Thailand's capacity for tracking how multinational companies shift income across borders within the same group to understate tax payments will increase after a transfer pricing law comes into force.
The transfer pricing law, which is being deliberated by the Council of State, will authorise Revenue Department officials to ask parent companies, even if they are located abroad, how much profit is generated from cross-border transactions of companies in the group. This is to determine whether the company or affiliates used transfer pricing practices to reduce taxable income and avoid paying taxes in full, said Prasong Poontaneat, director-general of the Revenue Department.
Transfer pricing is a practice in which units of multinationals make transactions with each other at prices that differ from the market in order to affect their profits. The practice is sometimes used by companies that hope to minimise their tax exposure.
Prasong: Law should create fairness
The law is intended to allow department officials prove whether transfer pricing transactions occurred at a fair price, said Mr Prasong.
"The bill will create fairness and it is in line with global standards as it is based on OECD guidelines," he said.
Thailand's current transfer pricing guidelines under Revenue Department instruction No.Paw 113/2002 stipulate a company established under Thai law or under a foreign law must calculate its net profit for the purposes of corporate income tax according to Section 65 of the Revenue Code.
The purpose of the transfer pricing guidelines is to assist taxpayers in setting arm's length prices for their transactions with related parties and to assist revenue officers in reviewing taxpayers' transfer prices for compliance with the arm's length principle.
The arm's length principle of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the parties were not related.