On January 29, 2021, Thailand’s Revenue Department published the Notification of the Director-General of the Revenue Department Re: Income Tax (No. 400), which prescribes the criteria, methods, and conditions for Revenue Department officials on how to assess income and adjust expenses for transactions between related parties (as defined in Section 71 bis of the Revenue Code) that engage in intercompany transactions where conditions between the two parties in their commercial or financial relations differ from those that would be made between independent parties (i.e., where the transaction is not an “arms length” transaction). Those who are familiar with international transfer pricing standard practices will note that the measures under the notification generally follow the concept of chapters II, III, VI and VII of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

The key elements of the notification are summarized below.

Accepted Transfer Pricing Methods

The notification recognizes the following as accepted transfer pricing methods:

1. Comparable Uncontrolled Price Method
2. Resale Price Method
3. Cost Plus Method
4. Transactional Net Margin Method
5. Transactional Profit Split Method

The notification also requires that the arm’s length result of an intercompany transaction (i.e. the controlled transaction) must be determined using the most appropriate transfer pricing method. If none of the above transfer pricing methods is appropriate for the tested controlled transaction, the company may apply an alternate pricing method to the transaction by notifying the Director General of Revenue in writing, within the relevant accounting period, and describing the reason for doing so.

Selection of the Most Appropriate Transfer Pricing Method 

There is no formal order of preference for the use of the five accepted pricing methods. However, the notification requires the selection process to take account of the following factors:

1. The respective strengths and weakness of the recognized methods;
2. The appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through functions performed, assets used, and risk assumed (functional analysis) by each party under the controlled transaction;
3. The availability of reliable information to apply the selected transfer pricing method; and,
4. The degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments (that may be needed to eliminate material differences between them).

Special Considerations for Intra-Group Services

Where the controlled transaction relates to a service, the remuneration will be deemed an arm’s length price if:

1. The service has actually been rendered;
2. The service provides, or would provide, the service recipient with economic or commercial value;
3. An independent enterprise in comparable circumstances would have been willing to pay for the activity if it were performed by an independent enterprise, or would have performed the activity in-house for itself; and,
4. The amount charged would have been charged and accepted between independent enterprises for comparable services.

Remuneration for a service that benefits the shareholders or the partners of a company or juristic partnership is not considered an arm’s length charge.

Special Considerations for Intangibles 

Where the controlled transaction involves intangible property, the following factors shall be taken into account to determine the remuneration for the controlled transaction:

1. If the transaction involved the use of intangibles, consideration shall be taken on the party involvement in development, enhancement, maintenance, protection, and exploitation of intangibles, including assets used and risks assumed.
2. If the transaction involved the sale, transfer, or grant of use rights of intangibles, consideration shall be taken on benefits, geographical limitations, specifications, and the right to develop the intangibles.

Corresponding Adjustment

If Revenue Office officials adjust the income or expenses of a party to an intercompany transaction, the other party will be allowed to perform a corresponding adjustment if:

1. The tested party already paid tax following the official’s adjustment; and,
2. The adjusted income or expense has been included in the tax computation of the other party, and that other party did not conceal the information or falsely inform the tax authorities of the controlled transaction.

The corresponding adjustment will also have to be made in accordance with the applicable tax treaty.

Advance Pricing Arrangements

If the company has cross-border related party transactions, the notification also allows it to request an advance pricing arrangement between Thailand and the other jurisdiction.

Implementation

The notification applies from the accounting period starting on or after January 1, 2021, onwards. The Revenue Department has not yet issued any related regulations or notifications with respect to the preparation of transfer pricing documentation. We will continue to monitor developments in transfer pricing in Thailand and keep you updated.

For more information about transfer pricing, or any aspect of tax law in Thailand, please contact Varapa Aurat at [email protected].