Revenue Department shifts gears for transfer pricing

TRANSFER pricing is the most lucrative money generator for the Revenue Department because it largely concerns multinational companies with large sales volumes. A 1-per-cent adjustment to revenue or costs can res

This article discusses how new Revenue Department administrative changes will affect many multinational companies from a transfer-pricing perspective.

In 2002, the Revenue Department introduced the Thailand Transfer Pricing Guidelines. At the same time, it set up a transfer pricing (TP) team under the Large Taxpayer Office (LTO) that specialised in transfer-pricing auditing.

As is obvious by the name, the LTO supervises tax compliance of large taxpayers. Even though the LTO oversees fewer than 3,500 taxpayers, it is responsible for nearly 50 per cent of the Revenue Department’s total tax collection.

It should be noted that not all multinationals or group companies are under the LTO’s supervision, as they must meet certain selection criteria.

The LTO comprises many types of audit teams. Until now, most conducted tax audits on issues other than transfer pricing and passed cases with transfer-pricing issues to the TP team. The TP team also initiates transfer-pricing audits itself.

Unlike the LTO, audit teams at Bangkok and provincial revenue offices have been supervising and auditing for all tax issues, including transfer pricing.

The TP team naturally has the most knowledge and expertise in transfer pricing. Its personnel have been intensively trained and have more opportunities to do these audits. While other audits teams have been provided training, they have much less experience.

The catalyst for the Revenue Department’s administration change is advance pricing agreements (APAs). The TP team is also responsible for negotiating and concluding APAs with foreign governments and under Thailand’s bilateral APA programme.

The APA programme has been growing in popularity over recent years and there is currently a substantial backlog of applications to be processed. The success of the APA programme is straining the TP team’s capacity, which has resulted in a slowdown of transfer-pricing audits.

Because transfer-pricing adjustments are such important revenue generators, the LTO has changed its approach to transfer-pricing administration. To cover as many taxpayers under its supervision as possible, it has tasked its other audit teams with addressing it. The TP team will continue to initiate transfer-pricing audits, but now its main focus will be APAs.

This means more and more taxpayers under the LTO will be challenged on transfer pricing. Taxpayers who have so far avoided a challenge may now find it difficult to escape one. Even taxpayers who review their transfer-pricing compliance annually may be affected by this move. The other audit teams do not have the same knowledge and experience as the TP team, so it could be more difficult to convince them that transfer-pricing methods are in compliance.

Another important change is that taxpayers under the Bangkok and provincial revenue offices will be transferred to the LTO. This action by the Revenue Department is meant to close the gap between collection targets and actual collection.

The likelihood that multinationals transferred from these revenue offices to the LTO will be audited for transfer pricing has increased significantly. The LTO is more familiar with multinational companies and transfer pricing than the revenue offices. Also, the other LTO audit teams are closer to the TP team, so they have better access to help with difficult issues than their non-LTO counterparts.

Because we can expect a surge in transfer-pricing audits, and fewer and fewer multinationals will be able to escape, now is the time to begin reviewing transfer-pricing practices annually to ensure they comply. The challenge for the Revenue Department is to bring its officers up to speed with the TP team.

Peerapat Poshyanonda is a |partner at PricewaterhouseCoopers Thailand.