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Growing interest in transfer-pricing tax avoidance could lead to costly audits

Apr 21. 2013
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With the reduction of corporate income-tax from 30 per cent to 23 per cent last year and to 20 per cent this year, tax chiefs are seeking ways to collect more revenue to offset the resultant smaller take and avoid aggravating the government's budget defi

Why do we have to think about this now? Why does transfer pricing matter?

Actually, transfer pricing is what companies should have been concerned about all along, not just now or later. There are provisions in the Revenue Code that all transactions must be made at market prices.

Tax authorities around the world are spending more time focusing on transfer pricing. They are concerned about whether companies transfer some profits from high-tax-rate to low-tax-rate jurisdictions through transfer prices. If the transfer-pricing policies were challenged by Thai tax officers, it would affect the prices charged between related parties and could affect companies’ competitiveness in the markets. In Thailand, transfer pricing has increasingly come under the scrutiny of the Revenue Department.

How does the Revenue Department conduct transfer-pricing audits?

The department commences a transfer-pricing audit with a desktop review to assess initially which taxpayers in various industries have potential transfer-pricing risks. Once it identifies targets for transfer-pricing audits, it normally issuesthe following to those taxpayers:

1. A transfer-pricing questionnaire asking for the details of related-party transactions; and/or

2. A letter requesting 10 documents known as transfer-pricing documentation.

How long does it take for a case to be settled?

It depends on the complexity of transfer-pricing issues to be challenged or investigated by tax officers and on how strong the supporting documents and business and economic reasons of the taxpayers are. The process could take from three months to about two years.

What are the penalties and surcharges?

Transfer-pricing audits can result in very significant assessments and income adjustments. If the adjustment results in additional tax, a surcharge of 1.5 per cent per month of additional tax payable up to the amount of tax plus penalties up to 100 per cent of additional tax payable will be imposed.

Is there any way to prevent companies getting into difficulty over transfer pricing?

Of course, companies can do things to prevent such difficulty. The best way to deal with a transfer-pricing dispute is to avoid |it in the first place. As a result, proactive strategies should be applied to manage transfer-|pricing risks – including applying and reviewing the appropriate transfer-pricing policies and preparing the documentation suggested in Departmental Instruction Paw 113/2545. Transfer-pricing documentation may often be left unattended to. Preparing it as per Paw 113/2545 is as if you started talking to the tax officers in the same language from the beginning.

If you choose the defensive approach – waiting for tax officers to conduct an audit and then defending the case, without any proper review and preparation beforehand, the transfer-pricing exposures on the table could be huge and you may be caught in the middle of the audit cases with burden of proof.

Also, if a taxpayer ... has an advance pricing agreement, the taxpayer can follow the guidelines in the agreement and can rest assured that its business can go ahead without a hiccup.

It may be more complicated if companies just look for documents after the Revenue Department starts investigating. In some case, some advice from experts may be needed.

What is transfer pricing?

Transfer pricing is the valuation of an inter-company transaction between affiliated entities. As the inter-company transactions occur between related parties (for example, between a parent company and a subsidiary), prices charged between related parties may not be determined based on the normal market forces.

What is transfer-pricing risk?

It is the factors that trigger transfer-pricing audits.

What is an advance pricing agreement?

In Thailand, it is an agreement between a taxpayer and two national tax authorities prospectively to set a transfer-pricing methodology to be applied to certain related party transactions. There should be no transfer-pricing audits if the taxpayer applies the methodology as agreed in the APA.

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