Thailand clarifies rules for use of internal and external comparables

Thailand’s Ministry of Finance has issued a Ministerial Regulation under the Revenue Code prescribing the approach Thai tax officers should take when analysing and adjusting the pricing of transactions between related parties.

Ministerial Regulation 369 dated 6 November requires tax officers to first consider similar transactions that the taxpayer has made with third parties (internal comparables) if they are available.

If the taxpayer does not have comparable transactions with third parties, the tax officer shall then be required to use information concerning similar transactions between independent parties regardless of whether such transactions take place in or outside the country or are undertaken by domestic or foreign companies.

The regulation’s guidance on when to use internal and external comparables is a welcome move and is aligned with the OECD’s transfer pricing guidelines. Whislt its purpose is to provide instructions for tax officers to follow during transfer pricing audits, the regulation also assist taxpayers in determining the approach they should take to preparing their transfer pricing documentation.

The regulation gives the Director General of Revenue the power to issue further rules, procedures and conditions regarding its application. We expect that a clarification may be needed in the future on the circumstances in which foreign comparables will be acceptable, as the Thai tax office has previously expressed a strong preference for the use of Thai comparables.

Ministerial Regulation 369 also contains a very wide definition of “commercial or financial conditions”, that shall be used when considering whether such conditions made between related parties are different to those that would be made if they were operating independently of each other. The regulation then spells out the conditions that must be satisfied in determining that there has been a transfer of profit as a result of such difference in commercial or financial conditions.