The evolution of Thailand’s transfer pricing laws has taken a long and winding path. The draft laws were initially adopted in principle by the Thai Government Cabinet in 2015, but the final laws were not enacted until November 2018. As of this writing, the journey has not ended — we are still waiting for the issuance of supporting regulations.
Transfer pricing laws provide power to the Thai tax authority to reassess the taxable income and expenses of related party transaction(s), ensuring that they are consistent with the arm’s length principle for corporate tax purposes. The arm’s length principle requires that the pricing of related party transactions be based on the pricing that would have been agreed upon in transactions between independent parties. The law is effective for accounting periods commencing on or after 1 January 2019.
Prior to the introduction of the new transfer pricing laws, taxpayers were expected to follow a non-binding transfer pricing guidance from the Thai Revenue Department issued in 2002, which was consistent with the OECD guidelines prior to base erosion and profit shifting (BEPS).
A related party is defined as:
Interpretation of paragraph (3) of the related party definition will require clarification from supporting regulations. The Thai tax authority has indicated that only paragraphs (1) and (2) of the definition will be applied initially. That is, only companies with shareholding relationship, direct or indirect, of 50% or more will be regarded as related.
TP Disclosure Form
A company or partnership with revenue of not less than 200 million Thai baht (THB) (approximately $6.3 million) and that does not meet the other exemption conditions to be stipulated in the Ministerial Regulations is required to prepare a TP disclosure form for submission to the Thai tax authority when it files its annual corporate tax return 150 days after the accounting year end (as one of the Thai tax authorities COVID-19 relief measures, the deadline for companies [non-listed] which would have been required to lodge the form within April 2020 to August 2020 was extended to 31 August 2020). The form requires certain information, including:
The requirement to provide a list of all of an MNE’s related parties, whether or not they have transactions with the Thai entity, is an onerous compliance obligation to be shouldered by the Thai entity. It is also important to note that the transfer pricing laws apply to both cross-border and domestic related party transactions.
Master file and Local file
The Thai tax authority, upon the Director-General’s approval, has the power to request additional documents or evidence with respect to the related party transactions within five years after the company files the TP disclosure form above. The transfer pricing documentation will be split into two files: (1) Master file, and (2) Local file, which is consistent with the approach adopted by the OECD as part of its BEPS initiative.
The specific contents of the Master File and Local File will be covered under the Ministerial Regulations. Since we do not have the specific contents at this time, companies preparing the Local File should rely on the contents required in the original transfer pricing guidance issued in 2002. The revenue threshold for the Master File is expected to be higher than 200 million THB.
A company has 180 days to submit the transfer pricing documentation from the first notice letter from the Thai tax authority, and 60 days for subsequent notice letters. In the case of special circumstances, the Director-General may extend the time limit from 60 days up to 120 days. Apart from the first notice, it would still be important to prepare the documents on a timely basis after year end as the 60-day time limit is unlikely to be sufficient to ensure that the document is prepared with input from all relevant parties, including the parent company.
Failure to file the report and/or additional documents/evidence, or submitting incomplete/incorrect documents or evidence without justifiable reasons under the law, will result in the taxpayer being subject to a fine not exceeding 200,000 THB.
As a third tier of the transfer pricing documentation, the Thai tax authority will require annual submission of a Country-by-Country report (CBCr). A draft of the CBCr laws, which was largely consistent with the OECD template, was provided for public discussion in April 2020. The proposed first year of enforcement is for accounting periods commencing on or after 1 January 2020 and for companies with consolidated revenues that are greater than 28 billion THB (approximately $875 million). The filing date for a resident ultimate parent entity or surrogate parent of an MNE group is 12 months after the close of the accounting period.
The new law also allows for corresponding adjustments for both cross-border and domestic transactions. For example, if Thai company A is assessed additional revenue from a transfer pricing adjustment for a transaction with related Thai company B, then company B may be able to claim an additional deduction for the amount of the adjustment. A Thai contracting party will be entitled to claim a tax refund as a result of tax reassessment provided that the refund is requested within three years from the due date of filing the relevant income tax return, or within 60 days after the date of receipt of a notification letter from the Thai tax authority.
With the introduction of the Thai transfer pricing law, taxpayers should double their efforts to ensure transfer pricing compliance. The Thai tax authority is expected to significantly increase staff resources in order to enforce transfer pricing rules in the near term. While the ongoing COVID-19 pandemic puts into question how aggressively the tax authority will take on this approach, it is certainly a looming reality as profitability levels return to normal.
The author is a tax partner with Deloitte Thailand and leads the Thailand transfer pricing services.