In 2022, the Revenue Department sent letters to many companies requesting them to submit transfer pricing information in the form of a Disclosure Form for financial year 2020 (without any hints that "they would be liable to the fines"). This is because those companies had related companies but did not submit the form as required by law. However, the deadline for submitting the 2020 form was extended by one year, allowing companies to avoid fines. Nowadays the Officers continue to follow up with companies to submit the Disclosure Form as usual. However, the fines will no longer be waived. Therefore, companies need to know (1) which companies are related companies, and (2) how to verify the status.
To determine whether a taxpayer has related companies, and which companies are related to the taxpayer, the taxpayer must understand the characteristics of related companies according to the law. Section 71 bis, paragraph 2, defines related companies in 3 categories:
- One entity holds shares, directly or indirectly, in another entity at 50% or more. This can be a foreign parent company holding shares in our company in Thailand at 50% or more, or our company holding shares in other subsidiaries in Thailand or abroad at 50% or more, etc.
- Shareholders in one entity, directly or indirectly, hold shares in another entity at 50% or more. It should be noted that the term "shareholder" in theThai language can be either a legal entity or a natural person and also can be a single person or multiple persons. For example, a parent company holds shares at 50% or more in two subsidiaries in Thailand. Therefore, both Thai companies are related companies.
- One entity holds shares or has control or management power such that another entity cannot operate independently from that entity, as defined by ministerial regulations (which have not yet been announced, so this definition is not yet in effect).
In practice, the characteristics of related companies in category 2 have caused interpretation issues leading to unnecessary tax burdens for many companies during the past 1-2 years. This may be because companies consider related companies only in cases where the largest shareholder in the company, holding 50% or more, holds shares in other companies at 50% or more. Meanwhile, the Revenue Department considers groups of shareholders, whether legal entities or natural people, or a combination of both. This may cause some companies not to submit the Disclosure Form or submit incomplete information.
Another issue would incur when a foreign parent company holds a large share but less than 50% in a Thai company, such as 49%, with 3 Thai companies holding a combined 51%. When the parent company holds less than 50%, these companies do not submit the Disclosure Form. However, the Revenue Department evidently could trace from its database that the 3 Thai shareholders collectively hold more than 50% combined and collectively hold more than 50% stake in many other companies. These companies are considered related companies, and the Revenue Department sends letters requesting the company to submit the Disclosure Form and pay fines for late submission (end of story).
All the above answers the first question, "Which companies are related to us?" The second question, "How can we verify this?" will be addressed in the next post.
[Contact Person: Mr. Phongnarin Ratarangsikul | Partner]