MANY taxpayers are worried about drastic changes to be brought about by the introduction of the specific transfer pricing provisions into the income tax law.
Some believe that financial years prior to when the new provisions go into effect are safe from transfer pricing assessment.
Others believe that the penalties are limited to penalties for failure to comply with transfer pricing reporting requirements.
These are all common misconceptions.
The changes are merely for keeping up with international standards and for increasing the efficiency of transfer pricing audit.
Firstly, these provisions simply modernise the income tax law by introducing internationally accepted transfer pricing concepts. These concepts already exist under double taxation agreements that Thailand has with other countries. A special time limitation for transfer pricing tax refunds is also provided to correspond with the nature of transfer pricing audits that tend to be longer than normal tax audits.
For example, company A in Thailand sells goods to company B in Japan at Bt110, which is above the ‘market price’ of Bt100. Under the current regulations, if the selling price used by company A is reduced to the ‘market price’ of Bt100, the current tax provisions don’t allow the revenue officers to adjust company A’s selling price to Bt100. So the difference of Bt10 is taxed in both Thailand and Japan.
With the specific transfer pricing provisions, revenue officers will have the power to reduce company A’s selling price to the market price of Bt100, and eliminate the double taxation.
Secondly, the specific provisions only introduce partial disclosure at the time of tax filing, and make both partial and full disclosures mandatory.
The submission of transfer pricing documentation is currently on a voluntary basis, and if and when requested by the revenue Officers. Taxpayers are not required to disclose any transfer pricing information at the time of tax filing.
But under the new provisions, taxpayers with annual turnover of more than 30 million baht will be required to submit high-level transfer pricing information when they file their taxes. The Revenue Officers will use this information to select audit targets based on risk.
In addition, larger enterprises will also be required to disclose detailed information on their transfer pricing practices, if and when requested. Revenue officers will use this information to determine whether taxpayers have complied with transfer pricing rules.
Since these reporting requirements will be mandatory, failure to accurately disclose information will result in a penalty of up to Bt 200,000.
As for the second misconception, those who believe that prior years are safe from transfer pricing assessment will be in for a surprise.
Revenue officers will still be able to perform transfer pricing assessment on financial years completed before, as well as after, the specific provisions go into effect.
They will apply the general provisions to the former, and the specific provisions to the latter.
After the deadline for tax filing in May 2018, taxpayers with December year-end, for example, will still need to make sure their transfer pricing practices for financial years from 2013 onwards are appropriate, as the statute of limitation for tax audit is five years.
Lastly, compliance involves more than reporting. In addition to complying with reporting requirements, taxpayers still need to comply with transfer pricing rules.
And incorrect transfer pricing practices will still result in hefty additional tax payments, and penalties.
Some taxpayers may decide not to disclose transfer pricing information mistakenly believing that their risk is limited to Bt200,000, which may be less than the cost of preparing the information. Others may decide to disclose the information solely to avoid the Bt200,000 penalty, without being aware whether their transfer pricing practices are correct.
These taxpayers should think twice before adopting such strategies. Remember that the risk is not limited to a Bt200,000 penalty for failure to disclose transfer pricing information. Incorrect transfer pricing practices will incur far more severe tax costs, regardless of whether the reporting requirements have been met.
Taxpayers need to consider the full extent of the transfer pricing rules and regulations and invest in their time and resources accordingly.
Contributed by PEERAPAT POSHYANONDA, Partner and VASOONTAREE CHANYATIPSAKUL, Manager, PwC Tax & Legal, Thailand