The Revenue Department recently issued the long-awaited Notification of the Director-General on Corporate Income Tax No. 407 dated 30 September 2021. The Notification outlines the transfer pricing requirements for both the information/documents for a local file and the criteria for the benchmarking study exemption. These requirements are applicable to all accounting periods starting on or after 1 January 2021.
The Notification can be found here in Thai.
Information for a Local File
The information needed for the preparation of the transfer pricing local file, is generally the same as the suggested local file requirements of the OECD Transfer Pricing Guidelines. The information and documents required by the Notification are as follows:
✓ Business model, management structure, local organization chart with headcount numbers, value chain, key suppliers, customers and competitors, business strategy and economic circumstances;
✓ Relationship structure (including shareholding information);
✓ Explanation of business restructuring and its impacts between related parties;
✓ Explanation of intangible assets received from or transferred to related parties and their impacts;
✓ Nature and amounts of controlled transactions with counterparties and countries;
✓ Explanation of and transfer pricing policy of each controlled transaction;
✓ Agreements relevant to those controlled transaction, and key information, conditions and prices in such agreements;
✓ Functions, assets and risk analysis;
✓ Financial information used in determining prices;
✓ Transfer pricing method applied for each transaction and explanation of reasoning of selecting such method over others, and information on counterparties to these controlled transactions for transfer pricing testing purposes;
✓ A “Benchmarking study”- an explanation of uncontrolled comparable transactions or independent comparable companies with financial indicators, independent compensation ranges, search methodologies and sources of information; and
✓ Any other necessary documents which may be required from assessment officers.
As a note, some of the main differences of information to be included in the local file that are required by Notification No. 407 and not the OECD Guidelines are the following:
✓ The entity’s total headcount
✓ The value chain analysis
✓ A list of all material inter-company agreements with a summary of each one (rather than merely attaching copies of inter-company agreements)
Existing Advanced Pricing Agreements (APAs) and any other tax rulings regarding the controlled transactions are not required if the Thai Revenue Department is not a party.
The local file and all related documentation and information must be prepared in Thai.
The Benchmarking Study Exemption
Eligible companies can choose to exclude the benchmarking study from the local file. In order to be eligible for the exemption the relevant taxpayer must meet the following conditions:
✓ For a taxpayer who does not have an effective APA in place:
○ A total revenue of less than THB 500 million;
○ No domestic transactions with related parties with different effective tax rates;
○ No cross-border related party transactions; and
○ No tax losses brought forward by both the taxpayer and the related parties with whom the taxpayer had transactions.
✓ A taxpayer who has in place an effective APA relating to the controlled transactions.
Companies face the burden of having to prepare all relevant documentation in Thai. While this may seem customary being in Thailand, companies may find it cumbersome or difficult where the management team reviewing the completeness and accuracy of the local file do not have a sufficient knowledge of the Thai language. As such, companies may often need to prepare the local file in two languages.
In terms of the benchmarking study exemption, the taxpayer bears the burden of proof to demonstrate that they meet the criteria when applying for the exemption. By allowing this exemption, it is clear that the Revenue Department is trying to assist certain taxpayers and relieve them of the benchmarking analysis burden. However, in practice, eligibility for the exemption may prove to be difficult for most businesses that do not hold an effective APA.
Taxpayers should note that the transfer pricing policies and benchmarking studies are required for each controlled transaction, not only for the overall business. As such, taxpayers should pro-actively begin to prepare their transfer pricing analysis on each type of controlled transaction to ensure that all information and documentation meets the new transfer pricing requirements. Importantly, there is an incorrect reporting penalty of up to THB 200,000 for those who do not correctly prepare the contents of the local file. Additionally, taxpayers should be wary of transfer pricing adjustments which are not related to the contents of the local file but apply where the taxpayer does not comply with the correct transfer pricing practice.