Looking back at tax developments over the past year, we've seen some promising incentives granted by the government and other developments that have caused taxpayer anxiety.
One contentious issue involved transfer pricing, which we discussed in a previous column ("Transfer Pricing Loopholes Likely to be Closed Soon", June 2). The cabinet at midyear approved an amendment to the Revenue Code to incorporate a new transfer pricing rule, which is somewhat similar to Section 482 of the US Internal Revenue Code. It applies when the price in a transaction between two related parties is not quoted on an arm's-length basis. In other words, it is not the same as the price they would have agreed had they not been related.
The worst part of this amendment was companies trading with related parties would be required to prepare transfer pricing documents and provide examples of benchmarks to explain the methods adopted in computing the agreed price.
Now there is good news for Thai companies with no foreign affiliates but perhaps bad news for multinationals. It is understood that the tax committee to the Council of State, the government's legal adviser, objects to the draft and insists the new transfer pricing rule must be limited only to transactions with offshore related parties.
This means local transactions will not fall afoul of the new law regardless of the deal size. Hence, no transfer pricing documents will need to be attached to the corporate income tax return, and there will be no need to pay a Big Four accounting firm for a benchmarking study.
Generally, the Council of State simply reviews draft legislation to ensure the wording works as intended. It is interesting that nowadays it seems to have more influence on the tax policy of the Finance Ministry.
The Revenue Department also seems to follow the suggestions of the Council of State willingly without any protest. Hence, we should see revised draft legislation soon, to the relief or major Thai corporations.
However, any adjustment of revenue and expenses in a modified draft could become complicated if it results in an increase in amounts payable from a Thai entity to its foreign affiliate.
As particular classes of revenue could be subject to withholding tax, an extra deduction will be allowed if the adjustment results in an increase in the Thai entity's tax expenses, on condition the Thai entity pay additional withholding tax on such additional expenses. Fair enough.
Meanwhile, the size of transactions requiring the Thai entity to prepare transfer pricing documents and price benchmarking remains unclear. To reduce the burden and compliance costs, the figure could be above 100 million baht for a trading transaction but lower for a service transaction.
As for the Thai-Thai related parties, the existing imputed revenue rule that adopts the "market value" approach set out in Regulation No. Por.113/2545 will continue to apply.
Royalty withholding tax on advertising expenditure: Another interesting development this year involved a controversial interpretation issue on which the Supreme Court had ruled in 2009. The original case involved a franchise agreement in which a Thai company agreed to spend a certain amount on advertising and sales promotion, the content and style of which were controlled by the foreign franchisor. The Supreme Court ruled such expenditure should be classified as a royalty paid to the franchisor and thus subject to withholding tax.
The Revenue Department applied this concept in a recent ruling involving the Thai distributor of sports equipment for a Malaysian company. Their agreement required the Thai distributor to spend at least 10% of total sales on advertising and promotion, with 2% paid to the Malaysian company and 8% paid for media and other marketing activities. The Malaysian company allowed the Thai distributor to use its trademarks for advertising and promotion.
The department ruled the entire 10% must be treated as consideration paid for the right to operate a distributorship in Thailand and for the right to use the trademarks, thus constituting royalty revenue subject to 15% withholding tax. The ruling did not mention value-added tax, but it was supposed to be applicable to the same amount.
Does this mean all mandatory marketing expenditure under a straightforward distributorship or agency agreement would be at risk, based on the use of foreign brand names or trademarks for advertising?
The 2009 Supreme Court ruling surprised most people, and for a while it was not clear if the legal division of the Revenue Department was ready to follow this very strict interpretation or if practical exposure would be limited only to the audit division. Now it is crystal clear both divisions have embraced this concept.
Therefore, whenever a foreign entity requires you to spend money to advertise or market its products, it may not be viewed simply as a duty under a normal distributorship agreement for tax purposes any more.
This article was prepared by Rachanee Prasongprasit and Prof Piphob Veraphong. They can be reached at admin@lawalliance.co.th