Tax avoidance can be defined as aggressive tax-planning strategies and structures by multinational companies that take advantage of the gaps or mismatches in tax rules to shift profits to low-tax locations.

While many countries around the world have either general or specific anti-avoidance legislation to tackle this problem, the current Thai Revenue Code lacks such measures.

The approval of a draft transfer-pricing law by the Cabinet early last month was a sign that the government is seriously attempting to address the problem of tax avoidance.

Thailand actually introduced transfer-pricing guidelines in 2002 in the form of a Departmental Instruction, which is not a law.

If introduced, this new transfer-pricing law will be Thailand's first introduction of specific anti-avoidance legislation to counter tax avoidance through unfair or inappropriate transfer prices charged between related parties.

Over the past few years, transfer pricing has become a top priority of tax authorities around the world. With the exceptions of Brunei, Cambodia, Laos and Myanmar, all Asean member countries have transfer-pricing regimes, either in the form of guidelines or specific laws that require taxpayers to prepare and maintain contemporaneous transfer-pricing documentation to be submitted to the tax authorities upon request, within a specific timeline.

Moreover, taxpayers in Vietnam, Malaysia and Indonesia are required to submit a transfer-pricing form or disclosure with their annual tax returns.

With the global spotlight on anti-avoidance measures, the transfer-pricing legislation is anticipated to be on the tax-reform agenda in Thailand.

Learning from the transfer-pricing laws of some other countries, those in Asean in particular, a number of unclear issues can be expected once Thailand's law is enacted. Therefore, the Thai Revenue Department (TRD) should issue additional regulations or requirements for taxpayers to provide more details.

Some of the key issues are below.

l Related-party transactions: Generally the focus would be on cross-border related-party transactions, as these could lead to unfair tax shares between two or more countries. However, the draft transfer-pricing law seems not to limit cross-border transactions, which could mean that the TRD may also want to cover related-party transactions made by entities in Thailand to prevent profit transfer from a profitable entity to a losing entity or to an entity that enjoys a reduced corporate-income-tax rate or is exempted from income tax.

l Disclosure requirement: The draft law broadly states that taxpayers have to submit transfer-pricing documentation to the TRD within 150 days after the end of the accounting period. If the entity fails to prepare or submit complete documents, it will be subject to a penalty of up to Bt400,000.

The draft law does not clearly detail the extent of documentation that is required to be submitted to the TRD - whether taxpayers must submit a detailed transfer-pricing study/documentation or whether they are only required to disclose the specific information in relation to the related-party transactions by completing a form or questionnaire attached to an annual income-tax return.

l The threshold value of related party transactions: In some Asean member countries, such as Singapore and Malaysia, the law provides the threshold value of related-party transactions in order to identify which entities are required to submit transfer-pricing documentation or disclose related-entity transactions. It is still in question whether the Thai transfer-pricing law will stipulate a threshold value.

Among the above issues, it is necessary to note that the preparation of transfer-pricing documentation will likely be mandatory and it will likely be required to submit upon filing annual income-tax returns or later upon request of the tax authorities within specific timelines.

It is anticipated that the documentation will not be much different from those required documents in the current transfer-pricing guidelines.

Thailand seems to be the only country in Asean that will impose penalties if the documents required by law are not prepared or submitted.

Thus it is crucial that entities with significant related-party transactions review their transfer-pricing policies and prepare the necessary documentation based on the guidelines.