) to prevent profit-shifting to low-tax jurisdictions, a key concern under the OECD’s Base Erosion and Profit Shifting (BEPS) framework.
These factors make the oleochemical industry a transfer pricing hotspot, requiring businesses to navigate Malaysia’s regulations carefully to avoid audits and penalties in 2025.
Key Transfer Pricing Challenges for the Oleochemical Industry in 2025
The MTPG 2024 and Section 140A of the ITA 1967 introduce specific challenges for oleochemical companies. Let’s break down the most pressing issues:
1. Pricing Raw Materials Amid Volatility
Oleochemical production relies heavily on palm oil and palm kernel oil, which are often sourced from related entities within the same corporate group. The arm’s-length principle requires that these intra-group transfers be priced as if they occurred between independent parties. However, palm oil price volatility—ranging from RM3,800 to RM7,750 per tonne over the past three years—makes benchmarking difficult. The MTPG 2024 emphasizes the use of comparable uncontrolled prices (CUP) or cost-plus methods, but finding reliable comparables in a volatile market is challenging. For example, a Malaysian oleochemical company purchasing crude palm kernel oil from an Indonesian affiliate must justify its pricing against market rates, which fluctuate monthly.
2. Meeting Documentation Thresholds
The MTPG 2024 sets thresholds for preparing full Contemporaneous Transfer Pricing Documentation (CTPD):
- Annual gross business income exceeds RM30 million, and total cross-border controlled transactions exceed RM10 million annually; or
- Controlled financial assistance (e.g., loans, guarantees) exceeds RM50 million annually.
Many oleochemical companies, especially larger MNEs like those in Johor or Penang, exceed these thresholds due to their export volumes. For instance, a company exporting RM37.2 billion worth of oleochemicals likely surpasses the RM10 million cross-border transaction threshold. Preparing full CTPD requires detailed functional and economic analyses, which can be resource-intensive for businesses already managing complex supply chains.
Smaller oleochemical SMEs below these thresholds must still comply with the arm’s-length principle and retain basic documentation. Should your business be below these thresholds, you are still obligated to comply with the arm’s-length principle and maintain basic documentation to substantiate your pricing during audits. This dual requirement creates a compliance burden across the industry.
3. Intra-Group Services and the 5% Safe Harbor Rule
Oleochemical companies often rely on intra-group services, such as R&D for developing new surfactants or marketing support for export markets. The MTPG 2024 offers a safe harbor rule for low value-adding intra-group services (LVAS), allowing a 5% mark-up without requiring a benchmarking study, provided the services do not involve unique intangibles or significant risk. However, determining whether a service qualifies as “low value-adding” can be ambiguous. For example, R&D for a new bio-based lubricant might not qualify, requiring a full benchmarking study, which increases compliance costs and complexity.
4. Business Restructuring and Functional Shifts
The MTPG 2024 provides guidance on transfer pricing for business restructuring, focusing on shifts in functional profiles (e.g., changes in functions, assets, risks). Oleochemical companies restructuring their supply chains—such as shifting production from Malaysia to Indonesia to leverage lower costs—must ensure pricing reflects 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 plant equipment to an affiliate.
5. Financing Assistance Transactions
Many oleochemical companies rely on intra-group loans or guarantees to fund operations, such as expanding production capacity to meet global demand. The MTPG 2024 reaffirms that controlled financial assistance exceeding RM50 million annually triggers full CTPD requirements. Additionally, a forthcoming IRBM document on financing assistance transactions (release date unspecified) will add further complexity, leaving companies in uncertainty for 2025.
Regulatory Framework: MTPG 2024 and Section 140A
The MTPG 2024, effective retrospectively from the Year of Assessment (YA) 2023, and Section 140A of the ITA 1967 form the backbone of Malaysia’s transfer pricing regulations. Key provisions relevant to the oleochemical industry include:
- Arm’s-Length Principle (Section 140A(2))
All related-party transactions, such as raw material purchases or intra-group services, must be priced as if between independent parties. - Documentation Thresholds (MTPG 2024)
As noted, businesses exceeding RM30 million in gross income and RM10 million in cross-border transactions must prepare full CTPD, a threshold many oleochemical companies meet. - 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 YA 2023 onward, requiring oleochemical companies to update past documentation to avoid penalties in 2025 audits.
The 2023 ITA revision also introduces e-invoicing requirements under Section 82(2B), mandating digital record-keeping for related-party transactions, which affects how oleochemical companies maintain auditable records.
Penalties for Non-Compliance: A High-Stakes Risk
Non-compliance with transfer pricing rules poses significant risks for oleochemical 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. - Practical Application
Recent audits suggest the IRBM often applies a 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. - Imprisonment
Up to 6 months under Section 113B for non-submission of CTPD, a severe consequence for egregious violations.
For an oleochemical company exporting RM37.2 billion annually, a RM240,000 penalty might seem manageable, but for smaller SMEs, it could be devastating. The 14-day submission window exacerbates the risk, as gathering historical records (e.g., palm oil pricing data from 2018) within this timeframe is challenging.
Practical Tips for Oleochemical Companies in 2025
To navigate these challenges and succeed through compliance, oleochemical companies can adopt the following strategies:
A. Benchmark Raw Material Prices Regularly:
Use the CUP method to benchmark palm oil and palm kernel oil prices against market data from sources like the Malaysian Palm Oil Board (MPOB). Document monthly price fluctuations to justify intra-group pricing during audits.
B. Leverage the 5% Safe Harbor for LVAS:
For routine intra-group services like administrative support, apply the 5% mark-up safe harbor rule to simplify compliance. Ensure services qualify as low value-adding to avoid benchmarking requirements.
C. Prepare Contemporaneous Documentation
Maintain CTPD in real-time, including functional analyses (e.g., detailing the role of the Malaysian subsidiary in the global supply chain) and economic analyses (e.g., justifying palm oil pricing). Use the IRBM’s Minimum Transfer Pricing Documentation Template if below thresholds.
D. 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.
E. 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.
F. 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.
Critical Considerations for 2025 and Beyond
The oleochemical 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 made harder by palm oil price volatility. The lowered cross-border transaction threshold (RM10 million) captures more oleochemical 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 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 SMEs.
From a critical perspective, the IRBM’s one-size-fits-all approach may disproportionately burden smaller oleochemical firms, which lack the resources of MNEs to manage compliance. The 14-day submission window seems overly punitive, especially given palm oil price volatility, which complicates historical benchmarking. On the other hand, the regulations align with global BEPS standards, ensuring Malaysia remains competitive while protecting its tax base.
Navigating Transfer Pricing for Oleochemical Success
Transfer pricing in Malaysia’s oleochemical industry is fraught with challenges, from pricing volatile raw materials to meeting documentation thresholds and managing intra-group services. The MTPG 2024 and Section 140A of the ITA 1967 impose strict compliance requirements, with penalties like RM20,000 to RM100,000 per year posing a high-stakes risk. By benchmarking prices, leveraging safe harbor rules, preparing contemporaneous documentation, and adopting digital record-keeping, oleochemical companies can navigate these challenges and succeed through compliance in 2025
