As mentioned in our technical update for November 2020, the Revenue Department issued Ministerial Regulation No. 369 to set out the rules, procedures, and conditions for Revenue Department officials to adjust corporate taxpayers’ revenue and expenses in relation to related-party transactions that are not at arm’s length. Subsequently, the Notification of the Director-General of the Revenue Department, No. 400 (“Notification No. 400”) was issued in order to provide further clarification on those rules, procedures, and conditions.
Keywords: Mazars, Thailand, Tax, Revenue Department, Revenue Code, Transfer pricing, Related party transactions
1 April 2021
Notification No. 400 addresses where related companies or legal partnerships have commercial or financial requirements to determine the compensation of controlled transactions differently from uncontrolled transactions when it is believed that there is a transfer of profits which results in a company or legal partnership not receiving profits or receiving lower profits or assessable income than usual for tax purposes. In that case, the assessment official has the power to adjust the income and expenses of the said company or legal partnership in order to obtain the amount of income received and expenses paid where the said company or legal partnership has operated independently.
The Notification defines the term ‘controlled transaction’ as a transaction between related corporate taxpayers, while the term ‘uncontrolled transaction’ is defined as a transaction between unrelated corporate taxpayers.
In considering how compensation for a controlled transaction will be determined where such a transaction is made independently, one of the following pricing methods which is considered to be the most appropriate in each situation may be used:
- Comparable Uncontrolled Price Method – this is a comparison of the price charged on the transfer of property or the provision of services.
- Resale Price Method – this is a comparison of the resale profit margin.
- Cost Plus Method – this is a comparison of the profit margin from the costs including direct and indirect costs on the transfer of property and the provision of services.
- Transactional Net Margin Method – this is a comparison of the net profit margin related to the appropriate bases (such as costs, sales or assets).
- Transactional Profit Split Method – this is a comparison of the allocated profits (or losses) received in accordance with the portion that each corporate taxpayer is involved.
Pricing methods other than those set out above can be used only if it is proved that the above methods cannot be applied to the transaction and there are other pricing methods that may be adapted to the case appropriately. If the companies or legal partnerships wish to choose other pricing methods, they shall notify the Director-General of the Revenue Department in writing with explanations of the pricing method chosen within the accounting period that the other pricing method will be applied. Documentation or evidence explaining why the above pricing methods cannot be applied, together with a detailed description of other pricing methods to be applied, are also required.
In considering which is the most appropriate pricing method, the following factors shall be used:
1. The strengths and weaknesses of each pricing method
2. The appropriateness of the pricing method based on the nature of the controlled transaction through a functional analysis of each contracting party to controlled transaction, taking into account the assets used and the risks assumed
3. The existence of reliable information necessary to implement the chosen pricing method
4. The degree of comparability between controlled and uncontrolled transactions, including the reliability of improving the comparability
For the controlled service transactions, the service charge would be considered as compensation which may be determined if the services are performed independently only if:
- Services are actually provided;
- Such services provide an economic or commercial benefit to the service recipient;
- The service recipient would be willing to pay for such services provided by a third party under similar situation; and
- The service charge would be an amount which can be determined if comparable services are performed independently.
Compensation for service transactions arising for the benefit of the company’s shareholders or legal partnership’s partners is not considered compensation which can be determined if services are performed independently.
For controlled transactions relating to intangible property, the following issues should be taken into consideration in analysing the comparability of the price:
- In regard to the use of intangible property, the duties for which each party is responsible in relation to the development, improvement, maintenance, protection and use of such intangible property shall be considered, taking into account the assets used and the risks assumed.
- In regard to granting the right to use, sell, or transfer intangible property, the expected benefits, geographic restrictions, unique or non-unique features, and the right to participate in the development of intangible assets shall be considered.
When the assessment official has adjusted income and expenses in connection with the controlled transactions of a company or legal partnership, if this results in an increase in revenues or a reduction in expenses, the amount of such under-declared income or overpaid expenses shall be deemed assessable income of the company or legal partnership. The assessment official has the power to include such under-declared income or overpaid expenses in the recalculation of the taxable net profit of the company or legal partnership for corporate income tax purposes or of assessable income subject to withholding tax under Section 70 or Section 70 bis of the Revenue Code.
When the assessment official has adjusted income and expenses for controlled transactions of any particular company or legal partnership, the assessment official shall have the power to consider adjusting income and expenses of the company or legal partnership which is the other party of the controlled transaction in order to be consistent with the adjustment of income and expenses of the first party for the benefit of calculating net income subject to tax or assessable income subject to withholding tax under Section 70 or Section 70 bis of the Revenue Code if the following facts are the case:
1. A company or legal partnership whose income and expenses has been adjusted has paid tax in accordance with the results of such an adjustment or in accordance with a court judgment in the event of an appeal; and
2. The amount of income or expenses of the company or legal partnership adjusted by the assessment official is the amount that has previously been included in the calculation of net profits or assessable income subject to tax of the other party of the controlled transaction, and the other party has not concealed the information or given false information about the transaction.
Notification No. 400 shall be applicable to accounting periods starting on or after 1 January 2021.