This second draft of the laws, in general, aligns with the first draft released in May 2015, but provides further clarification on certain areas of concern, particularly on how to define “related party”, more details on the types of document that taxpayers need to prepare, timeline for disclosure and maintaining transfer pricing documentation, as well as penalty for not preparing or submitting the required documents within the required timeframe.
The revised draft law provides power to the TRD to reassess the taxable income and expenses of related party transaction (s) to be consistent with the arm’s length principle. The arm’s length principle requires that the pricing of related party transactions be based on the pricing which would have been agreed in transactions between independent parties.
Since the introduction of Thailand’s non-binding transfer pricing guidelines in May 2002, one of the questions often raised by taxpayers in preparing transfer pricing documentation is how to define “related parties”. The current transfer pricing guidelines only provide a broad definition of related parties by reference to direct or indirect relationship in shareholding, management and control. This makes it difficult for taxpayers to interpret the guidelines in disclosure of related party transactions to the TRD. The current draft law provides a more objective test of whether entities are related by reference to a 50% threshold in shareholding. Additional criteria for defining parties as related may be announced in the Ministerial Regulation.
Based on the revised draft law, a company or partnership whose revenue meets the minimum threshold is required to prepare a report for submission to the TRD when it files an annual corporate tax return. This report does not appear to be transfer pricing documentation, but provides certain information on the taxpayer’s relationship with its related parties and the value of related party transactions.
It is not clear, however, whether this report would also require the taxpayer declare whether it has prepared the necessary documentation to support that its transfer prices are arm’s length as of the corporate tax return lodgment date.
Additionally, the TRD, upon the Director-General’s approval, has the power to request additional documents or evidence, with respect to the related party transactions, within 5 years after the company files the report above. We would expect that these types of documents would be the typical information included in transfer pricing documentation (eg business description and functional analysis, economic analysis, etcu). The company must submit such documents/evidence within 60 days after the date of receipt of a notice letter. In the case of special circumstances, the Director-General may extend the time limit to be between 61 to 120 days.
An important question is whether or not all taxpayers with related party transactions will need to prepare the required reports and documentation. The report for submission to the TRD and the supporting additional documents or evidence is only required if the taxpayer’s revenues exceed a certain amount which will be defined in a regulation. We understand that this revenue threshold will be applied with reference to related party transactions. It appears that domestic related party transactions within Thailand would also be included in applying this threshold.
Once the law is in effect, failure to file the report and/or additional documents/evidence, or submitting incomplete/incorrect documents or evidence without justifiable reasons, will result in the taxpayer being subject to fine not exceeding Bt200,000. Such fine could be up to Bt400,000 if a taxpayer fails to submit the report and/or additional documents/evidence or submits the incorrect/incomplete information. Further guidance from the TRD is expected on the list of information required.
The law also allows for corresponding adjustments for both cross- border and domestic transactions. For example, if Thai company A is assessed additional revenue from a transfer pricing adjustment for a transaction with related Thai company B, then company B may be able to claim an additional deduction for the amount of the adjustment. A Thai contracting party will be entitled to claim a tax refund as a result of tax reassessment provided that the refund is requested within three years from the due date of filing the relevant income tax return or within 60 days after the date of receipt of a notification letter from the TRD.
The public comments are due by July7. If the final laws are passed by Thai parliament this year, then they should be applicable for the accounting year commencing 1 January 2018.