How Do I Become Compliant in Transfer Pricing?

It’s not just about becoming compliant, it’s about staying compliant and for this there can be little doubt that you’ll need a skilled pair of hands to guide you through the myriad processes and procedures. As we’ve mentioned before, it’s one thing to have all of your transfer pricing documentation in place, but it’s an entirely separate thing to be compliant with. The documentation is, as always, just the first line of defence, but there’s plenty more you can do to ensure you’re not on the receiving end of an unpleasant visit from the Thai Revenue Department.

For the sake of chronology, let’s begin at the beginning. You’ll need to conduct a thorough and unsparing functional, asset and risk analysis. Now, it’s worth bearing in mind that the very concept of risk has evolved in line with developments from the OECD’s BEPS Action Plans, but the types of risk you’ll be expected to cover in your analysis include market risk, risk of loss associated with an investment in and use of material assets, risks inherent to research and development, financial risks that range from foreign exchange rates and interest rates to changing domestic and international legislation – the list goes on.

Read more: The impact of COVID-19 on your Transfer Pricing arrangements

Essentially, to establish transfer pricing in keeping with the Arm’s Length Principle a functional analysis is necessary to help determine which companies in a group of companies control which functions. If an intra-company transaction is to happen, first you must establish which company does what, who is providing what assets and therefore assuming the risks associated with the transaction. Think of this as a structural breakdown of the group, with a detailed listing of roles played by all companies involved in the transaction. 

A well thought through functional analysis is one of the first steps you can take on the long road to becoming compliant in the eyes of the Thai Revenue Department, but it’s by no means the last. While a functional analysis gives the authorities a sense of where the value lies within the group’s supply chain and can help give a broad overview of all the companies involved in the transaction, the economic analysis will further guide you towards compliance.

Conducting your economic analysis is effectively like showing the working out in a maths test, you must show the transfer pricing methodology you chose to work out your benchmarking. Benchmarking is crucial – it shows that you’ve studied similar transactions to the one you’re entering into and that yours will be comparable to one conducted between two wholly unrelated companies. 

Read more: Everything you’ve ever wanted to know about Transfer Pricing in Thailand (with examples)

Not only do you need to show the method you chose, along with why you chose it, but you’ll need to explain why other methods were unsuitable for your transaction. Keep in mind that when you’re benchmarking, the Thai Revenue Department prefers it when you benchmark your transactions against those carried out by local companies rather than international ones.

Similarly, you’ll want to ensure you have a robust industry analysis to identify any relevant nuances of the market your company operates in and determine whether there may be any competitive advantages that need to be adjusted for. This means putting together an analysis of trends in your industry, big changes or challenges that have impacted the performance of the industry, as well as your company’s place within that industry – are you the market leader or a relative newcomer?

Read more: Which Southeast Asian Nations Have Adopted the OECD BEPS Action Plan 13?

The question of your performance against that of your peers – particularly those of a similar size – could raise a few eyebrows at the Thai Revenue Department. If they deem there to be significant differences between the revenues your company is generating and those of other similar companies in the same industry, then there’s a good chance they’ll want to understand precisely why your company is not performing as well. They may even suspect profit shifting if the gulf between you and your competitors is large enough and there’s no viable explanation, so keep that in mind.  

Read more: Year-end transfer pricing adjustments and customs valuations

Now, remember the economic analysis? Well, you’re going to need to take the results from that analysis and apply them in financial analysis. This particular analysis will compare the prices agreed upon between the companies in your group and again check to ensure they’re within the range established by the Arm’s Length Principle – this will be done by checking against a financial index. Here is where you’d need to make any reasonable adjustments if there are factors that differentiate the prices agreed upon in your transaction and those of similar transactions by comparable companies.

So this covers a large part of the preparation you can do, but as much as this level of documentation – if done right – will provide some level of protection, you can always be more prepared when it comes to transfer pricing. 

Firstly, understanding the expectations of the Thai Revenue Department and being thoroughly up to date with all the changes in legislation before they come into effect is a key part of this. 

Assess your transfer pricing regularly – make sure key staff are aware of any changes that have taken place within the company that they ought to know about, as well as ensuring that you are always audit-ready. 

Remember, being compliant is far better than facing an audit and there is never a better time to start preparing than right now. 

You don’t need to provide documentation until requested by the Thai Revenue Department, but when that request finds you then the clock starts ticking and in Thailand as in any country, becoming compliant is not something you want to have to rush. 

For all of the analyses that you’ll be undertaking, just know that these do not guarantee your compliance in the eyes of the Thai Revenue Department, but without them, you are most certainly far more exposed than it would be wise to be. 

The key takeaway is to be prepared. If undertaking all of these means of protecting yourself when entering into a controlled transaction sounds like a lot, then get in touch with the people who know how to help and find a tailor-made solution that will get you as close to compliant as possible.