Transfer pricing disclosure: Stay put or take proactive measures?
WITH THE PROPOSED transfer-pricing law now under review by the Council of State, the landscape for transfer pricing is expected to undergo a major facelift once the law is enacted.
One significant change would be the requirement for taxpayers to disclose their transfer-pricing information when they file their year-end tax returns. It is expected that the law will only require “partial disclosure”. Failure to disclose such information on time or submitting inaccurate information will result in a penalty of up to Bt400,000.
Based on the draft law, taxpayers making related-party transactions will be required to prepare and submit documents illustrating, first, the relationship in terms of investment, management or control, whether direct or indirect, and second, the transfer-pricing method adopted for each related-party transaction.
This leaves two paths open for taxpayers. The first option is to stay put and only take immediate action once the deadline for disclosure is approaching, or they could take the proactive prudent approach of having their current transfer-pricing practices reviewed to identify any potential misconduct and take corrective actions at an early stage.
Taxpayers may find themselves in the middle of a long and winding road if they focus solely on avoiding the penalty for late submission or inaccurate disclosure, and do not try to identify possible misconduct that could lead to a much larger cost in the form of tax audit.
A company that does not undergo a transfer-pricing review and continues to follow inappropriate transfer-pricing policies may, before long, find itself under investigation after its practices become visible to the Revenue Department. Should the investigation lead to a tax audit, the company would be liable to pay the tax shortfall plus a |maximum penalty of 200 per cent of the shortfall and a surcharge of 1.5 per cent per month.
Once a taxpayer has been audited for transfer pricing, it will become a soft target to for a further audit in the future to determine whether corrective measures have been taken.
Alternatively, by having their transfer-pricing practices reviewed beforehand, taxpayers will be made aware of what they are doing correctly and what areas that require corrective measures. Early compliance reviews would be of greater benefit as they should allow taxpayers a sufficient transition period to correct their transfer-pricing practices.
Taxpayers would also be able to disclose information based on the correct practice right from the start, before the first submission is due.
The proactive approach, which is being pursued by an increasing number of taxpayers, should thus be considered a better option, as it could mitigate the risk of a tax investigation that could become tedious and exhausting, not to mention the potential additional taxes, penalties and surcharges.