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 6, 2007 issue of the Bangkok Post.
By Peerapat Poshyanonda
Despite Thailand's adoption of an Advance Pricing Agreement (APA) mechanism in its Transfer Pricing Guidelines in May 2002, no APA has been concluded with the Revenue Department to date.
This slow start is in contrast to the high level of APA activity in countries such as the United States, Australia, the United Kingdom, Japan, Canada and Mexico. China, whose APA programme was introduced a few years before Thailand's, has already concluded more than 150 unilateral and two bilateral APAs.
This article will take a close look at how the Revenue Department and other organisations benefit from APAs, and which organisations are right for this programme.
What is an APA?
An APA is an advance agreement on transfer-pricing methodologies, between a multinational enterprise and one or more government tax administrations. Although APAs are designed to resolve transfer-pricing issues in future years, they may also include resolutions of transfer-pricing issues in prior years.
Transfer pricing refers to the pricing of goods and services within a multi-divisional organisation, particularly in regard to cross-border transactions, which have tax implications.
Most APAs are bilateral, involving a taxpayer and the revenue authorities of two countries. Large organisations may need multilateral APAs involving three or more revenue authorities are known as multilateral APAs. When entering into bilateral and multilateral APAs, all revenue authorities negotiate and reach a mutually agreeable division of the tax base. The primary benefit of these APAs is to avoid double taxation.
A unilateral APA, meanwhile, covers transactions involving countries with which the country issuing the APA does not have a double-tax treaty, thus making a bilateral APA procedurally impossible. Unilateral APAs are also used in situations involving a large number of relatively small transactions, with a number of different countries. In such cases, bilateral negotiations involving various revenue authorities would not be cost-effective.
Why choose an APA?
In the absence of any APA programme, transfer-pricing issues have to be resolved through examination. This traditional method costs the government and the taxpayer alike a lot of time and money.
An APA is a cost-effective means to address transfer pricing in a less adversarial environment. It also provides a degree of certainty for taxpayers, in terms of future tax bills, and for tax authorities, in terms of future revenue.
When is a taxpayer advised to seek an APA?
An APA is usually only cost-effective in certain situations and at certain points in time. By seeking an APA, the taxpayer is voluntarily asking one or more governments to look closely at its transfer-pricing issues. It is therefore advisable for companies, which are already under transfer-pricing examination, to seek an APA. An additional benefit is that more years (i.e. prior as well as future years) will be addressed, compared to the traditional examination proceedings that can deal only with prior years.
Other suitable candidates are companies that are virtually certain to be examined. This certainty may be due to their size, history or other circumstances. Seeking an APA would merely accelerate an inevitable process. However, the proceedings should be much less adversarial than the traditional examination.
Other special circumstances may also justify a request for an APA. They include taxpayers who need financial certainty in regard to future effective tax rates, those who would be greatly affected by any unfavourable publicity, and any newly established business.
How can a taxpayer file an APA?
The taxpayer should carefully review its reasons for seeking an APA. A cost/benefit analysis, both with and without the APA should be performed to assess whether or not it would be cost-effective.
The taxpayer should then seek pre-filing conferences with the tax authorities of each country that would be involved. At the conferences, the governments involved can inform the taxpayer how likely the transfer-pricing issues are to be resolved through the APA process. They can also advise the taxpayer on how to structure the APA application effectively. The taxpayer would be in a good position to then decide whether to file an APA request.
Countries with active APA programmes have well established guidelines and procedures. Thailand is still in the learning process, and has yet to come up with such guidelines and procedures.
Which industries should seek an APA?
An APA is suitable for all industries, as it can cover transactions that involve goods, shared administrative services, transfer of know-how, cost sharing, etc. Whether the issues are resolved through APAs or through traditional examination proceedings, the transactions will face the same challenges. For example, it has always been easier to resolve transfer pricing involving tangible goods than those involving intangible goods. Therefore, industries with high-value intellectual property can also opt for APAs, without any added complexity to the current challenges they face.
To date, APAs have been concluded in other countries by companies in various industries, including automobiles, electronics, food products, pharmaceuticals, and banking.
What's ahead for Thailand's APA programme?
APAs represent good administration for taxpayers and governments alike. It would therefore be advantageous for all parties if the Revenue Department were to conclude its first APAs, and produce clear guidelines and procedures for APA proceedings as soon as possible. This will help Thailand's APA programme get off the ground and open the door to organisations that would benefit from it.
