Transfer Pricing Update: Additional Documents Required for Related Party Declarations

Written by Mr. Monchai Varatthan and Mr. Phongnarin Ratanarangsikul
The Revenue Department recently issued Director-General Notification on Income Tax No. 407. The new law requires certain parties to prepare documents or evidence necessary for transfer pricing analysis among related companies or juristic partnerships (“Notification No.407”).

Corporate taxpayers with revenue exceeding Baht 200 million in any accounting period must disclose their related party transactions to the Revenue Department. Notification No.407 is part of these broader disclosure requirements, which intend to establish whether related parties execute transactions at market prices (a.k.a arm’s length price).

The new requirement will become effective for taxpayers whose accounting periods start on and from 1 January 2021.

The author discusses the new requirement and what taxpayers should expect and prepare. All references to Sections are to those under the Revenue Code.

Who is liable under Notification No.407?

The Revenue Department can require a taxpayer or the “Reporting Entity” to submit documents or evidence, in addition to the standard disclosure form. The authority typically does so by issuing a notification letter, approved by the Director-General, requesting documents or evidence necessary to determine transfer prices between related companies.

Notification 407 defines the Reporting Entity as an organization that receives a notification letter, transacts with other companies, and, for its having revenue exceeding Baht 200 million in any accounting period, must complete disclosures under Section 71 Ter.

Required Documents or Evidence

The Revenue Department can require the Reporting Entity submit the following documents or evidence:

  1. Information of the Reporting Entity, e.g. description of business operations, shareholding structure, explanation of business restructuring between related companies, etc.
  2. Descriptions of intangible property transfers.
  3. Information about the Reporting Entity’s “controlled transactions”—a transaction with a related party, e.g. a list of controlled transactions by category and with explanations, contractual parties, pricing policy, agreements, functional analysis, and assets and risks of the Reporting Entity, etc.
  4. Financial information used to select pricing method(s) of each category of controlled transaction along with the rationale for that selection.
  5. A list and description of comparable uncontrolled transactions or comparable independent companies, information on profit level indicators and arm’s length range(s), sources of information used for locating such comparable uncontrolled transactions or independent companies or juristic partnerships, etc.
The above list is not intended as exhaustive. See Notification 407 for the entire list of documents or evidence the Revenue Department may request.

All documents and any evidence must be submitted in Thai language.

Complying with the Notification

Notification No.407 applies to accounting periods commencing on or after 1 January 2021. Hence, the Revenue Department is empowered to request such documents or evidence from a Reporting Entity starting from this accounting period. The Reporting Entity must submit the requested documents or evidence to either the Revenue Department’s Business Tax Administration Office or to its local tax office.

First-time recipients of the notification letter have 180 days to submit documents or evidence to the authority. (See Section 71 Ter, Paragraphs 3 and 4.) Thereafter, the Reporting Entity in receipt of subsequent notification letters must submit documents or evidence within 60 days from receipt of the notification letter(s). Extensions of up to 120 days are possible in these cases.

Author’s Note:

Be proactive, not reactive.

Taxpayers must stay aware of this requirement, prepare for the likelihood of questions and issues, and have the required documents or evidence at least organized and accessible for purposes of submission.
In summation:

  • Taxpayers whose revenue exceeds Baht 200 million and have declared related party transactions in the standard disclosure form under Section 71 Ter, Paragraph 1 can potentially receive a notification letter from the Revenue Department requesting additional documents or evidence.
  • Taxpayers who foresee having to submit the standard disclosure form should collect relevant documents, from the accounting period’s start, and store them for easy access.
  • Taxpayers must start reviewing their related party transactions, if contrary to Section 71 bis. [In another words, taxpayers must determine whether the commercial or financial conditions of these transactions differ from those typical of independent parties or whether there is reasonable cause for the Revenue Officer to suspect mischievous of profit transfers.] The Revenue Officer is empowered to assess transactions upon suspicion of mischievous activity.
  • Taxpayers should prepare the required documents in the form of transfer pricing documentation report [a.k.a. Local file] and keep such documents for 5 years after submission of the standard disclosure form. Five years is the current prescription period during which the Revenue Department can requisition taxpayer documents under Section 71 Ter, Paragraph 1.
  • Taxpayers must note that the Revenue Officers are empowered to adjust transaction values where they suspect prices, terms or conditions of related party transactions are not set at the market price. In this outcome, taxpayers would be compelled to recognize additional revenue or reduce expenses. Either way, taxpayers bear additional corporate income tax and other related taxes, e.g. value added tax, etc.