The game has changed …

The Thai Revenue Department (TRD) has conducted transfer pricing audits based on general tax provisions stating that transactions must be made at the market price. Since May 2002, the TRD has requested transfer pricing documentation from companies in order to conducting transfer pricing audits based on Departmental Instruction No. Paw 113/2545 (Paw113).

The game changed after May 7 2015 when the cabinet of Thailand approved a draft Transfer Pricing Act in order to prevent tax evasion due to transfer pricing applied between related entities and to respond to BEPs Action 13. The main framework of the draft Transfer Pricing Act is to require taxpayers who have related-party transactions to prepare and submit documentation to the Revenue Department. Transfer pricing documentation must be submitted to the Revenue Department within 150 days after the last day of the accounting period. If the entity fails to prepare or submit the completed documentation, the entity will face a penalty of up to 400,000 Thai Baht ($11,000).

Since then, an increasing number of listed companies and multinational companies which have significant related party transactions have started preparing transfer pricing documentation. They do this in order to review and evaluate their application of transfer pricing to determine whether they have acted in accordance with the arm's length principle and then take steps to manage transfer pricing risks in advance.

From recent discussions with the TRD, the draft Transfer Pricing Act is at the level of review by the Council of State. The Council of State has called upon the TRD to explain and support its draft several times. Practitioners and senior tax officers speculate that the Transfer Pricing Act will be enacted in 2016 and the TRD will issue sub-laws providing more details on the following.

Similar to other countries, not all companies will be required to prepare transfer pricing documentation. Therefore, it is highly possible that the TRD will determine the threshold value of related party transactions. Based on our discussion with senior tax officers and our analyses of transfer pricing thresholds in the Asia Pacific region, we believe that taxpayers who have conducted related-party transactions a value more than somewhere in the range of 100 to 500 million Thai Baht will be required to prepare transfer pricing documentation.

At present, the TRD requests that a taxpayer disclose its information on related party transactions through the transfer pricing form for the purpose of transfer pricing audit. The transfer pricing form requires a taxpayer to disclose information on the type of related party transaction (ie purchase of goods, provision of services, or royalty payments), the name and location of the related entities, and the transacted amount, for example.

Thus, should the Transfer Pricing Act be enacted in Thailand, it is likely that the TRD will require the submission of a transfer pricing form together with a company's annual tax return filing. It is highly possible that the TRD will add more questions than those in the used transfer pricing form. New questions may include yes/no question about preparation of contemporaneous transfer pricing documentation for the TRD to be able to determine which taxpayers are liable for the upfront penalty of up to 400,000 Thai Baht.

Even though Thailand is not a member of the OECD, the TRD has been holding internal discussions considering whether the TRD should require Master File and CbCR. We believe that the TRD will eventually issue sub-laws that require both. This is because there has been an increasing number of Thai multinational companies who invest in overseas countries which have specific transfer pricing laws and follow BEPs Action 13. If the TRD does not put the law in place, it is likely that Thai multinational companies will still submit Master Files and/or CbC reports in other countries (ie surrogate countries). This may put the TRD at a disadvantage with respect to not having the full information in its hands or not being able to control information.

After the APA Guidance was issued by the TRD in 2010, more and more taxpayers have submitted applications for BAPA to the TRD. Because of this, it has been observed that the TRD has become stricter in the screening process in accepting BAPA applications; especially for aggressive tax planning to try to adjust down its profit in Thailand through BAPA.

In the past, transfer pricing audits have been primarily conducted by a specialised transfer pricing audit team at TRD headquarters. Similar to other countries, the TRD targets loss making companies, and those with fluctuating margins, high service/royalty fees, and significant level of overseas related-party transactions as their first priority. However, we have seen increasing trends in the following:

• The general tax audit teams of TRD have started to conduct transfer pricing audits, as well. The trend has been for a general tax audit team has finished a review of a company's corporate income tax, they continue to investigate transfer pricing issues;

• The tax officers look further into the details of segmented profitability, ie tax-exemption segment vs tax-paid segment, related-party vs unrelated-party segment, domestic vs export segment;

• If a company has had a business restructuring, the taxpayer needs to be more cautious about exit charges that may be challenged by the TRD; and

• The TRD may challenge and cancel losses carried forward if the loss is due to transfer pricing issues.

With all of the above in mind, it is strongly recommended to have transfer pricing documentation with Thai benchmarking studies prepared in order to comply with the upcoming new transfer pricing laws and to manage transfer pricing 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 Thailand's Tax function and has over 25 years of experience in taxation. She has a wide range of experiences in taxation and transfer pricing. Her transfer pricing experience includes the review of transfer pricing and tax issues, assistance in transfer pricing documents and providing comment on Thai tax and transfer pricing implications for the transactions including transfer of tangible and intangible properties , inter-company services and cost-sharing arrangements . She has also assisted in advanced pricing agreements and audit examinations. Benjamas is a frequent speaker on Thai taxation for the firm and public seminars and the lecturer at universities in Thailand.

Abhisit Pinmaneekul Partner KPMG in Thailand Empire Tower, Bangkok Tel: +66 2 677 2470 abhisit@kpmg.co.th Prior to joining KPMG Thailand, Abhisit worked in transfer pricing area at KPMG Singapore for three years. He also has led and conducted a number of local/global transfer pricing planning and documentation engagements and reviewed various transfer pricing systems, cost structuring, as well as restructuring global business models and supply chains. He also assists clients in customs, tax and transfer pricing audits as well as negotiating with the tax authorities and leads Bilateral Advance Pricing Agreement. He has been a trainer and speaker for Transfer Pricing seminars and the technical sharing session of OCED transfer pricing guidelines and BEPS for the tax authorities. He has been a lecturer of a tax planning course in Chulalongkorn University.