Global transfer pricing standards with local impacts
THE ORGANISATION for Economic Cooperation and Development (OECD) initiated the base erosion and profit shifting (BEPS) project in 2013 to address perceived gaps in international tax rules causing a loss of revenues for governments of about US$100 billion to $240 billion (Bt3.5 trillion to Bt8.4 trillion) annually.
The OECD’s BEPS report identified 15 action plans including Action 13: Transfer Pricing Documentation and Country-by-Country Reporting.
Action 13 aims for greater transparency on multinational enterprise (MNE) operations through a three-tiered standardised approach to transfer-pricing (TP) documentation comprising master files (MF), local files (LF) and country-by-country reports (CbCR).
MF contains high-level information on global business operations and TP policies. LF is specific to each tax jurisdiction identifying material related to party transactions together with their amounts and TP analyses.
CbCR requires MNEs to report to each tax jurisdiction their main business activities therein, number of employees, revenue, profit, income tax, capital, retained earnings, and assets.
The MF/LF/CbCR information makes it easier for tax administrations to identify MNEs artificially shifting their income to tax-advantaged locations.
Now, readers may ask why BEPS Action 13 should concern Thai companies, as Thailand is not a member of the OECD and Thai TP documentation regulations have yet to be enacted. Let’s discuss two examples here.
First, you are a subsidiary of the parent company in a tax jurisdiction where Action 13 applies, and second, you are the headquarters of subsidiaries in tax jurisdictions under Action 13.
The table summarises the MF/LF/CbCR adoption status as of January 31, 2017, for the top inbound and outbound investment countries for Thailand.
If you are a subsidiary of a German parent, you are required to prepare Thailand-specific information for the year ended December 31, 2016 (FY16), for CbCR filing in Germany by December 31, 2017. After data comparison, your parent may decide to adjust TP policy to align where profits, sales, employees and/or assets are located and where taxes should be paid.
This may involve a group business restructuring and/or change in profit reported to the Thai Revenue Department (TRD), which would likely invite scrutiny.
To support the changes, you should prepare LF with appropriate analyses of your adjusted function and risk profile and reported profit. The TRD plans to join the Inclusive Framework on BEPS arranged by the OECD, which allows it to participate in a peer review process and receive guidance and support relating to BEPS implementation. It will be soon be ready to start investigating changes in TP positions of foreign subsidiaries in Thailand due to Action 13 adopted in other countries.
If you are a Thai MNE with operations in Indonesia and annual consolidated revenue of at least 11 trillion rupiah (equivalent to about 750 million euros or Bt28.7 billion) for FY16, you are required to prepare MF/LF by April 30, 2017, and file CbCR for your Indonesian subsidiary by December 31, 2017, in the local language.
Obviously, you do not have much time left, and missing the deadlines leads to penalties. However, impromptu presentation of information could expose your entire group to unnecessary TP risks. For example, the TRD may want to see the CbCR filed in Indonesia for your income taxes paid around the world through Article 26 of Exchange of Information of the tax treaty with Indonesia, even though BEPS Action 13 has not been officially adopted in Thailand.
These examples present a practical business case for Thai companies to manage BEPS Action 13 prudently – in line with the TP trends identified by Deloitte’s global research, where forward-thinking MNEs are taking a strategic approach to TP.
Now is a good time for Thai companies to rethink their processes, technology choices and management philosophy of TP activities to match today’s evolving global and local tax landscape.