Transfer Pricing in Thailand: A Guide for Foreign Investors

As foreign investment continues to flow into Thailand, businesses expanding into this dynamic Southeast Asian market must navigate various regulatory challenges. Transfer pricing is one of the most critical areas for multinational enterprises operating in Thailand. For foreign investors, understanding Thailand’s transfer pricing rules is essential to ensure compliance and avoid significant financial penalties.

Thailand’s Transfer Pricing Regulations

Thailand’s transfer pricing rules are governed by Section 71 Bis of the Revenue Code, which was introduced in 2019 to provide clearer guidelines on how the arm’s length principle should be applied. These rules are in line with global standards, such as the OECD Transfer Pricing Guidelines, and are designed to ensure that businesses operating in Thailand are paying their fair share of taxes.

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Key aspects of transfer pricing in Thailand

Arm’s Length Principle

The foundation of Thailand’s transfer pricing regulations is the arm’s length principle. Under this principle, the terms and conditions for intercompany transactions must be comparable to those that would be agreed upon by unrelated parties in the open market. If the pricing or terms deviate significantly from this standard, the Thai tax authorities may adjust the taxable income of the local entity.

Documentation requirements

One of the most important obligations for businesses in Thailand is to maintain thorough and accurate transfer pricing documentation. Companies must record their intercompany transactions and ensure they adhere to the arm’s length principle. This documentation must be available for inspection by the Thai tax authorities upon request.

The required documentation typically includes:

• Master file: A global overview of the multinational enterprise’s structure, business activities, and transfer pricing policies.
• Local file: Detailed information on the specific transactions between related entities in Thailand, including descriptions of the nature of the transactions, the pricing methods used, and the analysis supporting the pricing.

Failure to produce adequate documentation when requested can result in penalties and adjustments to the company’s tax liabilities.

Common transfer pricing methods

To ensure compliance with the arm’s length principle, businesses must select an appropriate transfer pricing method. The Thai Revenue Department recognizes several methods, in line with the OECD guidelines, including:

• Comparable Uncontrolled Price (CUP): Compares the price charged for a good or service in an intercompany transaction with the price charged in a similar transaction between unrelated parties.
• Cost Plus Method: Determines the arm’s length price by adding an appropriate markup to the cost of producing the goods or services.
• Resale Price Method: Based on the price at which a product purchased from a related entity is sold to an independent third party, minus an appropriate gross margin.
• Profit Split Method: Divides the combined profits of the related entities involved in the transaction based on their contribution to the overall value.
• Transactional Net Margin Method (TNMM): Focuses on the operating margin earned by the tested party (usually the local entity) relative to an appropriate financial indicator.

Penalties

Non-compliance with Thailand’s transfer pricing rules can lead to severe financial consequences. If the Thai tax authorities determine that transfer prices are not arm’s length, they have the authority to adjust the income of the local entity, potentially resulting in:

• Additional taxes owed
• Interest on overdue tax payments

Advance pricing agreements

For businesses concerned about their transfer pricing arrangements, Thailand offers the option of entering into an advance pricing agreement (APA) with the Thai Revenue Department. An APA is an agreement between a taxpayer and the tax authorities that determines in advance the transfer pricing methodology for specific transactions.

An APA offers businesses certainty in transfer pricing, helping avoid disputes or adjustments during tax audits and proactively managing transfer pricing risks.

Thailand’s transfer pricing threshold

In Thailand, the transfer pricing threshold is primarily based on the company’s annual revenue. Specifically:

• Transfer pricing documentation is required for companies with annual revenue exceeding 200 million THB (US$6 million).
• Companies below this threshold are generally not required to submit formal transfer pricing documentation but must still comply with the arm’s length principle in their transactions with related entities.

Industry-specific considerations

Manufacturing sector: transfer pricing primarily revolves around intercompany transactions involving goods, raw materials, and finished products. Challenges may include cost allocation, profit margin determination, and the benchmarking of comparable uncontrolled prices.

Service industry: transfer pricing can be challenging due to the pricing of intangible services. Companies must ensure that service fees adhere to arm’s length principles to minimize tax risks.

Intangible property: Transfer pricing for intangible assets, like intellectual property or brand value, demands precise valuation and thorough documentation. Thailand provides specific guidelines for setting appropriate royalty rates or fees for the use of intangible assets between affiliated entities.

Financial transactions: For financial transactions such as loans, guarantees, or intercompany financing, transfer pricing regulations mandate that interest rates and terms align with market conditions. It is crucial to ensure that these terms reflect economic realities to prevent potential adjustments or penalties.

How foreign investors can ensure compliance

To avoid the risks of non-compliance and penalties, foreign investors in Thailand should take several steps:

• Maintain comprehensive documentation: Ensure that all intercompany transactions are well-documented and support the use of appropriate transfer pricing methods.
• Seek expert advice: Work with local tax advisors or transfer pricing specialists to ensure that your pricing methods are in line with Thai regulations.
• Consider an APA: If unsure about the transfer pricing methodology, consider applying for an APA with the Thai tax authorities to ensure a clear and agreed-upon framework.
• Regularly review and update transfer pricing practices: As business structures or markets evolve, regularly review and update transfer pricing policies to remain compliant.

Conclusion

Transfer pricing is critical for foreign investors in Thailand due to strict compliance rules and the arm’s length principle. To meet local tax laws and avoid penalties, businesses should maintain proper documentation, conduct regular reviews of intercompany pricing, and ensure timely compliance with transfer pricing requirements. 

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