The new transfer pricing (TP) legislation in Thailand signals a tougher approach on TP, with the next step being its enforcement through tax audits.

Background

Thailand’s Revenue Code has for a long time contained provisions to give revenue officers the power to assess transactions for tax purposes at market prices. Off the back of these provisions, the Revenue Department issued an instruction in 2002 to provide guidance on determining the market price of transactions between related parties. The instruction essentially followed the OECD’s TP guidelines.

To fulfill Thailand’s commitment as a member of the OECD’s Inclusive Framework on BEPS, legislation was introduced to codify the arm’s-length principle into the Revenue Code and impart specific powers to assessment officers to impose TP adjustments on either income or expenses arising from non-arm’s length transactions, effective for accounting periods starting on or after January 1 2019.

The legislation also introduced mandatory TP documentation requirements and filing of TP disclosure forms by certain taxpayers.

Recent developments

Transfer pricing regulations continued to evolve in 2020, with draft rules for country-by-country reporting released for public consultation. The draft rules propose making the report effective for accounting periods commencing on, or after January 1 2020.

In November 2020, a regulation was issued on the use of internal and external comparables, which aligned with the OECD’s TP guidelines. If internal comparables are not available, the regulation requires information on similar transactions between independent parties to be used, regardless of whether such transactions take place in or outside the country or are undertaken by domestic or foreign companies.

A clarification may be needed in the future on the circumstances in which foreign comparables will be acceptable, as the Thai Revenue Department has previously expressed a strong preference for the use of Thai comparables.

Disclosure requirements

Many companies in Thailand adopt a December 31 year end, and these companies would have filed disclosure forms for the first time in respect of their December 31 2019 financial year.

Only companies with Baht 200 million ($6.7 million) or more in revenues in an accounting period must file the disclosure form with the Revenue Department, disclosing details of their related parties and the transactions during the year with these parties.

The filing deadline was extended to August 31 2020 because of the pandemic and the Revenue Department then offered to reduce the penalty from Baht 200,000 ($6,900) to Baht 5,000 ($173) if the form was filed late due to the pandemic and it was filed electronically by December 31 2020.

The Revenue Department will now have significant data about taxpayers’ related party dealings in Thailand. That data will be analysed and used to formulate the next steps for determining the selection of taxpayers for TP audits. It is understood that the Revenue Department has already started to make enquiries to taxpayers.

Impact of COVID-19 on transfer pricing

By June 2021, the Thai Revenue Department will have received the second round of disclosure forms for the December 31 2020 financial year (Read more about online filing of Transfer Pricing disclosure forms)

In terms of analyzing and identifying year on year trends, the Revenue Department will need to seriously consider the comparability of information that will be reported for the 2020 year, in light of the pandemic’s impact on trading conditions.

The information disclosed by taxpayers will likely not be sufficient to undertake meaningful analysis of year on year trends without requesting further information from taxpayers.

The new TP legislation grants the Revenue Department five years from the date of submission of the disclosure form to request additional information. The time given to reply is 60 days, extendable to 120 days but in the case of the very first request, the law grants a taxpayer 180 days to reply.

The Thai Revenue Department has not issued guidelines on the TP implications of COVID-19. The OECD issued a guidance at the end of 2020 under the OECD TP Guidelines, which was approved by Thailand, as a member of OECD’s Inclusive Framework. This guidance should be helpful in setting expectations in the event of a TP audit. (Read more about the impact of COVID-19 on transfer pricing).

Thailand is a manufacturing and distribution hub for many multinationals. Usually, their subsidiaries operate in Thailand as low risk or routine businesses, meaning they perform routine functions and assume routine risks as compared to the entire value chain.

The Thai Revenue Department may therefore expect a reasonable return on a year-on-year basis for such companies. As such, these companies should document the reasons for any decline in profitability due to the pandemic in their TP documentation, showing clearly how it was caused e.g. by lower capacity utilization, lower market demand, exceptional fixed costs, or other factors.

The introduction of TP legislation and the new disclosure regime has likely caused multinationals to pay more attention to the pricing of their transactions with Thai based related parties. One of the first challenges for taxpayers and the Thai Revenue Department may concern the appropriateness of the TP documentation maintained to explain the impact of COVID-19 on trading results.