IN OPEN markets, the “market price” is determined by external market forces as contracting parties aim to protect their best interests.
Common management control, however, hinders market forces from operating fully when related companies deal with each other. The price between related companies, the so-called “transfer price”, tends to deviate from the market price for the same transaction under the same situation.
This means it’s extremely difficult for multinational enterprises (MNEs) to pay the correct amount of tax, and/or for the Revenue Department to stop MNEs from manipulating their transfer prices to pay less tax. Clear rules are therefore needed for taxpayers and Revenue officers alike to follow.
The evolution of Thailand’s transfer pricing rules can be divided into three eras: pre-2002, 2002-2018, and post-2018.
Before 2002, general income tax provisions required that the transfer prices of MNEs must not be below the market price on the sales side and vice-versa on the purchase side. However, neither the definition of market price nor guidelines on how to compare transactions and situations under third-party dealings were provided.
This left too much room for interpretation. It led not only to conflicts between taxpayers and revenue officers, but also disparities in the definitions used among different Revenue officers. For instance, one officer may take the average of the prices, while another would use the most common price, to determine the market price.
The transfer pricing situation improved slightly in 2002 after transfer pricing guidelines, the Departmental Instruction Paw 113/2545 (Paw 113), were introduced to provide more clarity when determining transfer prices.
Paw 113 offered an internationally accepted “arm’s length principle” – where a transfer price must be set to equal the market price for the same transaction under the same situation. The definition of the market price, and guidance on determining if transactions were comparable, were also provided.
To prove their innocence, taxpayers could prepare a transfer pricing report containing information on the company, the industry, the functions it was responsible for, risks assumed and assets employed, along with one or more benchmarking studies.
We began to see more transfer pricing cases being resolved between taxpayers and the Revenue Department as a result. But the outdated income-tax law still restricted the arm’s length principle from being implemented properly. For example, the Revenue officer had the power to increase the selling price of a seller, but not to reduce the cost of goods sold by the buyer. The same profit was taxed twice.
On November 21, 2018, Thailand introduced specific transfer pricing provisions to unlock the restrictions imposed by the general income-tax provisions. Following the above example, the Revenue officer can now increase, as well as reduce, the transfer price to arrive at the arm’s length price. The same profit is only taxed once.
Also, the law makes mandatory the reporting of annual transfer pricing. This forces taxpayers to regularly review their transfer pricing practices, thereby helping to prevent taxpayers from manipulating their transfer prices. It also allows Revenue officers to monitor compliance more effectively and efficiently.
A clearer set of transfer pricing rules should separate those taxpayers trying to pay the correct tax amount from those avoiding tax. Meanwhile, the administration by Revenue officers should be more consistent than in the past.
Thailand is heading in the right direction on transfer pricing. But complying with the rules and documentation requirements can put heavy burdens on taxpayers. Let’s hope that the Revenue Department will be able to come up with guidelines that are as clear and practical as possible to allow taxpayers to comply efficiently with the regulations.
Contributed by PEERAPAT POSHYANONDA, partner and PANACHAI ANONTANUT, director, tax & legal services, PwC Thailand.