Transfer pricing 4.0 in Thailand

LATEST NEWS: A modern transfer pricing regime which will be proposed to the Cabinet in September 2017.


Transfer pricing experts live in interesting times.

Under the OECD’s BEPS-initiative (Base Eroding and Profit Shifting) the basic principles of transfer pricing are drastically reshaped and BEPS-rules are implemented all over the world surprisingly fast. But not everywhere. Thailand’s upcoming new transfer pricing legislation intends to implement old-fashioned transfer pricing principles, which have been famous in the last century. The “new” and tiny legislation seems to have fallen out of time with ineffectual rules which allowed multi-national enterprises like Google,

Thailand’s upcoming new transfer pricing legislation intends to implement old-fashioned transfer pricing principles, which have been famous in the last century. The “new” and tiny legislation seems to have fallen out of time with ineffectual rules which allowed multi-national enterprises like Google, Starbucks and Amazon for decades to legally pay nearly no taxes in any tax jurisdiction. But to know all and everything about the new legislation is not even half the battle.

Even in Thailand, goods and services go to the highest bidder. A prudent businessman maximizes his profit because otherwise, he runs the risk of being punished ruthlessly and mercilessly by the market. Things are different for business transactions between affiliated parties. For a group of companies, there are handsome opportunities to adjust the prices to minimize the effective group average tax rate.

Transfer pricing legislation aims to exclude such tax advantages. Thailand is currently in a process to update its transfer pricing regime with its first transfer pricing legislation and it is advisable, so take the new rules into consideration asap. However, a prudent businessman should not stop here but should see the much bigger picture. Even if the current Thai draft does not go back to the drawing board, Thailand is much too much involved and embedded in international trades and services to ignore international best tax practices. To trust on the new easy playing field could be deceptive.

The topic „transfer pricing“ is predominantly a tax issue. Although the pricing of goods and services within a group of companies might have certain corporate law implications, the transfer pricing strategy focusses on tax implications and is the playground for tax advisors and experienced tax lawyers.  These issues have a higher practical relevance for multinational enterprises than double taxation, CFC (controlled foreign company) regulations, thin capitalization principles, general anti-avoidance rules or any other tax topic. Since Thailand has no group taxation privilege, transfer pricing can play a significant role even between domestic Thai group companies.

Thailand traditionally has a very limited transfer pricing legislation. Under Section 65 Revenue Code, tax authorities are allowed to adjust the price of sales, services, and loans, if under market price, and excessive expenses. In addition, under Thailands tax treaties, “… conditions … which differ from those which would be made between independent enterprises, … may be included in the profits of that enterprise and taxed accordingly“.

The Departmental Instruction No Paw 113/2545 (DI 113/2545) as of May 16, 2002, consists of just three-and-a-half pages, is not binding for taxpayers and tax courts and contains just a few criteria for the calculation of net profits, assessment of revenues and expenses, documentation requirements and APAs (Advanced Pricing Agreements).

The drafted new legislation, containing just new Sections 71 bis and 71 ter of the Revenue Code, merely mentioning than defining (i) arm’s length principle, (ii) related parties, (iii) documentation requirements, (iv) APAs and (v) penalties. It seems to be the intention of the legislator that the definitions of terms and elements in meticulously detailed work should be done by the OECD. However, the OECD is already far ahead and tinker with the next but one generation of transfer pricing rules.

tp2Transfer pricing has always been a predominant focus within the OECD’s work to fight base erosion and profit shifting (BEPS) and to support the modernization of the international framework for taxing multinational companies. The current BEPS-initiative of the OECD puts a strong emphasis on improving the quality of transfer pricing rules and at least 4 out of 15 action points “to counteract aggressive inter-company pricing practices of multi-national enterprises (MNEs)” handle with transfer pricing issues. Like it or not, but in the post-BEPS-world, there is little space for the good old tax times and its outworn rules, which had been outsmarted easily. Even in Thailand, it is impossible on the long run to turn the time back.

