Transfer Pricing | Thailand
The following is a summary of how Thailand's transfer pricing ("TP") regime fits into OECD's BEPS Action Plan, and a contemplation on what Thai subsidiaries of multi-national enterprises ("MNEs") should do in this context.
Our conclusion is quite simple. Thai subsidiaries of MNEs, regardless of whether its annual revenue is in excess of 200 million Baht or not, should prepare TP documentation which entails the elements of so-called Local Files, which the OECD suggests. Generally, there should be no necessity to also prepare a Master File, nor Country-by-Country Report.
Our service fee for drafting TP documentation, which covers all the relevant elements in OECD's suggested Local File is 200,000 Baht. (This fee will cover the online corporate search service fee, which we must pay to Business Online Public Company Limited to perform our work.) If our client has more than one business segments/lines, our fee for each of the additional business segment will generally be 100,000 Baht. Other direct out-of-pocket expenses and VAT will be added to our service fees.
Thailand’s tax laws contain provisions* which would allow the Revenue Department (“RD”) to make adjustments to the taxable profits of Thai companies where a transaction was not at normal or market prices, whether or not it was with a related party. However, the scrutiny of the RD tends to be focused on the pricing of transactions between related parties, because there is a motive for the same group of companies to manipulate related party transaction prices in order to reduce the group’s overall tax burden.
*E.g.: Revenue Code ("RC"), Section 65 bis, (4) & (7); and, Section 65 ter (15).
Thailand’s relationship to the anti-“Base Erosion and Profit Shifting” (“BEPS”) efforts of the OECD
The OECD announced the following on 02/06/2017: “Thailand has become the 98th jurisdiction to join the Inclusive Framework on BEPS ("IF") and will participate on an equal footing with all other IF members at the next plenary meeting of the IF that will be held on 21-22 June 2017 in Noordwijk, the Netherlands.
The IF was established in January 2016, after the G20 Leaders urged the timely implementation of the BEPS package released in October 2015 and called on the OECD to develop a more inclusive framework with the involvement of interested non-G20 countries and jurisdictions, including developing economies.
Thailand's commitment to join the Inclusive Framework was communicated by His Excellency Mr. Apisak Tantivorawong, Minister of Finance of Thailand, during the first joint induction visit of the Inclusive Framework on BEPS and of the Global Forum on Transparency and Exchange of Information for Tax Purposes ("Global Forum"), held on 31 May – 2 June 2017 in Bangkok. Thailand became a member of the Global Forum in January 2017.
This on-site visit launched the first joint induction programme for the implementation of the international standards on exchange of information and of the BEPS measures. The programme will assist Thailand to implement new international tax standards with a focus on Country-by-Country Reporting and the other BEPS minimum standards, and the standards for exchange of information on request and for the automatic exchange of financial account information (the "Common Reporting Standard").”
Aa a consequence of the above, as well as historical enforcement practices, the RD of Thailand generally accepts OECD’s TP principals and anti-BEPS measures.
Based on “Action 13: 2015 Final Report” of OECD’s “Transfer Pricing Documentation and Country-by-Country Reporting” (“2015 Final Report”), the OECD recommends (see page 16) for countries to require taxpayers to prepare documentation consisting of three tiers. This 2015 Final Report identifies and recommends for tax authorities to require their taxpayers to prepare all three (3) of the following types of documents:
TIER 1: MASTER FILE
"The master file should provide an overview of the multi-nation enterprise’s (“MNE”) group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the master file is intended to provide a high-level overview of the group and it’s TP policies. Annex I to Chapter V of the 2015 Final Report sets out the information to be included in the master file."
TIER 2: LOCAL FILE
"In contrast to the master file, which provides a high-level overview as described in paragraph 18, the local file provides more detailed information relating to specific inter-company transactions. The information required in the local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction. The local file focuses on information relevant to the transfer pricing analysis related to transactions taking place between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country’s tax system. Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method. Where a requirement of the local file can be fully satisfied by a specific cross-reference to information contained in the master file, such a cross-reference should suffice. This 2015 Final Report provides for an Annex II to Chapter V which sets out the items of information to be included in the local file." (See Appendix I of this engagement letter for this information.)
Tier 3: COUNTRY-BY-COUNTRY REPORT ("CbC Report")
"The CbC Report requires aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. The report also requires a listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that Constituent Entity. The Country-by-Country Report will be helpful for high-level transfer pricing risk assessment purposes. Annex III to Chapter V of the 2015 Final Report contains a model template for the Country-by-Country Report together with its accompanying instructions."
