The Inland Revenue Board of Malaysia (IRBM/LHDN) may raise concerns over profit shifting to the US particularly if the transaction is subject to transfer pricing rules (put simply, a transaction between group entities or related parties).

There are also transfer pricing complications for the exporter if comparable goods are sold at different prices to the US market and to the rest of the world.

It is vital for businesses not to make expensive mistakes with regards to transfer pricing and Customs valuation by taking commercial decisions in a haphazard manner.

For example, a Malaysian manufacturer may sell the goods to an intermediary for $100 and the intermediary may sell to the US importer for $120.

By default, the tariff would be computed based on $120. But that does not have to be the case always.

The US allows a ‘First Sale’ rule to be applied whereby the importation is allowed to be valued at the price of the manufacturer’s sale price (i.e. $100 for the example above) subject to meeting certain criteria such as bona fide dealing, arm’s length pricing and, most importantly, the transaction between the manufacturer and the intermediary being  clearly destined to the US at the time of their transaction. Proper planning and paperwork are necessary to reap the benefits of this valuation approach granted by US Customs.

Businesses contemplating such a restructuring should bear in mind that in some (but not all) cases, the post-importation royalty is required to be factored in for valuation of goods for the purpose of computing the tariff.

Further, the withholding tax implication and transfer pricing implications must be fully evaluated prior to any action.

This translates into an opportunity for savings of tariff payable in the US, provided the parties (exporter and importer) collaborate on tracking and sharing of information. Businesses should also reevaluate the incoterm used for the trade to overcome practical obstacles in realizing the duty savings.

The deductions and exclusions are not limited to logistics cost. There is also an opportunity to seek to reduce tariff by properly accounting for latent defect [repair] allowances.

These legitimate saving opportunities are often overlooked as most other jurisdictions (Malaysia and EU included) do not recognize such exclusions and deductions in arriving at the dutiable value. We must always be cognizant that US systems do not necessarily align with our general understanding or presumptions.

Further, the Executive Order on 2^nd April also provides that if the goods being imported into the US comprise at least 20% of the value that originates from the US, the tariff applies only on the value of the non-US content of such goods. Documentation and tracking are vital for businesses that are eligible for this exclusion.

This higher operating cost, compliance cost, corporate tax rates and dividend withholding tax renders this option unfeasible for many businesses.

This option could be more cost effective than onshoring, but thorough documentation is vital to substantiate meeting of origin criteria. Further, the longer-term implications amid the escalating geopolitical tensions must be factored prior to any commercial decision.

However, should a business contemplate to move part or whole of its manufacturing process for US-bound goods to a jurisdiction with even lower tariff rate than Malaysia, it is important to evaluate whether such supply chain realignment would constitute a ‘restructuring’ for the purpose of Transfer Pricing Guidelines published by the IRBM/LHDN on 24^th December 2024. If affirmative, there is potentially (but not necessarily) a large corporate income tax exposure arising on the imposition of a 24% corporate income tax on the compensation for loss of income.

The transfer pricing and corporate income tax implications and risks must be well-considered prior to any decision to move the production from one jurisdiction to another.