Transfer pricing has long been enforced by the Thai tax authority using general tax law provisions disallowing excessive expenses (Section 65 Ter (13), (14), (15) of the Thai Revenue Code) and business exchanges at less than market price (Section 65 Bis (4) and Section 70 Ter).
Section 65 Ter provides that:
(13) Any expenses not exclusively expended for the purpose of acquiring profits or for the purpose of business shall not be allowed as expenses for tax purposes.
(14) Any expenses not exclusively expended for the purpose of the business in Thailand shall not be allowed as expenses for tax purposes.
(15) The portion of the purchase price of properties and of the expenses in connection with purchase or sale of properties, which exceeds a normal amount without justification, shall not be allowed as expenses for tax purposes.
Section 65 Bis (4) provides that:
In the case where, without justifiable grounds, property is transferred, service is rendered, or money is lent without any compensation, service charge or interest; or with a compensation, service charge or interest in an amount lower than the market value, the assessment officer has the power to assess the compensation, service charge or interest at the market value on the date of transfer, rendering service or lending.
Section 70 Ter provides that:
An export of goods made by any juristic company or partnership to, or under the instruction of its head office, branch, affiliated company or juristic partnership, principal, agent, employer, or employee shall be deemed sales made in Thailand, and the market price of the goods ruling on the date of export shall be deemed revenue of the accounting period in which the export is made.
Even though some of the above provisions refer to "market value/price," the use of these general provisions to control transfer pricing has always been problematic due to the lack of a definition of market value and/or price. This has resulted in frequent disputes between taxpayers and the Thai tax authority, as both sides naturally tend to interpret the market price as being closer to the end of the spectrum that is most to their benefit.
In May 2002, Thailand introduced a formal transfer pricing regulation, Departmental Instruction no Paw 113 (DI 113) to provide a guideline for tax officials to use during a tax audit involving transfer pricing. It was drafted with the help of the Australian Taxation Office (ATO), and is loosely based on OECD Transfer Pricing Guidelines. Through DI 113, for the first time, the concept of market price is defined. The concept of functions, risks and assets (FRA) is recognized as a measure of comparability, whereby the functions performed, assets owned and used, and risks assumed by a taxpayer can be compared to other independent taxpayers to determine the appropriate market price. DI 113 allows a taxpayer to substantiate its intercompany transactions as being at market price with the use of four alternative methodologies: the comparable uncontrolled price method (CUP), resale price method, cost plus method, and other internationally acceptable methods, such as the transactional net margin method (TNMM).
The introduction of this DI 113 was quickly followed by large-scale enforcement actions taken by the Thai tax authority, including letters of request for transfer pricing documentation sent to a large number of multinational taxpayers in Thailand. The Large Taxpayer Office, a division of the Thai tax authority supervising taxpayers with annual turnover of $25 million or more, is responsible for issuing the letters of request.
The letters of request for transfer pricing documentation came in two waves, targeting taxpayers in various industries, including electronics, pharmaceutical and services. In the first wave, the Thai tax authority encouraged taxpayers to prepare their own transfer pricing documentation, without the aid of outside tax advisers. However, as the documentation received in return proved inadequate to suit the Thai tax authority's needs, a second wave of letters was sent. This time, the Thai tax authority encouraged taxpayers to consult with external tax advisers for help with preparing the documentation. The second wave of documentation received was much more detailed and helped the Thai tax authority build a rather comprehensive database of taxpayer financial information for recordkeeping and future taxpayer comparison purposes. The Thai tax authority now maintains and uses this database as a source of information for transfer pricing inquiries and/or audits.
It is fair to say that with the experience gained from these increased enforcement activities, and regular training with the tax authorities of other jurisdictions, the Thai tax authority has become relatively sophisticated in the area of transfer pricing.
Documentation requirements
The DI 113 prescribes a list of 10 contemporaneous documents that are to be submitted as transfer pricing documentation. The 10 documents required are:
(1) Documentation showing the structure of the group and relationships among entities in the same group, including the organizational structure and nature of the business of each entity.
(2) Budgets, business plans and financial forecasts.
(3) Documentation showing the business strategies of the taxpayer and the reasons for use of such business strategies.
(4) Documentation showing the sales figures and operating results of the taxpayer and the nature of business transactions with entities in the same group.
(5) Documentation showing the reasons for entering into cross-border business transactions with entities in the same group.
(6) Pricing policies, product profitability, market information and the share of profit of each entity, taking into consideration the functions, assets and risks of the related entity.
