Published in the Bangkok Post on July 29, 2002 © Seri Manop & Doyle

Transfer pricing is under new guidelines

Many multinationals are scrambling to determine the impact of the new transfer pricing guidelines recently handed down by the government. There may be a good reason for the concern.

Transfer pricing rules determine whether the value placed on a transaction is adequate for corporate income tax purposes. For example, suppose a Thai manufacturer sells finished products to a distributor in Hong Kong for 40% of the product's final sale price, is this purchase price sufficient for the purpose of calculating corporate income tax payable in Thailand? The answer: It depends.

The standard the Revenue Department uses to examine the value placed on transactions is "market price" in order that the Thai firm may pay the appropriate amount of tax with regard to the transaction.

If the department determines that the value assigned to a transaction is "lower than the market value, the assessment officer has the power to assess . . ." the transaction.

If the department determines that the value assigned by the parties is higher than the market value the assessment officer also has the power to assess the transaction. A major issue presented by the new transfer pricing guidelines concerns the definition of market price. The market price for a transaction depends upon factors, including market information, business functions, risks macro-economic circumstance and environmental considerations.

The term "independent parties" is defined as "parties without any direct or indirect relationship in terms of management, control or capital contribution".

With the new definitions of "market price" and "independent parties", the new transfer pricing rules suggest that the department may now:

In business, many times companies enter into transactions with related organizations. This may mean that one of the parties to the transaction is a shareholder or director of the other party to the transaction or that the firms have some other direct or indirect relationship. These transactions are commonly referred to as inter-group transactions.

The new definitions of "market price" and "independent parties" suggest that the department will now scrutinize the values parties assign in inter-group transactions more heavily.

Using the above example, suppose that the Hong Kong distributor to which the Thai company sells the finished goods also owns a single share of the Thai company, the Thai company is later assessed by the department and the transaction is examined.

According to the new transfer pricing guidelines, because the Hong Kong distributor holds one share of the Thai company the two parties do not qualify as "independent parties".

The new guidelines suggest that because the parties to the transaction do not qualify as "independent parties", the department may scrutinize the value assigned to the transaction more comprehensively than if the two had been "independent parties".

The guidelines also include three valuation methods designed to assist parties to know what values will be deemed sufficient by the department (Comparable Uncontrolled Price Method, Resale Price Method, and Cost Plus Method).

Edwin van der Bruggen is the Editor-in-Chief of the Thai Journal of International Taxation. He may be reached attjit@esfnet.com. Michael Doyle is a partner of the Bangkok law firm of Seri Manop and Doyle Ltd. Tax and Legal Counsellors. He may be reached at michael@serimanop.com