The note at the end of the Act amending the Revenue Code No. 47, B.E. 2561 explains the reasons for enforcing the transfer pricing law (which reflects the Revenue Department's attitude towards transfer pricing) that currently, large companies with capital, control, and management relationships "can transfer profits to avoid taxes" by setting prices, service fees, or interest rates differently from what should be set if operated independently. Therefore, specific laws on transfer pricing must be enacted (to deter?). So, Section 71 bis empowers officials to adjust income or expenses for tax assessment if transfer pricing is deemed non-arm’s length "in a manner that can be believed to transfer profits."
I would like to invite us to think on two key issues:
1. If explaining to the officials that the contracting parties in the controlled transaction both pay taxes at the same rate, there is no incentive to set transfer prices to transfer profits. Will this be accepted? Because the concern is that both companies may be under the supervision of different Revenue Department areas, each of them must be responsible for their tax collection performance.
The answer may lie in the announcement No. 407, point 3, which states that companies that "do not need to submit" documents analyzing comparable prices or profit rates with similar independent companies (or Benchmarking Analysis) "can" if have the following characteristics:
(a) Business have income not exceeding Baht 500 million;
(b) Didn’t have controlled transactions with companies that pay corporate income tax at different rates;
(c) Didn’t have controlled transactions with companies established under foreign laws; and
(d) Both the company and the contracting party of the controlled transaction do not have accumulated losses carried forward from previous years.
These exceptions should help reduce the taxpayer's expenses because they do not need to spend time and money on Benchmarking Analysis. However, the announcement No. 407, point 3, does not state that "officials will not audit transfer pricing taxes." If taxpayers are not exempt from tax audits, they still need to use Benchmarking Analysis to prove that the transfer prices set comply with Section 71 bis.
Another exception is companies that have made Advance Pricing Agreements (APA) and are still in effect. The APA guidelines state that officials will not audit transfer pricing taxes, thus providing higher confidence. However, this exception is limited to contracting parties registered under foreign laws only because Thailand's APA is only bilateral agreements (Bilateral APA) with contracting parties in countries with tax treaties with Thailand. And submitting an APA requires Benchmarking Analysis beforehand.
2. I would like to invite us to change our perspective on this transfer pricing law. From the intention of deterring offenders, change to view the positive effects of the law, which is reducing the level of uncertainty. If taxpayers can set transfer prices correctly using the five pricing methods endorsed by the Revenue Department, companies can manage this risk. While the benefit that the Revenue Department (and Thailand) will receive is immediate full tax revenue (not increasing tax liability, which is a burden on taxpayers because it focuses only on catching and punishing offenders). From this perspective, if the Revenue Department focuses on educating taxpayers about correctly setting transfer pricing policies, it should benefit all parties more.
[Contact Person: Mr. Phongnarin Ratarangsikul | Partner]