Quick answer: Common LHDN transfer pricing adjustments involve unsupported management fees, non-arm’s-length margins, weak comparables, related-party financing and differences between contracts and actual conduct. An adjustment may attract a surcharge of up to 5%, even where no additional tax is payable. Separate section 113B penalties can apply if CTPD is furnished late or does not comply with the Transfer Pricing Rules 2023 and MTPGL 2024.
Common transfer pricing audit adjustments
| Audit issue | Typical weakness | Possible outcome |
|---|---|---|
| Goods or distribution margins | Results fall outside the supported arm’s-length range without explanation | Income or deductible costs adjusted to an arm’s-length result |
| Management and service fees | No benefit evidence, duplicate work, shareholder activity or unreliable allocation key | Fee deduction reduced or disallowed |
| Related-party loans | Interest-free balance, unsupported rate or terms inconsistent with borrower risk | Interest imputed or adjusted |
| Method selection | Chosen method does not fit the functions, risks or available data | LHDN applies a different method or tested party |
| Comparables | Weak screening, outdated data or material differences not adjusted | Comparable set rejected or revised |
| Actual conduct | Agreement differs from how the parties operated | Transaction evaluated according to actual conduct |
What is the transfer pricing surcharge?
For basis periods commencing on or after 1 January 2021, section 140A(3C) allows LHDN to impose a surcharge of up to 5% of the transfer pricing adjustment. The Transfer Pricing Tax Audit Framework 2025 confirms that the surcharge can apply even where the adjustment does not result in additional tax payable.
The framework provides a surcharge range of 0% to 4% for a qualifying voluntary disclosure. Businesses should not assume a reduced rate applies unless the disclosure meets the framework’s requirements.
What happens if CTPD is submitted late or is non-compliant?
From year of assessment 2023, failure to furnish compliant CTPD within 14 days from service of LHDN’s written notice may lead to prosecution. On conviction, the fine is RM20,000 to RM100,000, imprisonment for up to six months, or both. If no prosecution is instituted, LHDN may impose an administrative penalty for each year of assessment. The 2025 framework lists the following amounts, measured from expiry of the initial 14-day period:
- Up to 7 days after the deadline: RM20,000;
- More than 7 to 14 days: RM40,000;
- More than 14 to 21 days: RM60,000;
- More than 21 to 28 days: RM80,000; and
- More than 28 days: RM100,000.
The framework also states that a penalty may be imposed where the TPD submitted does not comply with the Transfer Pricing Rules 2023 and MTPGL 2024. The legal consequences should be reviewed against the specific notice and current law.
Can a voluntary disclosure reduce exposure?
The 2025 framework provides a 0% to 4% surcharge range for a qualifying voluntary disclosure. Conditions and timing requirements apply, and a disclosure made after the taxpayer knows an audit has begun may not qualify in the same way. Obtain advice before submitting figures or characterising a correction.
How to reduce audit-adjustment risk
- Prepare and date the correct CTPD before the return due date.
- Reconcile every material transaction to the accounts and tax computation.
- Test recurring charges annually instead of copying prior-year conclusions.
- Keep benefit evidence for services and credit analysis for financing.
- Update agreements when conduct or commercial terms change.
- Run a pre-audit review of high-value and loss-making transactions.
HTL’s transfer pricing audit checklist and LHDN tax-audit support provide practical next steps.
This article provides general information and is not a substitute for advice on a specific audit, assessment or penalty.
