Can the Revenue Officers still audit transfer pricing tax using general provisions?
Before the enactment of the specific transfer pricing law in 2019, the Revenue Officers has all along conducted tax audits on transfer pricing issues using methods aligned with the OECD Guidelines (the same as those prescribed in 2021 under Notification of Director-General on Income Tax No. 400 or DGN 400). For example, in Supreme Court Judgment No. 3071/2531, the Court ruled that the Revenue Officer lawfully assessed the cost of natural rubber used by Tor. Partnership in setting its selling prices by referring to the Ministry of Agriculture’s monthly average price data from 1981–1983 [CUP Method], since all of the receipts claimed by the partnership were inadmissible as evidence. Another example is Supreme Court Judgment No. 4183/2533, where there was evidence that P. Co. had purchased steel without recording the costs in the accounting book. The officer thus computed the selling prices—using the cost of imported steel from the record of the Customs Department, adding other production costs such as raw materials, labor, and other expenses, along with 9% profit margin calculating from the company’s financial statements [Cost Plus Method]. The Court held that this was not a speculative calculation but rather it was an accounting-based assessment supported by facts. Therefore, it is not the use of calculation method without lawful ground.
As a matter of fact, the enactment of specific transfer pricing legislation did not replace the general provisions that the Revenue Department used for transfer pricing audits in the past. All tax practitioners view that transfer pricing assessments must be conducted under Section 71 bis and tax assessments on price-related issues must be conducted under Sections 65 bis and 65 ter. However, at the present time, the Revenue Officers still audit transfer pricing issues with the old paradigm. For instance, an Officer may disallow expenses paid for services provided by a parent company at an amount exceeding 5% of the total revenue as tax deductible expenses. Such an audit has no support by benchmarking the prices or profit margins against that of independent entities using the prescribed pricing methods. This may be due to their familiarity with the old practices. What’s more puzzling is that, based on my experience, officers have sometimes documented in Form Tor. 6 (i.e., Testimony form) that the tax was assessed under Section 71 bis, yet the applied method clearly does not comply with the legally recognized pricing methods and the procedural steps prescribed under Departmental Instruction No. 400.
Another key issue is that Sections 65 bis and 65 ter require the companies to sell or purchase goods at the prices not lower or not higher than the market prices—yet neither provision defines “market prices.” When applying these sections in transfer pricing audits, the Officers thus have the discretion to determine what they deem to be the appropriate market prices. Consequently, the burden of proof falls on the companies to demonstrate that the transfer prices are not lower or higher than the “market prices” determined at the Officer’s discretion.
This raises the question: If the companies initially fail to establish their transfer pricing using legally accepted benchmarking or profitability analysis methods, and do not follow the practices under DGN No. 400 or 407— while the Officers do not assess tax under Section 71 bis but assess taxes by virtue of Sections 65 bis and/or 65 ter—then, during the tax appeal process or in court, will the Tax Appeal Committee or the Tax Court accepts the Companies’ arguments regarding the Officer’s failure to audit transfer pricing by mean of specific transfer pricing rules?
[Contact Person: Mr. Phongnarin Ratarangsikul | Partner]