Thai transfer pricing law to be enacted in 2018

In June 2017, a public hearing on the draft of the transfer pricing (TP) law was conducted by the Thai Revenue Department (TRD). Of the total participants, 90% agreed that the TP law should create transparency, reduce the transfer of profits among multinational enterprises (MNEs), and prevent double non-taxation. In January 2018, the Cabinet approved the draft TP law, which will amend the Revenue Code on TP. This draft TP law provides descriptions of related parties, minimum income threshold, requirements on TP disclosure form submission, and TP documentation preparation, and provides for a non-compliance penalty (which is limited to THB 200,000 ($6,000)).

Finally, the wait is almost over. As the Cabinet submitted the draft of the law amending the Revenue Code on TP to the National Legislative Assembly for approval on June 5 2018, there is an expectation that the law should be enacted within 2018.

The draft TP law submitted to the National Legislative Assembly contains some updates since the previous version, which are as follows:

• The first applicable accounting period has been revised from on or after January 1 2017, to on or after January 1 2019; and

• A taxpayer who passes the minimum income threshold of THB 30 million will still be required to disclose its relationship with related parties and the amount of its related-party transactions in its annual tax return submission, regardless of whether the taxpayer's relationship with its related parties extended throughout the entire accounting period.

Upon the enactment of the TP legislation in Thailand, the TRD is expected to subsequently propose secondary legislation to the Cabinet as regards the following:

Ministerial regulation on the calculation of revenue and expenses of a related entity or related juristic partnership, whereby the framework will cover:

• Definition of 'related entity or related juristic partnership', 'controlled transaction', 'uncontrolled transaction', 'transaction condition', and 'advance pricing arrangement' (APA);

• Consideration of the arm's-length principle;

• Comparability analysis;

• Calculation/determination of arm's-length range;

• Tax assessment through the adjustment of revenue and expenses;

• Consideration of conditions for special transactions, e.g. intangible transactions;

• The request for APAs;

• Ministerial Regulation on the determination of the revenue base of an entity or partnership that is not subject to the TP disclosures (Section 71 ter). The framework will cover the determination of revenue base, as well as categories of excluded income, for the purpose of exempting a company or juristic partnership from the annual TP disclosures and/or TP documentation;

• Notification of the director-general of the TRD providing details of a TP disclosure form, which will need to be submitted together with an annual tax return filing under Section 69; and

• Notification of the director-general of the TRD providing the requirements for the preparation and submission of documents or evidence in order to perform an analysis of related-party transactions. This will include the requirement for a company or juristic partnership to disclose information and prepare documents/evidence as specified under this notification.

The tentative timeline is for both ministerial regulations to be proposed to the Cabinet within 60 days after the law is enacted, and for both notifications of the Director-General of the TRD to be announced within 30 days after both ministerial regulations are introduced.

The Cabinet agreed to participate in the OECD's BEPS inclusive framework. In this context, the TRD has been reviewing its tax regimes provided for investment promotion (i.e. international headquarters, regional operating headquarters, international trading centre, treasury centre and international banking facility).

On June 19 2018, the Cabinet issued a draft Royal Decree to add further requirements for international headquarters in relation to royalty income. The proposed change is that royalty income qualifying for the reduced corporate income tax of 10% for onshore income and tax exemption for offshore income will be limited to royalties derived as a result of research and development activities performed in Thailand by the international headquarters (internally or outsourced).

The international banking facility incentive was completely abolished.

The second draft of the e-commerce legislative amendments was released on January 17 2018. It proposed that a foreign company providing services through electronic media to a non-VAT registered person, provided the services were used in Thailand, must register and would be subject to 7% VAT in Thailand if its annual taxable income exceeded THB 1.8 million.

Related BEPS Action 7, on artificial permanent establishments (PEs), is still being considered by the TRD.

The TRD has been considering BEPS Action Plan 13. It is understood that the working team is contemplating whether the country-by-country reporting deadline should be aligned with the deadline for the filing of the annual tax return for that income year, or whether it should be delayed by 12 months. The merits of allowing an extension for the submission deadline in the first year of filing are also being assessed.

