Strong rules on transfer pricing on agenda in many countries

AMONG several proposals for tax reform, the director-general of the Revenue Department has said the agency would propose an amendment to the Revenue Code concerning transfer pricing, aiming to provide greater clarity on the determination of fair transfer prices.

The director-general has indicated that in past years many multinational companies, including Thai companies, used the transfer price as a vehicle to move profits to foreign countries with lower income-tax rates so they pay less tax in Thailand.

It is expected that the new regulations will be a tool to prevent such transactions.

Thailand introduced its transfer-pricing guidelines in May 2002 in the form of Departmental Instruction No Paw 113/2545. This instruction provides guidance on the transfer-pricing method and required documentation. Unlike some other countries, in Thailand transfer-pricing documentation is not mandatory.

The issuance of new transfer-pricing regulations and/or guidelines by other Asean countries, such as Indonesia, Malaysia, the Philippines and Vietnam, has put increasing pressure on the department to develop and enhance its own practices, especially in preparation for the Asean Economic Community coming in December next year.

A specific transfer-pricing regulation is expected to be released next year that will likely require documentation. This direction of the department will come just at the right time and will be in line with the other countries around the word, as it is currently on the agenda of several governments, especially in the member countries of the Organisation of Economic Cooperation and Development and Group of 20.

Last year the OECD initiated a project with several action plans to counter BEPS – base erosion and profit shifting. BEPS refers to tax-planning strategies by companies that take advantage of gaps or mismatches in tax rules to shift their profits to countries with low income-tax rates. There are few or no real activities, resulting in little or no overall income tax being paid.

The OECD action plan focuses on key areas, including the strengthening of transfer-pricing regimes, by calling for enhanced documentation requirements. OECD and G20 member countries have been participating in and contributing to the BEPS project while several non-OECD members have been aware of the project and followed its developments.

As a result of the BEPS project, several countries are anticipated to re-examine their transfer-price guidelines and also expand their requirements. Based on current developments, even though Thailand is not a member of either the OECD or G20, it is not surprising that transfer pricing is one important component of the Revenue Department’s proposal for tax reform.

The department generally refers to the OECD’s guidelines for international standards and practices. For example, it mostly accepts the transfer-pricing methods and comparability analysis approach specified under the OECD’s guidelines.

Any change in the OECD guidelines might have an influence on the department’s practice. On the other hand, if there is an absence of clear guidelines from the department, a taxpayer may observe the OECD guidelines.

In fact, transfer pricing is already one of the most pressing issues in Thailand, especially in the current situation where the Revenue Department’s tax collections have been declining because of the sluggish economy, the cut in corporate and personal income-tax rates, and continuation of the 7-per-cent value-added-tax rate.

To compensate for their collection shortfall, tax authorities are conducting transfer-pricing audits more aggressively and extending their targets to taxpayers outside the responsibility of the Large Taxation Office.

The transfer-pricing team at the LTO has provided training to local tax authorities across the country. Now it is common for local authorities to raise the transfer-pricing issue during a tax audit.

However, because of the lack of clear guidelines, resolutions of a dispute take longer, resulting in wasted time and manpower. It is expected that the new regulations will provide more clarity on the determination of the appropriate transfer price and clearly indicate the documentation required.

With this trend, taxpayers with related-party transactions should start reviewing their related parties’ pricing policies and assess possible transfer-pricing risks, as well as begin preparing transfer-pricing documentation.

Benjamas Kullakattimas is tax partner in charge at KPMG Phoomchai Tax.