The Inland Revenue Board of Malaysia (IRBM) has revised its Advance Pricing Arrangement (APA) guidelines to align with updates introduced in the Income Tax (Advance Pricing Arrangement) Rules 2023, introduced in May, 2023.

The revision imposes stricter eligibility criteria for APA applications and outline the IRBM’s expectations on profit margins, which will be based on following proposed benchmarking analysis:

  • For taxpayers whose functions, assets, and risks (FAR) and business model remain unchanged, the proposed benchmarking analysis should not result in an operating margin reduction exceeding 3% of the average weighted margin for established businesses for the previous five years or at least three years for those who started their business operations within the last three to five years.
  • For taxpayers experiencing a change in FAR, an operating margin reduction of 5% or more may be unacceptable unless there are no intangible property transfers, a significant shift in FAR, or transfers of substantial people functions.

The Advance Pricing Arrangement Guidelines explain the manner in which a taxpayer may apply for an APA to the DGIR/CA (Director General of Inland Revenue/Competent Authorities), and the manner in which such an application will be processed and administered.

The Guidelines are to explain procedural and administrative requirements of Section 138C of the Income Tax Act 1967 and the Income Tax (Advance Pricing Arrangement) Rules 2023.

Adjustments

The terms of agreement in relation to adjustments are determined on a case-by-case basis.

Compensating adjustment will arise in situations when actual results differ from the agreed arm’s length prices provided in the APA agreement.

Taxpayers should make compensating adjustments in accordance with the terms in the APA agreements to arrive at the agreed arm’s length prices.

The compensating adjustments will only apply to the covered transactions.

A taxpayer will make a compensating adjustment in the annual tax return if the result of the covered transaction is not in agreement with the APA.