(7) Documentation showing the reasons for selecting a particular pricing method.
(8) In cases where various pricing methods could be selected, documentation providing details of pricing methods other than the method under (7) and the reasons such alternative methods were not selected. Such documentation must be prepared contemporaneously with the decision to select the pricing method under (7).
(9) Documentation evidencing basic principles and negotiating position of the taxpayer in business transactions with entities in the same group.
(10) Other documentation relating to pricing (if any).
DI 113 does not prescribe a fixed format that documentation must come in, as long as the documentation addresses the general requirements specified in the guidelines. However, the tax authority has expressed a preference for local comparable companies over foreign comparable companies for the benchmarking study.
Although the 10 documents specified are expected under the regulation to be "contemporaneous," that is, prepared in conjunction with setting the transfer pricing policy, as a practical matter, many taxpayers prepare the documents after the transfer pricing policy has already been set in place. This is not the best practice, but may be a practical option available to taxpayers that have transfer pricing policies in place at the time they decide, or are compelled, to prepare documentation.
If the Thai tax authority is not satisfied with the documentation submitted, it may seek further clarification or additional information as it deems necessary.
Documentation requirement in practice
To date, there have been no known formal transfer pricing audits in Thailand, but there have been many informal transfer pricing "enquiries," (the name given to audits by the Thai tax authority), resulting in many negotiated tax adjustments. These informal transfer pricing inquiries usually occur in conjunction with general tax visits. Tax visits are an approach used by the Thai tax authority to better understand a taxpayer's business operations, whereby the Thai tax authority will ask to review financial records at the taxpayer's place of business. These tax visits usually occur once a year, to each taxpayer. The transfer pricing enquiries that have been occurring in conjunction with these tax visits are becoming so common, every multinational company operating in Thailand with substantial related-party transactions should expect to face them every two to three years from now on, if not every year.
There is no penalty under Thai tax law for not having transfer pricing documentation to hand, if requested by the tax authority. Taxpayers without documentation are generally given one month, with additional one-month extensions ordinarily given upon request, to prepare the documents. However, under DI 113, tax officials are instructed that if a taxpayer presents sufficiently-detailed documentation using a suitable and correct transfer pricing method, the tax official is to comply with that transfer pricing method in his or her examination of the market price. This practice is in line with our experience, whereby the Thai tax authority tends to have different perceptions of companies with well-prepared transfer pricing reports at the time of a transfer pricing inquiry, as compared to those without. In particular, the Thai tax authority tends to scrutinize documentation prepared by companies in response to a transfer pricing inquiry much more closely than documentation prepared in advance. This is because the investigating Thai tax officials tend to believe that companies with documentation prepared in advance are likely to have used an appropriate basis for determining their transfer pricing policies, before implementing such policies.
On the other hand, if a taxpayer presents documentation prepared in response to a transfer pricing inquiry – usually months after the inquiry because of the time needed to prepare documentation – the Thai tax authority is more likely to believe the documentation is skewed to support the pre-existing (and possibly, inappropriately-based) transfer pricing policy; thus, it is more likely to raise questions relating to the taxpayer's transfer pricing policy. There has been one incident where the Thai tax authority further questioned the gross margin of a taxpayer's individual products, rather than the company's overall profitability, just to test whether the documents provided are in line with what the taxpayer has been practising.
Because transfer pricing documentation could be requested in the course of one of the Thai tax authority's routine annual tax "visits," as discussed above, the recommendation is to have a Thailand-specific documentation readily available in the event of such a request.
However, if a transfer pricing study has been conducted within the company group on a global and/or regional basis, and it is not economically viable to have Thailand-specific documentation, then taxpayers should make sure that current copies of such documents are available at the Thai entity's place of business. Although it may not be entirely accepted by the tax authority (as mentioned earlier, a benchmarking study should be based on local comparable companies), at least it is proof to the tax authority that the taxpayer does have a clear set of transfer pricing policies in line with the OECD guidelines.
If no transfer pricing study has been done by the group, the next best thing would be to compile a list of documents with at least information covering the group's shareholding structure, business plan, financial projections, pricing policy, and reasons for entering into related-party transactions (that is, items number 1 through 6 of the contemporaneous documents). A local benchmarking study (that is, items number 7 through 10 of the contemporaneous documents) can be provided later. The documents should be updated at least once every two years, even if the business of the taxpayer does not change.
