Transfer pricing in Thailand has always been marginal and has received little attention from the Thai Revenue Department.
Thailand is not part of the OECD, but in any case since 2015 The Kingdom has followed its directives until it has regulated this important practice widely used by multinational groups in order to control taxation.
For the moment, Transfer Pricing does not interest small businesses, but if a turnover of more than 6 million USD is expected, it will be advisable to start paying attention to the topic. If you manage a company connected to a foreign company by means of capital. , shareholders, management or control bodies, this argument is definitely for you.
Transfer pricing in Thailand – Regulatory framework
Thailand had somewhat limited transfer pricing legislation until 2020.
Pursuant to Section 65 of the Tax Code, the tax authorities are authorized to adjust the price of sales, services and loans, if below the market price, and to excessive expenses. Furthermore, according to Thai tax treaties, “… conditions … which differ from those that would be applied between independent firms, … may be included in the profits of that firm and taxed accordingly”.
In 2015 Thai Authorities began to think of a new rule which, with articles 71 bis and 71 ter of the Revenue Code, limited itself defining the principle of free competition, the concept of related parties, documentation obligations and penalties.
It seemed to be the intention of the legislator to follow the indications of the OECD, of which Thailand is not a part, however.
In 2018, the Revenue Code Amendment Act (No 47) established, adding the new Section 35 ter, 71 bis and 71 ter in the Thai Revenue Code, to make the new legislation effective for the fiscal years starting from January 1st, 2019.
Therefore, from 2020, companies with an annual turnover of over THB 200 million have started to submit transfer pricing documentation with the annual tax return.
In January 2021, the TRD issued two notifications from the Director General, both with immediate effect: the first communication introduced the possibility of sending electronically information on related parties and transactions subject to control.
The second, notification number 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 incorporates the OECD’s transfer pricing concepts.
What is transfer pricing
transfer pricing determines the market price or tax valuation for cross-border or domestic transactions between related entities.
The market price (or arm’s length principle / price) is the consideration that independent contracting parties would charge commercially for the same types of goods or services supplied, on the date the transaction is made.
The transfer pricing regime is applicable only to companies which are part of a group. Companies qualify as a group if they are directly or indirectly connected by capital, management or control bodies. Therefore, two companies that share shareholders, management or supervisory bodies are subject to transfer pricing regulations.
In summary, transfer pricing is a tool for verifying the fairness of the sale prices of tangible and intangible assets between companies belonging to the same Group.
If we reason well, this is a case that affects many Thai companies set up and managed by foreign investors, with the only limitation (for now) of 200 million in annual turnover.
What should the company do?
Comparing the prices between companies in a group with the prices charged by third-party companies is almost impossible: The market price is more a concept than a real value.
In order to define the right Price, five international standards are generally accepted:
- the Comparable Uncontrolled Price Method
- the Resale Price Method
- as quasi-standard the Cost Plus Method
- the Profit Split Method
- the Transactional Net Margin Method (TNMM)
Under the new legislation, group companies will have to indicate the pricing method used.
The legislator does not indicate a deadline for the preparation of documents, which can be prepared on a voluntary basis or at the request of the Thai Revenue Department and stored at the company’s headquarters.
The minimum information to be provided is:
- Structure and relationship between business entities,
- Budget, business plans and financial projections,
- Pricing policies, product profitability, relevant market information,
- Documentation to support the selection of a particular pricing method.
Transfer pricing in the case of intangible assets
With regard to the management of intangible assets, taxpayers are advised to consider the obligations of each contracting party in relation to the development, improvement, maintenance, protection and exploitation of the intangible asset.
Factors to consider when setting the price of an intangible asset include expected benefits, geographic limits, unique characteristics, etc. A discussion of the transfer pricing method to use would have been helpful, as the discounted cash flow approach is sometimes used in intangible valuation and this is not one of the five prescribed methods.
FAQ ON TRANSFER PRICING IN THAILAND
What is transfer pricing?
transfer pricing determines the market price or tax valuation for cross-border or domestic transactions between related entities.
What is required regarding transfer pricing in Thailand?
- The submissionto the Revenue Department of an annual report of transactions with domestic and offshore related parties.
- Supporting Documentation on Transfer Pricing.
When does it take effect?
The transfer pricing regulations have been in force since 2020, for transactions with related parties in the previous year. For operations from 2020 onwards, the deadline for submitting the documentation expires 150 days after the end of the accounting year. In the event of a formal request from the Revenue Department, the documentation must be submitted within 60 days.
Who has to prepare the report?
Thai companies or legal partnerships with related parties and / or related party transactions and income exceeding 200 million Thai baht (US $ 6.33 million) in the previous accounting period.
What penalties are applied for non-compliance?
Fine of up to 200,000 Thai baht ($ 6,330) for inadequate or inadequate documentation or incorrect information.
Considering that the Revenue Department Officer has the power to recalculate the tax due, an additional corporation tax may be required, with a penalty equal to the fiscal deficit, increased by 1.5%.
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