We have seen an increase in TP audits and investigations conducted by the Thai tax authorities. Our key observations are:

• The TRD has increased its workforce for conducting TP audits. General tax audit teams across Thailand are now also carrying out investigations, in addition to the specialised TP audit team. Generally, they request TP documentation for review as a starting point, but may also request other documents (i.e. agreements, details of TP policies with examples of pricing calculations, group foreign exchange policies, and so on). In some cases, tax authority officers may request that TP documentation is translated into Thai;

• Transfer pricing audits focus not only on manufacturing companies but also trading and services companies. For trading companies, tax audits increasingly target taxpayers that incur losses from the purchase of goods from related parties for resale to third-party customers. If a TP adjustment is made on the import prices, a portion of input VAT may be disallowed to be used for offsetting against output VAT. This would result in additional VAT liability plus a penalty and surcharge;

• Service transactions are still one of the top priorities for tax officers in conducting tax audits or reviews; and

• We have seen an increasing number of cases where the tax authorities request taxpayers to provide segmented financial data (i.e. board of investment [BOI] vs. non-BOI, related parties vs. third parties, and so on). Where a taxpayer requests a VAT refund, the tax authorities may request the taxpayer to provide monthly financial data that can be used to review and challenge monthly profitability.

The TRD is more open to bilateral APAs. In several TP audit cases, the TRD has suggested that taxpayers apply for bilateral APAs to manage TP risks going forward.

The TRD has started to focus on reviewing TP and PE issues in respect of e-commerce companies. Any interactions with the TRD must be carefully managed.

The draft TP law has reached the next important milestone in the legislative process. With the proposed enforcement date being on or after January 1 2019, it may be inferred that the law may be enacted within this year. With the tentative first filing of the TP disclosure form in May 2020, a pro-active approach to the preparation of robust TP analysis, documentation and anticipated required disclosures will be essential in managing TP risks, including discussions with the tax authorities on future proposed adjustments and reduced penalties.

Taxpayers with related-party dealings that pass the minimum income threshold of THB 30 million should prepare in advance to comply with the upcoming TP law. At a bare minimum, taxpayers should initially prepare information on their related-party transactions and their relationship with related parties for entry into a TP disclosure form. This will have to be submitted along with the annual tax return filing.

Although the TP disclosure form has not been released to the public yet, it is expected that the form will request information similar to that required in the TP questionnaire that is already being used by the TRD during TP audits and investigations.

The TP questionnaire requires taxpayers to provide the following:

• Details of related-party transactions in respect of purchases, sales, the provision of services, receipt of services, royalties, interest received and/or paid on loans;

• The name of related parties and countries in which they are located; and

• The value of the transactions and the currencies applied in each related-party transaction.

Benjamas Kullakattimas

Head of tax KPMG in Thailand Empire Tower, Bangkok +66 2 677 2426 benjamas@kpmg.co.th Benjamas Kullakattimas is the partner in charge of KPMG in Thailand's tax function. She has over 25 years of experience in taxation and transfer pricing (TP). Her TP experience includes assistance in preparing and reviewing TP documentation and providing advice on the Thai tax and TP implications of transactions, including the transfer of tangible and intangible property, inter-company services and cost-sharing arrangements. She has also provided assistance on advanced pricing agreements (APA), audit examinations and negotiations with tax authorities. Benjamas frequently presents on topical Thai taxation issues for KPMG in Thailand and at public seminars. She also contributes articles to various publications and lectures on tax at various universities in Thailand.

Abhisit Pinmaneekul		Chollatip Santitorn
	Tax partner KPMG in Thailand Empire Tower, Bangkok +66 2 677 2470 abhisit@kpmg.co.th		Tax associate director KPMG in Thailand Empire Tower, Bangkok +66 2 677 2188 chollatip@kpmg.co.th
Both Abhisit Pinmaneekul and Chollatip Santitorn specialise in transfer pricing (TP) at KPMG in Thailand. Before joining KPMG in Thailand, Abhisit worked at KPMG in Singapore for three years in the TP practice, and Chollatip worked at a multinational enterprise in Singapore on TP implementation. Abhisit and Chollatip have led and conducted numerous local and global TP planning and documentation engagements. They have led many multinational groups in Thailand to address BEPS Action Plan 13 by preparing local files, master files and country-by-country reporting. Abhisit and Chollatip have also assisted clients in conducting BEPS risk review and analysis. They have reviewed various TP systems, cost structuring arrangements, global business models and supply chains, and have advised on the restructuring thereof. Their experience also includes assisting clients in customs, tax and TP audits and negotiating with the tax authorities and leading the conclusion of bilateral advance pricing agreements (APA). Abhisit led technical sharing sessions in respect of the OECD TP guidelines and BEPS with the tax authorities. He is a frequent speaker at various TP events and seminars and a lecturer of a tax planning course at Chulalongkorn University.