Thailand finally unveils its long-awaited transfer pricing law which adopts internationally recognized standards for transfer pricing and upgrades it from a mere departmental instruction to full regulatory status, while providing clearer guidance and certainty on the application of transfer pricing rules for both Thai inbound and outbound investment.
A New Chapter Begins
As the number of multinational companies increases, the number of transactions between group companies rises respectively.
Intercompany transactions generally offer the opportunity to shift income from one jurisdiction to another. Profit shifting can be detrimental to the Thai government to the extent that it reduces tax revenues. The Thai Revenue Department (“TRD”) is therefore introducing and extending TP laws (“TRC47 ”) in order to combat profit shifting as a consequence of intercompany transactions. TRC47 provides several new sections offering practical and useful guidance to taxpayers.
On November 21, 2018, the TRD took another significant step towards tightening its Transfer Pricing (“TP”) compliance and enforcement regime with the release of the Amendment and Revision of the Thai Revenue Code No.47 (“TRC47”).
Over the past five years, stemming from the Base Erosion and Profit Shifting (“BEPS”) initiatives of the Organization for Economic Co-operation and Development ("OECD"), many jurisdictions, including Thailand’s key trading partners, have introduced a series of measures to counteract TP abuse and other harmful tax practices.
While Thailand has been relatively slow to react, the passing of TRC47 is the clearest indication to date that the TP landscape in Thailand is about to shift dramatically. This will be based on mandatory TP documentation and a strict penalty regime for non-compliance.
In order to achieve the goal of being a fully transparent tax collecting authority, the TRD has outlined the key elements of TP enforcement, such as the arm’s length principle. This holds that transactions between related companies need to be comparable with transactions between non-affiliated third parties. Documentary requirements have also been introduced into national/domestic tax law, including a disclosure form that is now essential. Related companies have been defined, applicable penalties, and a statute of limitations have been clearly outlined in the new legislation.
Chapter 1: Definition of Related Companies
Related companies qualify as a group if they are linked directly or indirectly by capital, management or control and shareholding. The definition of “related companies” in the TRC47 states that:
“The companies are related if one company participates directly or indirectly in management, control, or at least 50% in the capital/ shareholding of the other company.”
Under the TRC47, “relationship/transaction” is defined as a commercial relationship or financial relationship between two or more parties. The related company’s relationship marks certain transactions between such related entities as controlled transactions. Controlled transactions are compared with uncontrolled transactions.
If a related company performs a comparable transaction with a related company as well as an unrelated company, an internal uncontrolled transaction will be used for comparison purposes, i.e. a transaction between a related and unrelated company.
Chapter 2: TP Adjustments
The TRD is empowered to make adjustments to income and expenses for payments between related companies. This is in cases where related companies engage in transactions below market rates considered typical of those between independently operating companies. If artificial transferring of profits is suspected then TP audit officers, as empowered by the Ministerial Regulation, can adjust the value of such transactions so as to be at market rates and assess additional income taxes on any additional taxable profit resulting from such adjustment.
Note that pursuant to some double taxation treaties and or domestic rules in the opposing country, an offset or other deduction for the income shifted may be permitted. This type of corresponding adjustment should be carefully researched and appropriate actions taken as needed to utilize such offsets, where appropriate.
Chapter 3: TP Disclosure Forms and Submission Deadlines
The new law establishes reporting requirements for companies with income exceeding 200 million baht ($6 million) for each accounting period. These companies must submit a Transfer Pricing Disclosure Form (“TPD Form”) detailing the name and information of the related companies and the total amounts of the related company’s transactions. This form is attached to the company’s annual tax return, which is normally due within 150 days of the company’s fiscal year-end, normally the end of May for calendar-year based taxpayers.
Chapter 4: TP Reporting Requirements and the Burden of Proof
To monitor TP policies of multinational companies, the TRD can demand that full documentation for any TP transaction be provided to it at any time within five years from the submission date of the TPD Form. The TP audit officer may issue a notice to the related company to provide a Transfer Pricing Report (“TPR”) including supporting documents in preparation for the audit. In this regard, the TRD puts the onus of proof on the TRD officers. This, however, may switch to the taxpayer who must then provide evidence that their TP positions are correct (using arm’s length conditions).
TP is driven by specific facts and circumstances and involves comparisons with similar arm’s length transactions. The taxpayer is therefore more likely to hold the relevant information to support its pricing than the TRD.
Chapter 5: Statute of Limitations and TP Audit
The statute of limitations provides five years from the submission deadline of the TPD Form in which TP audit officers can undertake tax reassessments. Thus, documentation must be kept for five years and the taxpayer can make changes to related company transaction values within this time as well.
Once a company receives a notice from a TP audit office about an upcoming audit, it has 60 days to comply with such a notice. A grace period extension of up to 120 days can be granted by the TRD for a total compliance time of up to 180 days from the first notice to provide the TRD with a formal TP report.
Chapter 6: Right to Reclaim Excess Taxes Paid
If a TP audit officer amends the income or expenses of a related company resulting in the over-payment of taxes, the related company has the right to claim the excess amount within three years from the last tax return submission deadline. Alternatively, within 60 days from the receipt of a notice of the amendment by TP audit officers according to the regulations prescribed by the TRD Director-General.
Chapter 7: Penalties and Surcharges
The TP law prescribes penalties for non-compliance. The TRD may impose penalties of up to 200,000 baht for failing to comply with its documentation requirements. The new TP law does not require contemporaneous documentation be in place prior to the taxpayer filling the tax return. Nonetheless, subsequently prepared documentation may not provide adequate protection against penalties in the event that the TRD disagrees with the TP methodology used.
Penalties for TP adjustments will be a percentage of unpaid tax. The surcharges will be 100–200 percent of the tax shortfall and interest on late payment of taxes of 1.5 percent per month may be imposed. This is capped at 100 percent of the tax shortfall.
Thailand’s Next TP Chapters
Thailand intends for this stricter TP law to secure tax revenues and combat profit shifting, and the law will be applied to all related companies whether Thai or foreign owned. The OECD’s TP methods are mainly accepted. Multinational companies may face significant compliance challenges with the regulations and administrative requirements surrounding TP, just as the TRD are becoming increasingly sophisticated in the way they operate, and more closely focused on TP activities.
Thailand’s new TP law forms part of the OECD’s BEPS inclusive framework, and came into force on January 1, 2019.
The first tentative TPD Form submission deadline will be in May 2020. While this form has yet to be revealed to the public, it is expected that it will require taxpayers to detail onshore and offshore related companies, commercial agreements, business transactions, values for sales and services, loans and interest, royalties and other information as the TRD may request.
Failure to commence due preparations may result in having to overpay taxes further down the line.
Jack Sheehan is Head of Regional Tax Practice, Jonathan Blaine is Tax Director and Patipan Kongviriyagit is Senior Tax Manager at DFDL Thailand.