The OECD has suggested a mechanism to require multi-national enterprises to file CbC Reports in its jurisdiction of residence, and subsequently share that information with other states. The relevant OECD website here goes into further details. The website also states that: "the first exchanges of CbC reports took place in June 2018 and, with the OECD’s support, tax administrations are incorporating CbC reports into their tax risk assessment and assurance processes to understand better the risks posed to their jurisdictions. CbC reports are also at the heart of other programmes to provide greater tax certainty to MNEs, including the pilot for the OECD International Compliance Assurance Programme (ICAP)."
Thailand’s Documentation Requirements
Thailand’s specific transfer pricing guidelines were issued in the form of Departmental Instruction No. Paw 113/2545 (the “Instruction”) on 16 May 2002. The Instruction provides Revenue Department officers with guidelines in interpreting the existing transfer pricing laws when conducting tax examinations and outlines the approach that taxpayers should follow when establishing transfer prices. The Instruction is, in general, consistent with the OECD’s transfer pricing guidelines. Thereafter, in practice, the RD of Thailand has consistently generally accepted the TP principals as provided for in the “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”.
Dated November 21, 2018, the Revenue Code Amendment Act (No. 47) was published in the Government Gazette, Volume 135, Legislation Issue. (See Appendix II) This amendment to the Revenue Code (“RC”) requires corporate taxpayers which has annual revenue of 200 million Baht or more, and which has related party transactions to complete a form (“TP Declaration Form”), as will be prescribed by the director-general of the RD together, when they submit their annual corporate income tax return. The form will require the taxpayer to identify and declare its related party transactions during the past tax year, and the value of such transactions. (Refer to Revenue Code, Section 71 ter, para. 1) (As of now, the RD has not published the form yet.)
Paragraph 2 of Section 71 ter of the RC further states that within five years from the date of filing the TP Declaration Form, the RD officer, with approval of the Director-General, may require specific/targeted companies to submit documents or evidences (“TP Documentation”) showing information necessary to analyze whether or not its related party transactions were at normal or market value.
Thailand’s Current Enforcement
In our opinion, the only real change arising from the recent Revenue Code Amendment Act (No. 47) is that Thai companies that have annual gross revenue of 200 million Baht or more can now be fined for up to 200,000 Baht if it does not provide accurate or provides incomplete information in its TP Declaration Form or TP Documentation. However, this should come as no relief to other companies that have revenue of less than 200 million Baht because the fundamental tax provisions [e.g. RC, Section 65 bis, (4) & (7); and, Section 65 ter (15).] which enable tax adjustments are still applicable to all companies. Moreover, even smaller companies should note that on the final page of the corporate income tax return (PND 50), the director of the company has always been required directors to declare "Yes" or "No" as to whether their "Sales of goods, services, or properties, provisions of loans, or rental of properties without consideration or with consideration that was substantially lower than market price"; and whether the company had the "Purchases of properties, including expenses connected to the purchase, and service charge at a price that was substantially more then reasonable amounts."
In other words, all companies should continue to transact on an arms's-length basis (i.e. market or normal value), unless there is a justifiable reason to not do so.
The next questions would be whether or not companies should prepare TP Documentation or not, and if so, whether or not all three Tiers of documentation are necessary. Companies which have a material tax adjustment risk should have TP Documentation supporting that their transactions were indeed at arm's-length. If there is no such TP Documentation in place, it will have the risk of being assessed an arbitrary tax adjustment, in the event of an audit by the RD. In other words, it is safer for companies to be able to defend its pricing of transactions, and shift the burden of proof to the tax authority, to prove otherwise.
As of now, there is no clear law, regulation, instruction, etc. which specifies which of the three Tiers of documents must be prepared. Historically, Thai subsidiaries of multinational companies have prepared the equivalent of Local Files. Based on an informal interview (July 2019) with the legal department officers of the RD, it is expected that, generally, only the equivalent of Local Files will continue to be required. This is perhaps because most multinational companies in Thailand would be a subsidiaries in the group, and there is not much interest in how the offshore parent company allocates its profits globally. Moreover, if necessary, the Thai RD would ultimately be able to obtain Master Files and CbC Reports from other states through existing treaties/mechanisms. However, this being said, based on our interview, the RD has not ruled out the possibility for requiring large corporations to prepare Master Files and CbC Reports. We suspect that large multinational corporations having its headquarter in Thailand may be required, in the future, to prepare Master Files and CbC Reports.
Output (Our scope of work = Local File)
Our main service, in relation to TP is to provide TP Documentation which covers each relevant element that should be contained in a Local File. A sample outline of our TP Documentation is presented in Appendix III of this engagement letter. You will see that our outline substantially contains all of the information as recommended under Annex II to Chapter V (Transfer pricing documentation – Local file) of OECD’s 2015 Final Report.
