Thailand introduces transfer pricing legislation

In light of recent global transfer pricing trends, the tax authorities in various jurisdictions are clamping down on multinational companies stripping out profits and not applying sound transfer pricing policies. As a result, there has been a change in the transfer policies as well as the pricing arrangements of many companies operating in Thailand including foreign investors. The impact of such changes has predominantly given rise to a decrease in Thai profitability. To ensure Thailand does not fall short and collects its fair share of revenue allocation, the Thai government has been increasingly focused on transfer pricing, and there has been significant progress in the transfer pricing legislation in Thailand for the past few years.

The draft transfer pricing legislation was approved by the cabinet of Thailand in May 2015 and by the National Council of State (Krisdika) in late 2016. According to the new Thai constitution, which was introduced in April 2017, a public hearing on the draft legislation is required before such legislation can be passed to parliament for enactment. It is expected that the public hearing on the draft transfer pricing legislation will be conducted within the third quarter of 2017, in which case, the new transfer pricing legislation may become effective for the accounting year ended on or after January 1 2018.

It is understood that the new transfer pricing legislation will be incorporated under the corporate income tax section of the Thailand Revenue Code and will cover the following three main provisions:

• Power of the tax authority: The tax authority will be granted the power to adjust the assessable income and allowable deductions of an entity that entered into a transaction with another related entity under different commercial and financial conditions from a transaction between independent parties;

• Time limit for a tax refund request: An entity that has overpaid tax or has excess withholding tax as a result of a transfer pricing adjustment can request a tax refund within 60 days from the date of receiving an assessment. The purpose of this provision is to reduce the occurrence of double tax which may arise where, for example, the assessment is issued after the expiry of period in which a taxpayer can request a refund request (i.e. three years following the filing deadline of the tax return).

• Documentation and filing requirement: The new legislation will require a taxpayer with related party transactions to prepare compulsory transfer pricing documentation which must be submitted to the Thai Revenue Department (TRD) within 150 days after the end of an accounting period (which is the same date that a taxpayer is required to submit and file its annual corporate income tax return). Failing to prepare and/or submit this documentation could lead to penalties of up to THB 400,000 ($11,000).

The expectation (in line with the procedures followed in various other countries) is that at the time of the submission of the corporate income tax return, the TRD may only require the taxpayer to submit a "form" as part of its income tax return filing which discloses the related party transactions and potentially introduce a "yes/no" question on whether the taxpayer has prepared the full transfer pricing documentation as required under the Thai Revenue Code. The TRD may then use the information in the form and the answer provided to the yes/no question to request the taxpayer to provide all the transfer pricing documentation for the TRD's review. The form and yes/no question will also enable the TRD to assess the compliance status of the taxpayer providing the TRD with the means to impose the penalty of up to THB 400,000 if necessary. At the time of submission of the taxpayer's corporate income tax return it is important that the taxpayer has prepared and is in a position to submit, if required, the full transfer pricing documentation to the TRD.

The draft transfer pricing legislation does not currently provide a threshold value for related party transactions. However, KPMG professionals understand that not all taxpayers will be required to prepare the transfer pricing documentation. Therefore, it is likely that the TRD may provide a threshold value for related party transactions in future.

Thailand has given clear indications to the OECD members that it is willing to participate and co-operate in the various OECD initiatives and working groups. The Thai government announced on May 16 2017 that it will join the OECD's BEPS inclusive framework as an associate country. In the announcement it stated that Thailand would like to establish clearer standards to protect against international tax invasion and to utilise the exchange of the country-by-country (CbC) reports. KPMG professionals speculate that CbCR may be enforced in Thailand after the main transfer pricing regulations are enacted.

Below are some other notable tax developments in Thailand:

The digital economy provides increased opportunities for e-commerce operators to reap substantial sales from a country without establishing a taxable presence in the said country. The existing permanent establishment (PE) rules in domestic tax law and tax treaties require some type of physical presence before a PE can be established in another country. Under Section 76 bis of TRC, a foreign company is deemed to carry on business in Thailand and will be subject to Thai tax if it derives income in or from Thailand through the activities of its employee, agent, representative or go-between in Thailand. Based on a strict reading of these provisions, if a foreign operator which carries on an e-commerce business does not enter Thailand or does not have any employee, agent or representative and/or server located in Thailand, such foreign operator should not be regarded as carrying on business in Thailand and thus shall not be subject to income tax in Thailand. The TRD is aware of this loophole and it is expected that the TRD will soon introduce new law to capture the taxation of cross-border e-commerce transactions in Thailand. If the foreign operator has some type of presence in Thailand, such foreign operator may be considered as conducting business in Thailand and resulting in a liability to pay Thai tax. Thus, it is possible that the focus of the TRD is to broaden the interpretation of what constitutes a taxable presence or PE in order to include cross-border e-commerce transactions in the Thai tax system. How this will impact on the application of double tax treaties is also a relevant point. Generally, if a PE is created in Thailand, the foreign operator would be taxed in Thailand in the same manner as a Thai operator.