Advance pricing agreements
Thailand's transfer pricing regulation allows a taxpayer to address potential transfer pricing challenges in advance through the use of an advance pricing agreement (APA). An APA is an arrangement between a taxpayer and one or more tax authorities to determine an acceptable market price and transfer pricing methodology in advance of related-party transactions over a specified period of time. The main benefit of an APA is that it provides certainty to the taxpayer.
Advance pricing agreements in Thailand can be unilateral, that is, between a taxpayer and tax authority, or bilateral/multilateral, that is, between a taxpayer and two or more tax authorities (that is, the Thai tax authority and tax authority of another country).
As in many other countries, the concept of an APA is new to Thailand. Hence, APA procedures in Thailand are still developing and are quite informal at this point. At the present time, there is no fixed format for the negotiations. Below is typically how the negotiations work at this time.
When a taxpayer initiates an APA, the Thai tax authority is not apt to go into formal discussions with the taxpayer at the initial stage or for the first round of meetings. Rather, the Thai tax authority prefers to start out with various informal discussions with the authorized representatives of the taxpayer, whereby the representatives are expected to disclose the taxpayer's name, and discuss the taxpayer's objectives, concerns and transactional information by way of presentation. As the discussions proceed further, and if the taxpayer and tax authority are interested in formal negotiations, the taxpayer must submit formal transfer pricing documentation as per the requirements of the Thai transfer pricing regulation. Individual transfer pricing documentation must be prepared for each of the transactions concerned, if more than one is involved. The Thai tax authority does not charge a fee at this point for the APA application process. Typically, the duration of time needed to conclude an APA in Thailand would be three years to five years, depending on the taxpayer's industry, and provided that the taxpayer's business structure does not change during the negotiations.
Experience with APAs
An APA provides certainty; nonetheless, it is time consuming. There have been several prolonged attempts by taxpayers and advisers to conclude APAs with the Thai tax authority since the introduction of DI 113, but the progress of these applications has been slow and difficult, as the Thai tax authority has been considering and sometimes changing its stance on key issues.
Hence, an APA should not be the means for a taxpayer in Thailand to attempt to reduce the profits of its existing operation, as the tax authority may not be willing to enter into negotiations. At the moment, it is fair to say that an APA is possible only on a case-by-case basis, such as for a business undertaking a drastic restructuring within the group, or the introduction of new products or new businesses.
The first APA has recently been concluded with the Thai tax authority, and with the tax authority contemplating issuing a guideline specifically for APAs, it is expected the APA application process will become smoother and more predictable in the future, especially as more APAs are negotiated and completed.
Next steps
The best transfer pricing practice for multinational companies with significant intercompany transactions is to prepare transfer pricing documentation before a tax enquiry arises and have this documentation on hand ready to fend off any challenges from the Thai tax authority. Preparing documentation in advance shows that the taxpayer has undergone the economic analysis necessary to determine the market price of its intercompany exchanges of goods and services properly. Furthermore, transfer pricing studies often reveal previously-unused ways in which to transfer excess profit and reduce a company's overall group tax rate legally. On the other hand, waiting for challenges to arise and preparing documentation in response will put the taxpayer in a much more frenzied, less-certain and disadvantageous position than if documentation had been prepared in advance of the inquiry.
If you are undertaking a business restructuring which affects operations in Thailand, an APA may be an option for you. So far, only one APA has been concluded, and there are still no clear parameters for negotiations at the present time. However, with the current support of tax professionals, the Thai tax authority can be expected to gain, within a reasonable time, the knowledge it needs to develop a high-quality APA programme.
Biographies |
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Anthony Visate Loh is a partner and head of the international tax services for Ernst & Young in Thailand. He specializes in cross-border tax planning, tax-efficient supply chain management and transfer pricing, and is responsible for orchestrating both the first filed and the first concluded advance pricing agreements in Thailand. He joined Ernst & Young in 1999 as a tax consultant.
Narumol Limprasert is a full-time transfer pricing senior manager for Ernst & Young in Thailand. She has extensive experience in the area of transfer pricing. She joined Ernst & Young in 2003 as a senior tax consultant and was part of the team that both filed and concluded the first advanced pricing agreements in Thailand. Limprasert is a business administration graduate, major in Accounting, from Assumption University, Thailand, and has a master's in international business from Macquarie University, Australia.
Matthew Elgin is a full-time transfer pricing senior consultant in Thailand. He specializes in the areas of tax-effective supply chain management, with an emphasis on transfer pricing, and international tax planning. He joined Ernst & Young in 2004 as a tax consultant. Elgin is a graduate from the University of Nevada, Las Vegas (BA) and Southwestern University, School of Law (JD) in the US. |
