New Transfer Pricing Guidance for Thailand’s Taxpayers

In line with international scrutiny pertaining to related-party transactions, the Thai Revenue Department (TRD) has also increasingly turned its attention to transfer pricing in recent years. Changes to the Thai Revenue Code in late 2018 and 2019 have translated into a number of compliance requirements for Thai taxpayers. In response, many Thai taxpayers filed their related-party transaction report and prepared contemporaneous documentation in 2020, the first year in which the two reports were required.

Over the period, there had been some TRD audit activity relating to taxpayer’s transfer pricing matters. These challenges have been relatively restrained—perhaps due to the Covid19-related filing postponement for some taxpayers, and perhaps due to the pandemic itself. Just as transfer pricing focus seems to be settling down, the TRD released two Director-General notifications in January 2021, both of which are effective immediately. One of these notifications is administrative. The other contains some clarifications on transfer pricing approaches and adjustments to income.

In this article, we detail the more significant TRD viewpoints contained in the two notifications. For comprehensiveness, we have also summarized the transfer pricing requirements from the 2018 and 2019 legislative changes in the box at the end of the article.

Notification—Submission of Related-Party Disclosure Form

The first notification requires disclosure of related-party information and controlled transactions to be submitted online (as opposed to the prescribed hardcopy form of the previous year). Companies would first need to register before this online submission is possible. Presumably, having the information in a digital format will facilitate the use of data analytics by the TRD. Submission of a hardcopy is still possible if the taxpayer provides the TRD with a reasonable cause.

Notification (No. 400)—Adjusting Revenue and Expenses of Related Entities

Notification 400 provides further clarification on common transfer pricing concepts such as comparability, approved methods, arm’s-length range, and income adjustments. In general, the notification echoes OECD transfer pricing concepts. The key points and our commentary are highlighted below.

• The notification starts off with some definitions of common transfer pricing terms, reiteration of the OECD’s arm’s-length principle, establishing comparability, and the factors that may have a bearing on comparability.
• Five prescribed methods are highlighted, and conceptually, they parallel the OECD’s transfer pricing methods. The notification also highlights certain factors to consider, in selecting the most appropriate method—for example, the availability of information to reliably apply the chosen method. Of special note, a taxpayer who wishes to use a non-prescribed method is required to provide written notice to the TRD, along with an explanation of the alternative method. In addition, the taxpayer is required to prepare evidentiary documents to support its position that none of the prescribed methods is applicable and an explanation of the alternative approach for examination by an assessment officer. Given these somewhat onerous requirements, and the possibility of the written notice triggering an audit, it will be interesting to see if taxpayers will still opt for an alternative method.
• An assessment officer has the authority to adjust a taxpayer’s revenues and/or expenses so that the taxpayer’s results will fall within an arm’s-length price or profitability range. This seems to be an acknowledgment of the full arm’s-length range even though the current default preference is for the interquartile range.
• On whether a service is actually provided and a deduction warranted, the notification reflects the OECD willingness-to-pay and benefit tests, as well as the notion that the compensation should be consistent with what an independent party would pay for. Taxpayers who have hoped that the TRD will permit a simplified transfer pricing approach for low value-adding intragroup services or a safe harbor for such services may be disappointed that there is no mention of this concession in the notification.
• With respect to dealing with intangible property, taxpayers are advised to consider the obligations of each transacting party in connection to the development, enhancement, maintenance, protection, and exploitation of the intangible. In determining returns from the intangible, factors to be considered include the expected benefits, geographical limits, unique characteristics, etc. A discussion on the transfer pricing method to use would have been useful, given that the discounted cash flow approach is sometimes used in valuing intangibles and this is not one of the five prescribed methods.
• After making a transfer pricing adjustment to a taxpayer, under certain circumstances, the TRD has the power to adjust the income and expenses of a second Thai taxpayer (who is a controlled counterparty to the transaction). The notification does not go into details on what would be the outcome of adjusting the counterparty. It would be intriguing if the TRD initiates an adjustment that will lead to a tax refund for the counterparty; and also if a counterparty would use this clause to apply for a tax refund to limit the group’s increased tax liability.
• To avoid double taxation and to prevent future disputes, Thai taxpayers transacting with controlled counterparties in treaty partner countries may request for an advanced pricing agreement on a forward-looking basis.

Implications for Taxpayers

The transfer pricing requirements in the Thai Revenue Code are brief, and hence, Thai taxpayers have continued to rely on the TRD’s Departmental Instructions No. Paw 113/2545 (Paw 113) for transfer pricing guidance. Paw 113, released in 2002, contains concepts that parallel the OECD transfer pricing guidance of that time. With the release of Notification 400, taxpayers now have a more current, authoritative source of transfer pricing guidance. We have also been informed that there may be additional guidance forthcoming—perhaps pertaining to items in the draft Ministerial Guidance on transfer pricing that have not found their way into Notification 400. In the meantime, taxpayers should continue to adhere to sound transfer pricing practices and prepare robust transfer pricing documentation to support their transfer pricing arrangements.

THAI TRANSFER PRICING REQUIREMENTS—A QUICK SUMMARY

What is Required?

• Annual disclosure of transactions with domestic and offshore related parties.
• Supporting transfer pricing documentation.

When Does It Take Effect?

• Effective since 2020, for related-party transactions in the preceding annual accounting period.

Who Must Prepare?

• Thai companies or juristic partnerships with related parties and/or related-party transactions, and income greater than 200 million Thai baht ($6.67 million) in the preceding accounting period.

When To Prepare?

• Related-Party Transaction Disclosure: 150 days after the end of the previous year’s accounting period. (In 2020, some companies were accorded a deferred deadline due to the Covid-19 pandemic. At time of writing in February 2021, the TRD has not indicated whether there would be a similar deferment for the current year’s filing.)
• Transfer Pricing Documentation: 60 days upon receipt of a formal request (some extension may be possible).

Penalties for Non-Compliance?

• Fine of up to 200,000 Thai baht ($6,673) for no or inadequate documentation, or for wrong information.
• There may be additional corporate tax payable, with a penalty equal to the tax shortfall, plus a monthly surcharge at 1.5% of the tax shortfall (capped at the tax shortfall).

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Geoffrey K. Soh is head of Transfer Pricing, Panya Sittisakonsin is a partner, and Teeraya Teerapraphangkul is a senior transfer pricing consultant at Baker McKenzie.