In 2017, amendments were introduced in the Thai Revenue Code which provides that (1) tax evasion or tax from fraudulent activities amounting to THB 30 million per year or (2) a tax refund resulting from faulty facts or from fraudulent or similar activities in nature amounting to THB 2 million per year may be subject to the penalties and sanctions processed under the Anti-Money Laundering Act.

KPMG professionals have seen trends in the following areas:

• The general tax audit teams of the TRD have started to conduct transfer pricing audits in addition or subsequent to the completion of their corporate income tax audits. We also understand that the transfer pricing audit team has been promoted to focus on the Advance Pricing Agreement and to guide the general audit teams in their transfer pricing audits.

• Increasing tax investigations on the provision of intercompany services. Tax officers are requesting taxpayers to provide supporting documentation to prove the benefits received by the service recipients and the details of the pricing policy adopted (i.e. components of the cost base and the mark-up and allocation key applied).

• In the context of a business restructuring, taxpayers need to be more cautious on whether there could be a potential exit charge or creation of a permanent establishment in Thailand which may be challenged by the TRD.

• In the past, the TRD focused on cross-border intercompany transactions, however, we have seen recent cases where the TRD has audited domestic intercompany transactions which could result in not only additional corporate income tax liabilities, but also in additional value added tax and/or withholding tax liabilities.

There has been increased activity in the conclusion of bilateral advance pricing agreements with the TRD attending negotiation meetings with overseas tax authorities more often. The TRD appears, however, to be adopting a more strict approach in the application of bilateral advance pricing agreements where profits and tax are being reduced in Thailand without substance. In addition, during the advance pricing agreement process, the TRD may question other tax-related implications, such as the exit charge, the creation of PEs, withholding tax, etc. As a result, it is prudent that taxpayers review not only the transfer pricing aspects but all other tax related matters applicable to their structure before applying the provisions of the Advance Pricing Agreement.

Before the transfer pricing regulations are enforced in Thailand, taxpayers with related-party transactions should start preparing the required transfer pricing documentation (including a local benchmarking study) to evaluate the transfer pricing risks inherent in their business and to identify any corrective actions or steps which should be taken to manage those risks in advance.

Benjamas Kullakattimas

Partner KPMG in Thailand Empire Tower, Bangkok Tel: +66 2 677 2426 benjamas@kpmg.co.th Benjamas is the partner in charge of KPMG's tax function in Thailand. She has more than 25 years of experience in taxation and transfer pricing. Her transfer pricing experience includes assistance in preparing and reviewing transfer pricing documentation and providing comments on the Thai tax and transfer pricing implications of transactions, including the transfer of tangible and intangible property, inter-company services and cost-sharing arrangements. She has also provided assistance in advanced pricing agreements and audit examinations. Benjamas frequently presents on topical Thai taxation issues for KPMG at public seminars and is also a tax lecturer at various universities in Thailand.

Abhisit Pinmaneekul

Partner KPMG in Thailand Empire Tower, Bangkok Tel: +66 2 677 2470 abhisit@kpmg.co.th Abhisit is the tax partner specialising in transfer pricing at KPMG in Thailand. He has more than 10 years of experience, and prior to joining KPMG in Thailand, Abhisit worked at KPMG in Singapore for three years in the transfer pricing practice. He has led and conducted a number of local/global transfer pricing planning and documentation engagements and reviewed various transfer pricing systems, cost structuring arrangements, global business models and supply chains. He has also advised on the restructuring thereof where required. His experience includes assisting clients in customs, tax and transfer pricing audits as well as negotiating with tax authorities and leading the conclusion of bilateral advanced pricing agreements. Abhisit has been a speaker for various transfer pricing seminars. He was also engaged in the technical sharing session of the OECD transfer pricing guidelines and BEPS with the tax authorities. He has been a lecturer of a tax planning course in Chulalongkorn University.