Transfer Pricing Series Part 1: Potential Red Flags

This tax news will be interest to: Thai companies that are part of multinational enterprise (MNE) groups and carry out intercompany transactions.

In this tax news, we explain potential red flags that could trigger a Transfer Pricing (TP) audit by the Thai Revenue Department (TRD), how the TRD selects audit targets and how companies can minimise TP risks.

How does the TRD identify red flags for TP audits?

The TRD uses the TP Disclosure Form as an assessment tool to select companies for TP audits. With this Form, companies must disclose details of their intercompany transactions, including the nature of transactions and amounts, as well as business restructuring.

Once submitted, the TRD analyses the data from the TP disclosure forms and identifies companies with red flags that could increase the likelihood of a TP audit. The aim is to ensure compliance with the arm’s length principle when companies carry out transactions with unrelated parties.

Potential red flags for TP audits

The TRD focuses mainly on the following areas:

1.     High Volume of Intercompany Transactions: A significant volume of intercompany transactions with related parties may attract the attention of the TRD. The TRD may compare the intercompany transactions with the company's annual operating revenues or expenses.

2.     Business Model Changes or Reorganisations: Significant changes to the company or the Group’s business model or restructuring may raise concerns, particularly if these changes affect the functions performed, risks assumed, and assets employed by the company and related parties.

3.     Financial Performance:

• Consistent operating losses or profit margins that are consistently below the industry average.
• A significant amount of losses carried forward 
   

4.     High Payments to Related Parties: Excessive payments for management services, licence fees, commissions or technical services to related parties could be a red flag. The TRD may suspect that these payments do not comply with the arm's length principle and could reject them as deductible expenses for corporate income tax purposes.

5.     Inconsistent Pricing or Margins:

• Differences in prices or margins for the same or similar products/services between related and unrelated parties.
• Pricing inconsistencies between BOI (Board of Investment) and non-BOI businesses or before and after a tax holiday period.
   

6.     Payments to Tax Havens: Transactions involving payments to countries that are considered tax havens may attract the TRD’s attention due to profit shifting concerns.

7.     Incomplete or Missing Documentation: Failure to submit the TP disclosure form or TP documentation or lack of adequate supporting documentation may trigger an audit. Proper documentation is essential for the defence of TP practice during tax/TP audit.

Looking to the future: minimising TP audit risks

We will soon be publishing Transfer Pricing Series #2 (expected in March 2025), which will focus on minimising the risk of TP audits and provide a guide from the first series on potential red flags. Stay tuned for upcoming insights on defensive positions for dealing with TP risks during the tax/TP audit.

For further questions, please contact:

• Narumol Limprasert – Tax and Transfer Pricing Partner at Narumol.Limprasert@th.gt.com or +66 2 205 8222
• Phatsawut Fueangwutthiron – Transfer Pricing Manager at Phatsawut.fueangwutthiron@th.gt.com or +66 2 205 8273