Transfer pricing, international tax planning, and the tax laws

Transfer pricing structuring is part of international tax planning and traditionally followed for decades its “simple tools and modules”: Profits should be taxed in the jurisdiction with the lowest tax rate; expenses should occur in the country with the highest tax burden. Regarding Thailand these three aspects have to be considered:

  1. Thailand reduced its corporate income tax rate in two steps from 30% to 20% in 2013. This converted Thailand’s tax profile from a high tax to a low tax legislation.
  2. The tax rates abroad are mostly higher. This should motivate to shift profits inbound from abroad and expenses outbound to high tax countries.
  3. Singapore and Hong Kong have a slightly lower tax rate but offer a 0% taxation for offshore activities. This should motivate to shift profits outbound to offshore jurisdictions and expenses inbound to Thailand

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To block multinational corporations from freely adjusting transfer prices, international tax laws generally use two tools: They adjust transfer prices between affiliated companies to the pricing considerations of unrelated parties. And they require certain documentation to prove that the pricing policy has been made in a reasonable way and at the right time.

International trades and services trigger two or more countries and each country has its own transfer pricing regime. As a result, at least two legislations have to taken into consideration and the sale of goods and services from Thailand to a group company abroad – or vice versa – has to be in-line with

  1. Transfer pricing limitations in Thailand
  2. Documentation requirements in Thailand
  3. Transfer pricing limitations under foreign laws
  4. Documentation requirements under foreign laws

Although many transfer pricing rules base on OECD guidelines, the devil is in the details and an unsynchronized legislation might, unfortunately, result in a double taxation or (rarely) in white profits which remain untaxed.

Tax compliance under the new transfer pricing regime

The transfer pricing regime is applicable for group companies only. Companies qualify as a group if they are linked directly or indirectly by capital, management or control. Shareholding, as solely relevant for the applicability of the Foreign Business Act, is just one of several criteria. The group qualification will trigger under the new rules reporting requirements. The good old days when the revenue department has to explicitly request certain documents are over soon.

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To compare prices between group companies with prices between unrelated parties is nearly impossible.The “arm’s length” price is often more of a concept than a fixed value. International accepted standards are (i) the Comparable Uncontrolled Price Method, (ii) the Resale Price Method and (iii) as quasi-standard the Cost Plus Method. Thailand’s industry practice is also familiar with (iv) the Profit Split Method and (v) the Transactional Net Margin Method (TNMM). Under the new legislation, group companies will have to indicate the utilized pricing method – which will kill a lot of flexibility on tax payer’s side.

Documentation always should be prepared on a contemporaneous basis – but no deadline had been indicated in the old guidelines. Documentation had to be retained at the company‘s office. The old list of ten document packages contained, above all

  1. Structure and relationship between business entities,
  2. Budgets, business plans, and financial projections,
  3. Pricing policies, product profitability, relevant market information,
  4. Documentation supporting the selection of a particular pricing method.

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In practice taxpayer previously had to decide whether he should prepare the proper documentation up-front for the case of a later investigation, or whether he can prepare all the documents later on request. Experience showed that a delay in preparation often resulted in inconsistencies, gaps, inappropriate information and insufficient supporting documents. Under the new regime, it can be expected that the documents have to prepared rather instantly.

  • Section 3 sex Revenue Code: „If the books, documents, and records … are in foreign language, … may order … to have their Thai translation prepared within a reasonable period of time.“

In the case of missing or inappropriate documentations, the tax authorities may and will assess the remuneration based on their view of a proper market value. Although the taxpayer can file a protest under Thai tax laws, the violation of the documentation requirements will in practice weaken his tax position significantly. General penalties under Thai Revenue Code amount to 100% of the amount of additional taxes and surcharges of 1.5% per month. Under the draft legislation, a penalty of THB 400,000 is charged if the transfer pricing documentation is not prepared in time.

If price adjustments under the transfer pricing rules result in a double taxation, the new regulations provide for a refund, if the company follows specific steps within a prescribed time. Whether a cash refund is a realistic scenario, only the future will tell.

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The Revenue Department is generally willing to issue an APA (Advanced Pricing Agreement) on the legality of transfer prices – typically with a validity of five years. However, APAs had a very slow start and are, up to now, very rare. The APA requires from the taxpayer not only a specific request, similar to the request for a binding tax ruling under German tax laws but also all the relevant documentation. The successfully achieved APA provides the taxpayer with rules, methodologies, and conditions which the taxpayer has to follow. It seems to be advisable to make use of the APA more often, depending on the future legislation.