To confirm, the objective of our work would be to analyze whether you had commercial or financial transactions with related parties, which are different from what they would have been, had you been independent unrelated parties, resulting in the transfer of profits from the party which should have incurred such profit to another related party. Or, in other words, our analysis would be to determine whether your Company’s related party pricing and/or outcomes are consistent with the arm’s length principle. We will further document such analysis.
The proposed work plan for the preparation of “TP documentation” contains four major steps (some of which may occur concurrently) summarized as follows: -
Step 1: Functional analysis
Step 2: Selection of transfer pricing methodology
Step 3: Comparable data search
Step 4: Preparation of TP documentation
Step 1: Functional Analysis
The functional analysis will involve an assessment of the functions performed, assets utilised and risks assumed by the Company and its related parties. Specific consideration is given to the related party dealings of the Company and the functional relationship between the companies and other entities in your group. In addition, the functional analysis will describe any unrelated party transactions entered into by the Company, and the relevance, or otherwise, of this data in the assessment of the Company’s transfer pricing position. We will also need a certain amount of information from you about your industry and your market. We will obtain commercial and financial information to gain a better understanding of the business activities of your and your affiliated companies. Specifically, we will:
Request information for the following purposes:
To identify the nature and volume of related and third-party transactions;
To understand the financial results, including segment results;
To understand your accounting principles;
To review existing documents including inter-company agreements, contracts etc.
Review information received and prepare follow-up requests
Conduct interviews with relevant personnel of the Company to discuss its operations and results.
Step 2: Selection of transfer pricing methodology
This step involves selection of the most appropriate transfer pricing methodology to determine the arm’s-length price or outcomes from transacting at arm’s-length. We will document our final choice, which may be by process of elimination, and document the reasons as to why other transfer pricing methodologies were not considered appropriate. The pricing methodologies endorsed by the Thai Revenue Department for the determination of market price are as follows:
Comparable Uncontrolled Price
Other internationally accepted methods which would include:
Profit Split Method
Transactional Net Margin Method
Step 3: Comparable Data Search
Once the methodology has been selected, it is necessary to identify comparable transactions/ businesses between independent parties against which the Company’s related party transactions can be evaluated. The search for comparable transactions/businesses will be performed by applying various selection and screening criteria. The level of comparability between your Company and the independent transactions/businesses will be decided based on the functional analysis performed in Step 1, above. It may be necessary to make adjustments to the independent transactions/businesses to enable closer comparability with transactions undertaken by the Company. We will provide an opinion as to whether the transactions executed by the Company during the review period falls within the range of comparable transactions or businesses, which in turn will support the conclusion as to whether or not the Company transacted in accordance with the arm’s length principle.
Step 4: Documentation
WE will prepare a written report documenting the findings and conclusions reached in the aforementioned three steps. This documentation will satisfy the TP documentation requirements of Thailand. The documentation will be prepared in the English. We can prepare a Thai translation of the documentation on request.
Generally, it takes approximately 3 to 5 months to finalize our TP Documentation. Such amount of time is necessary because multiple parties, including the headquarters of our client requires time to review it.
Our Service Fees
Main Service Fee: Based on our discussions with you and preliminary review of the financial statements, we estimate that our fees for the preparation of TP documentation (excluding detailed consideration of the repair services) would be 200,000 Baht (“Main Service Fee”) for the first business segment (“E.g., Your trading business segment). (We will absorb the approximately 55,000 Baht online subscription fee to perform our corporate search using the services provided by Business Online Public Company Limited.)
Additional Business Segment Analysis: If, while we perform our work, it is discovered that YOU have more than one business segment (E.g., You have a Service business segment), which should be separately analyzed using benchmark data distinct and different from the main business segment, performing an analysis on such additional business segment will result in an additional fee of 100,000 Baht per additional business segment, provided that we are instructed by you to prepare TP Documentation CONCURRENTLY with your first business segment. If you instruct us to prepare TP Documentation for your additional business segments after we have started our interviews with your Company personnel, we may need to adjust this fee. In deciding whether to proceed with a review of these transactions, we would suggest that the materiality of the transactions would be the main factor to the considered.
Direct Expenses: In addition to professional fees, we ask you to reimburse us for our reasonable out-of-pocket expenses incurred in connection with our services, such as travel, reproduction, telephone, postage, typing, database search and printing, plus VAT at the applicable rate (currently seven percent). (However, our “Main Service Fee” includes online subscription service fees for access to the services (“Corpus”) provided by Business Online Public Company Limited. (Which approximately costs at least 55,000 Baht). Therefore, we will not be charging your Company for such online service fee.)
