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Thailand Starts To Apply Transfer Pricing Rules

by Mary Swire,, Hong Kong

22 June 2007

Thailand's Revenue Department has launched a crackdown on companies which transfer profits to offshore tax havens using artificial pricing. Deputy director-general Satit Rangkasiri said many large and medium-sized corporations had used tax-haven countries to inaccurately declare taxable income.

Mr Satit gave an example of an exporter whose product had a price of Bt140 apiece, but who exported to a low-tax country at a price of only Bt100, allowing the difference of Bt40 to be taxed at a low rate before re-export at the market price of Bt140.

Mr Satit said such practices were against the Thai tax code and would be subject to penalties if discovered. Tax officials have the authority to assess higher tax payments on exporters found to be manipulating their income streams.

''Recently we've seen a number of consultants emerge in the market offering advice and assistance for Thai companies to establish subsidiaries in offshore tax havens, usually to facilitate inappropriate businesses and transactions,'' said Mr Satit. ''The Revenue Department is preparing to crack down on the practice - both on the companies involved and their advisers.''

Tax officials said they were monitoring closely the activities of four large business and tax consultancies and another two smaller firms that assist Thai companies in setting up offshore tax vehicles.

Thai transfer pricing rules were fairly primitive before new guidelines were introduced last year. 'Market price' was previously not defined; now it is specifically defined as "a price, service fee or interest that would be agreed in good faith between independent parties when transferring property, performing services or lending money commercially . . .".

The guidelines include three permitted valuation methods: Comparable Uncontrolled Price Method, Resale Price Method, and Cost Plus Method. The Revenue Department may now investigate whether the parties to a transaction are related parties and may use the permitted valuation methods to establish an arm's length price.

However, there is little information so far on how the Department will apply the rules in practice, or on what negotiating mechanisms will be available in disputed cases.

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