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New transfer pricing regime imminent

20 Mar 2018 at 04:00 / NEWSPAPER SECTION: BUSINESS

New transfer pricing regime imminent

Vague 'justifiable grounds' excuse becomes a thing of the past as regulations brought up to international standards

Since last year, Thailand has become a member of two global groups combatting international tax avoidance. First, the Global Forum on Transparency and Exchange of Information for Tax Purposes requires member countries to exchange information for tax transparency. Second, the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) commits members to implement up to 15 action plans, with action plans 8-10 concerning transfer pricing.

Transfer pricing describes a transaction where taxable income is distorted by a price strategy used by multinational enterprises to move profits to a lower-tax jurisdiction. The BEPS action plans aim to ensure that taxes are imposed in the jurisdiction where the value of the transaction is genuinely generated.

For the past four decades Thai authorities dealing with this challenging issue have relied on the primitive "imputed income" rule. This authorises an official to assess tax if a transaction is entered into with no consideration, or with consideration lower than the "market value", and without "justifiable grounds". Now the government has finally decided to lift the standard of anti-transfer pricing rules to the level set out by the OECD.

In the middle of last year, public hearings were held on the first draft of an Act to amend the Revenue Code to include section 71 bis and 71 ter. Some disagreements were expressed about perceived broad application of authority. In the most recent draft, which the cabinet approved early this year, the main provisions include the following:

(a) Except for the accounting year in which income does not exceed the amount specified in the ministerial regulation (at least 30 million baht), a company must submit, together with its annual tax return, a report on any "related-party transaction", the value of which must be disclosed, irrespective of whether their relationship existed throughout the accounting year.

(b) For the purposes of net profit tax, withholding tax on income paid in or from Thailand to a foreign entity "not doing business in Thailand", or tax on profit remitted to an offshore entity, if the commercial or financial terms of the related-party transaction differ from what they would have been in an arm's length transaction, officials can assess income tax by adjusting income or expenses on an arm's length basis.

(c) A transaction will be considered "related" if one company holds, either directly or indirectly, at least 50% of the shares in the other, or at least 50% of the shares in two companies are held directly or indirectly by the same person(s), or there is common capital, management or control that does not allow either to operate independently from each other.

(d) Within five years from the day the report in (a) is submitted, the assessment official may require additional information or documentation for transfer pricing analysis. The company must comply within 60 days. If it can prove an unavoidable delay, the director-general of the Revenue Department can grant an extension of up 120 days.

(e) Where a company that was a party to the assessed person paid more tax than should have been paid based on the assessed price, it will be entitled to request a tax refund within three years from the deadline for tax return filing, or within 60 days from the day it receives a letter of adjustment from the assessment official.

The wording of the new rules suggests there will be no excuses such as "justifiable grounds" to charge a transaction value lower or greater than the price that would apply to two non-related businesses operating at arm's length. Pending more details in the ministerial regulations, the adopted price should be the same as that concluded by unrelated parties for the same or a similar transaction, in a comparable situation. The Supreme Court has supported this concept under the current tax regime.

In one case, a Thai credit card company borrowed money from its US parent at interest rates ranging from 5-6% in order to fund loans to affiliates in Thailand. The latter were charged the lower interbank rate, resulting in a loss to the card company. The Revenue Department assessed imputed income by applying the cost of funds to the card company, in other words, the rates it paid the US parent.

After taking into consideration different types of interest rates, the court ruled that the credit card company could not apply the interbank rate "since it was not a bank".

"Since the credit card company loaned to group companies the money it borrowed from the offshore lender, not the money available in its savings, the applicable rate that should be viewed as the market rate in this case was the loan rates offered by the five largest banks in Thailand," it said.

Since the loan rates offered by the five largest banks -- ranging from 14.5% to 15%, with the lowest at 8.25% during the period in dispute -- were higher than the rate imputed by the Revenue Department, the court ruled in favour of the department. It said the card company must realise interest income "at least at the rate equal to those paid to the US lender in funding the loan".

Complex interpretation issues under the new transfer pricing rule can be expected with regard to imputed income on an arm's length basis. Establishing an arm's length price where no comparable has been concluded by independent parties will also be a challenge. There is also a fear that such pricing adjustments could ultimately lead to criminal charges, or even be viewed as violations of money laundering rules under Section 37 ter of the Revenue Code.

(For those wishing to learn more about this issue, a seminar and panel discussion will be held on Friday, March 23. For reservations, call 081-445-5796, 081-821-8368 or email

By Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at

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