Annex II to Chapter V of
OECD/G20 Base Erosion and Profit Shifting Project - Transfer Pricing Documentation and Country-by-Country Reporting
(Action 13: 2015 Final Report)
Transfer pricing documentation – Local file
The following information should be included in the local file:
A description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the country(ies) in which such individuals maintain their principal offices.
A detailed description of the business and business strategy pursued by the local entity including an indication whether the local entity has been involved in or affected by business restructurings or intangibles transfers in the present or immediately past year and an explanation of those aspects of such transactions affecting the local entity.
For each material category of controlled transactions in which the entity is involved, provide the following information:
A description of the material controlled transactions (e.g. procurement of manufacturing services, purchase of goods, provision of services, loans, financial and performance guarantees, licences of intangibles, etc.) and the context in which such transactions take place.
The amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e. payments and receipts for products, services, royalties, interest, etc.) broken down by tax jurisdiction of the foreign payor or recipient.
An identification of associated enterprises involved in each category of controlled transactions, and the relationship amongst them.
Copies of all material intercompany agreements concluded by the local entity.
A detailed comparability and functional analysis of the taxpayer and relevant associated enterprises with respect to each documented category of controlled transactions, including any changes compared to prior years.
An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method.
An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection.
A summary of the important assumptions made in applying the transfer pricing methodology.
If relevant, an explanation of the reasons for performing a multi-year analysis.
A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information.
A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both.
A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method.
A summary of financial information used in applying the transfer pricing methodology.
A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above.
Annual local entity financial accounts for the fiscal year concerned. If audited statements exist they should be supplied and if not, existing unaudited statements should be supplied.
Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements.
Summary schedules of relevant financial data for comparables used in the analysis and the sources from which that data was obtained.
Revenue Code Amendment Act
B.E. 2561 (2018)
His Majesty King Maha Vajiralongkorn Bodindradebayavarangkun
Given this 18th day of November 2018,
Being the 3rd year of the present Reign.
His Majesty King Maha Vajiralongkorn Bodindradebayavarangkun has been graciously pleased to proclaim that,
Whereas it is deemed expedient to amend the Revenue Code,
Be it, therefore, enacted by H.M. the King, with the advice and consent of the National Legislative Assembly acting as the Parliament, as follows:
Section 1. This Act shall be called “Revenue Code Amendment Act (No. 47) B.E. 2561 (2018)”.
Section 2. This Act shall be enforced on and from the day following the date of its publication in the Government Gazette onwards.
Section 3. The following shall be added as Section 35 ter of the Revenue Code:
“Section 35 ter. Whoever fails to comply with Section 71 ter or files reports or documents or evidences under Section 71 ter by showing inaccurate and incomplete information without reasonable grounds therefor shall be liable to fine not exceeding Baht two hundred thousand.”
Section 4. The following shall be added as Section 71 bis and Section 71 ter of the Revenue Code:
“Section 71 bis. In the case where companies or juristic partnerships with relationships with each other have commercial or financial requirements differently from that should have been specified if said companies or juristic partnerships had operated businesses independently, in a description that can be believed that there are transfers of profits, the Assessment Officer shall have the power to adjust the incomes and expenses of said companies or juristic partnerships so as to obtain the amounts of incomes receivable and expenses payable should said companies or juristic partnerships have operated businesses independently, as if they had received and paid such amounts for use in making computation of the net profit payable under Section 65 or the assessable income liable to tax payment under Section 70 or Section 70 bis, however, according to the bases, procedures, and conditions prescribed in Ministerial Regulations.
The companies or juristic partnerships that have relationships with each other under paragraph one refer to companies or juristic partnerships from two juristic persons upwards that have relationships with each other in the following descriptions:
(1) A juristic person holds shares in or is a partner of another juristic person, either directly or indirectly, at not less than fifty percent of the total capital.
(2) Shareholders or partners holding shares or being a partner in another juristic person, either directly or indirectly, at not less than fifty percent of the total capital, that hold shares or are a partner in another juristic person, either directly or indirectly, at not less than fifty percent of the total capital, or
(3) Juristic persons with relationships with each other in respect of capital, management, or control in a description that a juristic person may not operate business independently from another juristic person as prescribed in Ministerial Regulations.
