By Varapa Aurat (Consultant, Tilleke & Gibbins, Thailand)
On May 6, 2021, a new transfer pricing notification from Thailand’s Tax Department was officially published in the Government Gazette. The Notification of the Director-General of the Tax Department Re: Income Tax (No. 400), which was first announced earlier in the year, prescribes the criteria, methods, and conditions for Tax Department officials on how to assess income and adjust expenses for transactions between related parties (as defined in Section 71 bis of the Tax Code) that engage in intercompany transactions where conditions between the two parties in their commercial or financial relations differ from those that would be made between independent parties (i.e., where the transaction is not an “arms length” transaction).
Those who are familiar with international transfer pricing standard practices will note that the measures under the notification generally follow the concept of chapters II, III, VI and VII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The key elements of the notification are summarized below.
Transfer Pricing Methods Allowed
The notification recognizes the following as accepted transfer pricing methods:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Transactional Profit Split Method
The notification also requires that the arm’s length result of an intercompany transaction (i.e. the controlled transaction) must be determined using the most appropriate transfer pricing method. If none of the above transfer pricing methods is appropriate for the tested controlled transaction, the company may apply an alternate pricing method to the transaction by notifying the Director General of Revenue in writing, within the relevant accounting period, and describing the reason for doing so.
Selection of the Most Appropriate Transfer Pricing Method
There is no formal order of preference for the use of the five accepted transfer pricing methods. However, the notification requires the selection process to take account of the following factors:
- The respective strengths and weakness of the recognized methods;
- The appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through functions performed, assets used, and risk assumed (functional analysis) by each party under the controlled transaction;
- The availability of reliable information to apply the selected transfer pricing method; and,
- The degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments (that may be needed to eliminate material differences between them).
Special Considerations for Intra-Group Services
Where the controlled transaction relates to a service, the remuneration will be deemed an arm’s length price if:
- The service has actually been rendered;
- The service provides, or would provide, the service recipient with economic or commercial value;
- An independent enterprise in comparable circumstances would have been willing to pay for the activity if it were performed by an independent enterprise, or would have performed the activity in-house for itself; and,
- The amount charged would have been charged and accepted between independent enterprises for comparable services.
Remuneration for a service that benefits the shareholders or the partners of a company or juristic partnership is not considered an arm’s length charge.
Special Considerations for Intangibles
Where the controlled transaction involves intangible property, the following factors shall be taken into account to determine the remuneration for the controlled transaction:
- If the transaction involved the use of intangibles, consideration shall be taken on the party involvement in development, enhancement, maintenance, protection, and exploitation of intangibles, including assets used and risks assumed.
- If the transaction involved the sale, transfer, or grant of use rights of intangibles, consideration shall be taken on benefits, geographical limitations, specifications, and the right to develop the intangibles.
If Revenue Office officials adjust the income or expenses of a party to an intercompany transaction, the other party will be allowed to perform a corresponding adjustment if:
- The tested party already paid tax following the official’s adjustment; and,
- The adjusted income or expense has been included in the tax computation of the other party, and that other party did not conceal the information or falsely inform the tax authorities of the controlled transaction.
The corresponding adjustment will also have to be made in accordance with the applicable tax treaty.
Advance Pricing Arrangements
If the company has cross-border related party transactions, the notification also allows it to request an advance pricing arrangement between Thailand and the other jurisdiction.
The notification applies from the accounting period starting on or after January 1, 2021, onwards. The Revenue Department has not yet issued any related regulations or notifications with respect to the preparation of transfer pricing documentation.