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Thai transfer pricing on the verge of new era
May, 04th 2015

Thailand is expected to introduce new transfer pricing (TP) laws in the near future, which will apply to all companies in the Kingdom with related-party transactions. At a recent Deloitte seminar on "Thailand TP Developments", with participation from senior officials from the Revenue Department, we shared some valuable insights on the development of the new TP rules.

Currently, all companies in Thailand are required to transact with related parties at market rates, or what is referred to as an arm's-length basis. That is, the prices or profits earned on transactions between related parties (the "transfer price") should in line with the prices or profits earned between unrelated companies for the same or similar product or service.

Main objective

The primary objective of these rules is to prevent the erosion of the tax base in Thailand through shifting profits out of Thailand through the pricing of related-party transactions.

Thailand first introduced guidance in relation to TP methods and documentation in 2002. This guidance was, however, only issued as an instruction to the Revenue Department's officers and companies were not legally obliged to follow the requirements of the instruction.

Under the proposed TP rules, taxpayers will be required to prepare TP documentation to evidence their transfer prices are at arm's length. The documentation will need to be "contemporaneous".

TP documentation

Whilst the term contemporaneous can be defined to mean that TP documentation is prepared at the time of entering into a related-party transaction, and this is certainly the best practice, it appears that the Revenue Department will consider that this will be satisfied if the documentation is in place at the time the company files its annual corporate tax return.

For example, a company that has a December 31 year-end is required to lodge the corporate tax return by May 30, 2016 for the 2015 year. The TP documentation will therefore need to be completed by May 30, 2016.

The Revenue Department does not, however, appear to be considering a requirement to lodge the documentation at the time of |filing the tax return, and prefers instead to require that a company confirms its compliance with the documentation rule in the annual tax return.

It is expected that there will be heavy fine of possibly hundreds of thousands of baht if a company does not comply with the documentation requirements. Additional tax, penalties and interest may then be imposed if a TP adjustment is made where the pricing/profits are deemed not to be determined on an arm's-length basis.

It is anticipated that the new TP rules will pass into law by the end of this year or early 2016, in the form of an additional section in the existing Revenue Code with supplementary regulations to be issued by the Revenue Department to provide additional detail. The new rules will likely be effective immediately.

Accordingly, if the rules are issued before the end of 2015, then companies with financial years ending December 31, 2015 will be required to have TP documentation in place for the current financial year (and confirm compliance in their PND 50 tax return filed in May 2016).

Taxpayers will be required to submit their documentation in hard copy to the Revenue Department upon request, most likely within one week.

If the taxpayer struggles to provide the documentation within such a short period of time, it will be clear to the Revenue Department that, in fact, contemporaneous documentation was not prepared and will likely result in the imposition of a significant fine.

Currently, it appears that there will not be any materiality thresholds for preparation of TP documentation, meaning the new rules will apply to all companies with related-party transactions (both offshore and domestic), regardless of transaction size.

The efficacy of this, however, is questionable and with the significant burden that preparation of documentation places on companies, we would hope that the Revenue Department considers implementing thresholds earlier rather than later.

Large multinationals with significant related-party transactions may also consider applying for a bilateral advance pricing agreement (APA) with the Revenue Department and relevant offshore tax authority, to agree on the company's prospective transfer prices for a set period of time (generally three to five years).

Specific rules

Whilst such APAs have been available to companies under the provisions of international tax treaties for some time, it is also expected that the new TP regulations will also provide specific rules in relation to APAs.

Preparation of TP documentation can be a time-consuming process (generally two or more months), with companies required to provide an in-depth analysis of the functions it performs, risks it assumes and assets it uses in relation to its related-party transactions.

In addition, companies need to conduct benchmarking analyses to identify independent companies engaged in comparable transactions, to confirm the arm's-length (or market) prices for the related-party transactions.

Therefore, to ensure the required documentation is in place when the new rules take effect, all taxpayers with related-party transactions should consider starting the documentation process now.

In addition to compliance with the new rules, early preparation enables a company to identify any TP issues or risks it may have, and provides time to implement TP adjustments (if appropriate) before the company's financial accounts are finalised. Further, much of the TP documentation can be prepared in advance, helping taxpayers manage their workloads over the busy year-end period.

In light of the proposed new rules, taxpayers are encouraged to review their related-party transactions, TP policies, profitability levels and existing documentation to ensure compliance with Thailand's current TP laws, and the upcoming documentation requirements.


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