Transfer pricing compliance vs. transfer pricing planning – before the anti-BEPS legislation is introduced

As a reaction to budgetary crises, Thailand is tightening transfer pricing regulations and strengthening enforcement to generate additional tax revenues. Thailand is adding more resources to its Revenue Department, is increasing its auditing rhythm and is imposing stricter penalties. However, by implementing the tools and modules of the past in its new legislation, the Thai Revenue Department brings a knife to a gunfight.

As a downside, multinational enterprises are faced with increased administrative and compliance burden. Complying with transfer pricing requirements is costly in itself. Scared headquarters might decide to proactively mitigate the risks associated with transfer pricing by avoiding sophisticated tax planning tools. To be BEPS-compliant outside of Thailand but using the old rules from the last century for the Thai inter-company business relationships is like trying to square the circle.

However, a transfer pricing strategy with the focus on tax compliance stands in opposition to the transfer pricing strategy to minimize tax payments. Field surveys under U.S. tax legislation show that a corporation focusing on minimizing taxes has an effective tax rate that is more than 6% lower than an enterprise focusing on tax compliance. Transfer pricing-related tax savings are greater when higher foreign income, offshore entities, and R&D activities are combined with a tax minimization strategy.

Lack of disputes with tax authorities is certainly one of the desirable goals, but not the only one. The abstinence from sophisticated tax-planning tools and modules regularly comes with a high price tag. The management of a Thai company should be encouraged by the group headquarters not to use always the easiest path. The strategic tax planning decisions of multinational enterprises should be made by the headquarters and not silently shifted to a slumberous accountant in the Thai affiliate company without global knowledge.

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Transfer pricing planning is not limited by the selection of the most appropriate transfer pricing method. The minimization of the effective group average tax rate requires a comprehensive structuring of the supply chain, taking into account the allocation of risks, functions, assets and human resources. Well-known tax schemes are on the one side the stripped or limited risk distributorship model and on the other side, contract manufacturing respectively toll manufacturing. Similar solutions are available for the efficient tax management of intellectual property.

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When implementing tax planning modules in the transfer pricing policy, legal implications have to be taken into consideration. For instance, a tax-driven corporate restructuring might result in additional compliance requirements, the tax-driven supply chain has implications on the balance sheet, the transfer of intellectual property might reduce the IP protection under applicable laws, the transfer of key personnel to low tax jurisdiction triggers the management compensation plans and risk transfers could have an impact on product liability aspects.

The OECD’s Base Erosion and Profit Shifting initiative and its impact on Thailand’s transfer pricing regime

It should be noted that the BEPS rules are a game changer to the functional analysis described above. Under BEPS not only the economically relevant characteristics define the substance, but the full scope of creation, ownership, maintenance and use of the assets are relevant. For intellectual property the five stages developing, enhancing, maintenance, protecting and exploiting are distinguished in the post-BEPS-area. It has to be seen in the future, whether the action list of 15 steps will gain relevance to Thailand’s transfer pricing legislation now – or later.

In the BEPS-world multinational enterprises enter a more complex tax environment and lessons learned in the past might urgently need a refreshment. BEPS has been made by its creator to eat tax schemes like the “Double Irish With A Dutch Sandwich.” Whether Thailand will implement these sophisticated rules in its final transfer pricing legislation and policy, the future will tell.

End-to-end transfer pricing planning

A transfer pricing strategy focussed on tax efficiency requires a complete end-to-end approach. Following key best practices includes these four steps:

  1. A comprehensive collection of financial data and other qualitative information of the complete supply chain management.
  2. Definition, maintenance, monitoring and clear communication of the group transfer pricing strategy within the group – including Thailand.
  3. Analyzing and adjustment of the input and feedback received from the (Thai) affiliate, including fine-tuning of data and proceedings.
  4. Documentation of all steps, decisions, communications into a full paper trail at the level of the headquarters – apart from the local documentation required by local Thai legislation.

To ensure compliance with the dynamic transfer pricing landscape of Thailand does not mean to overpay taxes. It would be welcome if the headquarters would actively accept the responsibility for the group’s average tax rate and act accordingly. The new legislation should be seen as a wake-up call to leave the comfort zone.


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