Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the March 21, 2006 issue of the Bangkok Post.
By Peerapat Poshyanonda and Janaiporn Khantasomboon
In their attempt to cut costs, many companies choose not to keep their transfer-pricing documentation up-to-date. Although this may appear to be an economical decision in the short-run, the long-term picture is problematic.
Should companies keep current-transfer pricing documentation despite the cost incurred? What consequences are faced by companies that don't keep this documentation up-to-date?
Taxpayers having transactions with related companies are expected to prepare and maintain documentation on their transfer-pricing practices for possible review by revenue officers. Although Thai transfer-pricing guidelines require taxpayers to prepare ''contemporaneous'' documentation, many taxpayers have, in practice, opted to start preparing the documentation only if it is requested by the officers (Later strategy) in order to save time and compliance cost.
However, this Later strategy is appropriate only for taxpayers with well-planned transfer-pricing policies, a good supporting documents system, and employees who fully understand and properly implement the policies. Each taxpayer should, therefore, decide whether the Later strategy or the strategy of preparing contemporaneous documentation (Now strategy) is more appropriate before making a big plunge.
A simple analogy is the choice between annual health checks and waiting to see the doctor after getting ill. Experience tells us that waiting until one gets ill can be much more expensive and, in the worst case, too late for treatment.
The Later strategy is like seeing the doctor after getting ill, while the Now strategy is like annual health checks. It allows not only the taxpayer to document what they have implemented, but also, more importantly, its employees to review and better understand the adopted trans - fer-pricing practices.
The review and documentation process provides the taxpayer and its employees with the opportunity to understand their strengths and weaknesses. This is key to an increased level of compliance and a successful defence in the future.
The Later strategy focuses on minimal compliance. If the revenue official does not request transfer-pricing docum - entation, the taxpayer does not incur extra compliance cost, which it would have had it used the Now strategy.
However, the Later strategy has many weaknesses. Among them:
- Danger of providing inconsistent and/or inappropriate information. Transfer-pricing documentation is effective only if it is well prepared. Preparation involves the organisation of complex facts, which requires time and effort from people in different parts of an organisation. Rush - ing through the process often leads to the provision of inconsistent informati - on, impairing the taxpayer's credibility and increasing time-consuming queries. Sometimes, providing inappropriate or insufficient information leads to adverse analyses by the revenue officer.
- Failure to take corrective measures. Employees may not have sufficient under - standing of the organisation's transfer-pricing policies and therefore may have been applying them incorrectly over the years. The taxpayer may find that it has not been complying with transfer-pricing regulations over the years while waiting for revenue officials to request the docu - mentation.
- Too much tax has been paid. Occasionally, the taxpayer finds out that it has been paying too much tax over the years that it has been waiting for the revenue official to request the docume - ntation. In some cases, too much profit has been left in Thailand as a result of an incorrect application of a perfectly good transfer-pricing policy. This also means that the taxpayer has been sitting on top of transfer-pricing exposure on the other side of the related party transaction in another jurisdiction.
- No/insufficient supporting documents. Even in cases where the taxpayer has properly implemented its transfer-pricing policy, it may still suffer hefty penalties if it fails to keep proper supporting documents over the years that it has been waiting for the revenue officer to request for the transfer-pricing documentation.
The Now strategy minimises the risk of providing inconsistent and/or inapp - ropriate information to the Revenue Department. It allows the taxpayer to take corrective measures to minimise or eliminate any transfer-pricing short - comings identified before they cause more damage. The taxpayer is then able to set transfer prices such that it would pay the appropriate amount of tax and keep relevant documents over time to support its business decisions.
Furthermore, the Now strategy offers an opportunity to the taxpayer to do some tax planning. Once the taxpayer understands what the appropriate profit to be left in Thailand is, under the current structure, it can make a decision on whether or not to transform the structure into a more tax-efficient one in order to minimise its global tax bill.
The taxpayer should assess what state of health it is in. Then, it should carefully select the appropriate course of action with regard to the timing to prepare transfer-pricing documentation.
