Guru Speak

Transfer pricing may often be the focus of negative attention from the Revenue Department. This is not surprising, as organi¬sations can use it to shift profits from one company in a group to another in order to pay less tax in Thailand.

The Revenue Department introduced a set of transferpric¬ing guidelines in May 2002 that provide guidance on how to determine such pricing. It has been enforcing these guide¬lines rigorously.

In an attempt to ensure that it receives its fair share of tax revenue.

In countries such as the United States, the United Kingdom and Australia, multinational corporations are continually monitored to ensure that suf¬ficient profits are reported and taxed in the home territory. Without similar rules and enforcement, Thailand could lose out on tax revenue if MNCs decide to overreport profits in their home countries to avoid costly audits there.

The Revenue Department has been quite successful in its transferpricing challenges. In the past, a tax assessment of Bt40 million was considered sig¬nificant. In transfer pricing, how¬ever, adjustments can reach hundreds of millions and even billions of baht.

Taxpayers are seen as soft tar¬gets when it comes to transfer pricing because of the many pit¬falls involved.

First, an MNC has to choose a business model and an appro¬priate transferpricing policy. For example, a group may choose to establish a base focusing exclu¬sively on manufacturing with the parent company taking responsi¬bility for the sale and distribu¬tion of products and assuming most of the risks associated with running the business.

In this example, the most appropriate transferpricing poli¬cy would be "cost plus", reflect¬ing the price that a business would be prepared to pay an independent manufacturer to produce a product for it if it had no production facilities of its own. If a "resale price" transferpricing policy were adopted in this case, the manufacturer's return may be too high in a mar¬ket upturn and too low in rela¬tion to its func¬tions, risks and assets in a market down¬turn.

However, a perfectly good transferpricing policy can still cause prob¬lems, particu¬larly if it is diffi¬cult to implement.

Finally, even if an appropriate policy is chosen and properly implemented, taxpayers may still be challenged by the Revenue Department. Perhaps the implementation of the transferpricing policy has not been properly documented, or the taxpayer has prepared transferpricing documentation but the documents are not sufficient to support the assertions made.

Thailand has benefited both from transferpricing adjust¬ments and from increased trans¬ferpricing compliance, with MNCs now having to think care¬fully whenever they want to increase royalty or management fees, for example.

Transfer pricing is here to stay.