In the second quarter of 2024, the transfer pricing landscape in Asia was undergoing significant changes, signaling a new era of complexity and opportunity for multinational enterprises (MNEs). The regulatory framework across crucial markets like Malaysia and Singapore along with significant international bodies like the OECD, became more intricate, presenting challenges and avenues for businesses to navigate. Additionally, market sentiment across Asia varied, with some regions experiencing robust growth while others struggled to adapt.

In Malaysia, the Inland Revenue Board (IRB) introduced new guidelines for Advance Pricing Arrangements (APA) on April 2, 2024. These guidelines reshaped the existing APA landscape in profound ways, following the release of the Income Tax (Advance Pricing Arrangement) Rules 2023. The new rules established stricter eligibility criteria, requiring businesses to meet higher revenue and transaction thresholds before qualifying for APA applications. Specifically, companies must now have revenue from covered transactions exceeding RM 100 million—a shift from the previous turnover-based criteria. Furthermore, the guidelines introduced specific thresholds for sales, purchases, and financial assistance, ensuring that only transactions with substantial monetary value would be considered.

Companies began to take notice of these changes. Large enterprises operating across borders and engaging in complex intercompany transactions understood that they would need to reevaluate their eligibility for APAs and ensure their operating margins remained within acceptable ranges. Under the new guidelines, companies could face a 3% margin reduction over five years if no major shifts occurred in their business models. However, businesses experiencing significant functional changes could face stricter scrutiny, with reductions of 5% or more flagged unless well-justified.

Singapore was also revising its transfer pricing policies in response to regional trends. The Inland Revenue Authority of Singapore (IRAS) released the 7th edition of its Transfer Pricing Guidelines (TPG) in June 2024. This update represented a balancing act between easing compliance burdens and ensuring adherence to international best practices. The new guidelines offered exemptions for domestic related-party loans, allowing companies to bypass some of the more demanding documentation requirements if certain conditions were met. At the same time, the guidelines clarified how to determine loan interest rates, transitioning from the now-outdated Interbank Offered Rates (IBOR) to more reliable risk-free rates (RFR).

For many multinationals operating in Singapore, this shift was a welcome relief. The simplified rules around transfer pricing documentation (TPD) allowed them to focus on essential compliance without excessive paperwork. However, the penalties for non-compliance remained substantial, with fines reaching up to SG$10,000, reminding companies that staying on top of their transfer pricing obligations was critical.

While Malaysia and Singapore fine-tuned their regulations, the OECD—the international standard-setter for tax policies—also released critical updates in May 2024. The organization’s new guidance on Country-by-Country (CbC) reporting clarified how dividends should be treated in profit and loss reporting, creating consistency across jurisdictions. Starting in January 2025, dividends paid between group entities would no longer be included in the profit before tax in the recipient’s jurisdiction, provided they were recognized as dividends in the payer’s jurisdiction. This shift aimed to enable multinational enterprises to present a clearer and more accurate reflection of operational earnings, reducing inconsistencies in profit reporting.

Additionally, the OECD issued final guidance on Pillar One Amount B, simplifying the application of the arm’s length principle to baseline marketing and distribution activities. Amount B established a fixed return on sales ranging from 1.5% to 5.5%, making it easier for companies engaged in wholesale distribution to comply with transfer pricing rules. This change was welcomed by businesses seeking greater certainty in managing their tax liabilities across different jurisdictions.

Amid these regulatory shifts, market sentiment in Asia presented a contrasting picture. In India, optimism abounded, with leasing volumes in significant cities robust due to the country’s booming outsourcing and offshoring industries. Gross absorption in 2023 hit 64 million square feet, nearing record highs from 2019. The country’s talent pool remained a key growth driver, instilling confidence that the upward trajectory would continue well into 2024.

In stark contrast, mainland China faced different challenges. Although inquiries and site inspections increased in the first half of 2024, nationwide market sentiment remained muted. Businesses in China focused more on cost-cutting than on expansion, with many occupiers seeking to downgrade their office spaces or relocate to buildings with lower rents, reflecting a cautious approach amid economic uncertainty.

Similarly, the situation in Korea was challenging. Demand for office space weakened compared to six months prior, burdened by rising rental costs and high capital expenditures for relocations and fit-outs. Many tenants opted to renew their leases rather than move, but negotiations often dragged on due to a widening gap in expectations between landlords and tenants.

As Asia’s transfer pricing rules continue to evolve and the region’s markets fluctuate, businesses face the challenge of adapting to new regulations while remaining competitive in a rapidly changing environment. The story of Q2 2024 is one of complexity, opportunity, and the need for agility in a landscape where regulatory and market forces increasingly shape business decisions.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

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The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

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