In the case the Assessment Officer has adjusted the incomes and expenses of the companies or juristic partnerships that have relationships with each other under paragraph one and it results in the companies or juristic partnership having paid taxes or having withholding taxes withheld and remitted of an amount exceeding the amount they should have paid, or of an amount they are not liable to pay, the said companies or juristic partnerships shall have a right to file an application for a refund thereof within three years from the last day of the period of filing of tax returns prescribed by law, or within sixty days from the date of being notified of such adjustment by the Assessment Officer in writing, however, according to the regulations prescribed by the Director-General.
Section 71 ter. A company or a juristic partnership that has relationships with other company or juristic partnership in the description of companies or juristic partnerships that have relationships with each other under Section 71 bis, paragraph two, whether such relationships remaining throughout the accounting period or having inter transactions within the accounting period, shall prepare a report of information concerning the companies or juristic partnerships that have relationships with each other and the total value of inter transactions in each accounting period as per the form prescribed by the Director-General, and submit same to the Assessment Officer together with the filing of returns within the period prescribed under Section 69.
Within five years from the date of filing report of information concerning companies or juristic partnerships that have relationships with each other under paragraph one, the Assessment Officer, with approval of the Director-General, may send a notice to the companies or juristic partnerships under paragraph one to submit documents or evidences showing information necessary for analysis of requirements of transactions between companies or juristic partnerships that have relationships with each other as prescribed by the Director-General, and the person receiving such notice must comply therewith within sixty days from the date of receipt of said notice, except in the case of necessity to an extent that it is unable to comply therewith within the said period, the Director-General may permit an extension of said period further, but it must not exceed one hundred and twenty days from the date of receipt of such notice. However, specifically in the case of receiving the notice for the first time, the person receiving the notice shall comply therewith within one hundred and eighty days from the date of receipt of said notice.
The provisions of this Section shall not apply to company or juristic partnership having incomes from business or derived from business conducted within an accounting period not exceeding the amount, or of any other descriptions, as prescribed in Ministerial Regulations, the amount of income of which must be prescribed at not less than Baht two hundred million.”
Section 5. The provisions of Section 3 and Section 4 shall be enforced on the incomes of companies or juristic persons whose accounting period begins on or after 1st January 2019 onwards.
General Prayuth Chan-o-cha
Note: This Act is enacted because at present many large companies or juristic partnerships that have relationships with each other in respect of capital, management, or control, have commercial or financial requirements in making transactions between them differently from that should have been specified if such companies or juristic partnerships had operated business independently, thereby enabling them to transfer profits between each other to evade taxes they are liable to pay, and there is a tendency to use such method increasingly and continuously to an extent that it may affect the collection of income taxes and the treasury status of the State. As such, in order to prevent and to rectify such problems, it is deemed suitable to prescribe bases on collection of juristic person income tax for such a case, so that it be in line with international principle and guideline for compliance. Hence, it is a necessity that this Act be enacted.
[Ref.: Government Gazette, Volume 135, Legislation Issue, Part 97 Kor., Page 46-49, of 21st November 2018]
OUR TP DOCUMENTATION
Sample outline of our typical TP Documentation. We will substantially follow this outline unless parts are irrelevant or it would be appropriate to add or deviate from this outline. Please note that several of the items (e.g. 3. Industry Analysis) require your input, as we would not be in the best position of knowing your industry.
Table of Contents
1. EXECUTIVE SUMMARY
1.1 Purpose of the Report
1.3 Function and Risk Analysis
1.4 Transfer Pricing Analysis
2. COMPANY ANALYSIS
2.1 Overview of the Group
2.2 Related Parties
2.3 Example Company Limited
3. INDUSTRY ANALYSIS
3.1 Brief Introduction of Industry
3.2 Global Market Conditions for Company Products
3.2 Market Conditions
4. RELATED PARTY TRANSACTIONS
4.2 Financial Analysis
5. FUNCTION AND RISK ANALYSIS
5.3 Intangible Assets
6. SELECTION OF TRANSFER PRICING METHODS
6.1 Selection of Transfer Pricing Methods
7. COMPARABILITY ANALYSIS
7.1 Application of the TNMM
7.2 Selection of Tested Party
7.3 Financial data of Covered Transactions
7.4 Selection of Years for Comparison
7.5 Search for External Comparable Companies
7.6 Selection of Profit Level Indicator
7.7 Analysis and Result
CROSS-REFERENCES WITH OECD LOCAL FILE REQUISITE INFORMATION
Appendix 1: Information on Main Related Parties
Appendix 2: Function and Risk Check List
Appendix 3: Form of Financial Analysis of Annual Related Party Transactions
Appendix 4: Business Description of Selected Comparable Companies
Appendix 5: 20XX~20ZZ Financial Summary of Selected Comparable Companies