This article appeared in the June 1, 2012 issue of the The Nation .
Source: The Nation Website (Eng)
By Niphan Srisukhumbowornchai and Voraprapa Nakavachara
The existence of multiple tax rates means that some group companies may sometimes attempt to reduce their group's overall tax payments by shifting profits among one another appropriately, and at times inappropriately.
This article will examine how such schemes can be carried out internationally and domestically by taxpayers, how the Revenue Department could respond to "inappropriate" profit transfers, and how taxpayers can appropriately manage their overall tax burden and manage transfer pricing risk.
Shifting profits among related companies is viewed by many taxpayers as a pure cross-border issue. This is because, for certain countries, although multiple tax rates exist, consolidated filings are allowed. Thus, domestic transfer pricing issues become irrelevant in these countries. In general, large multinational corporations (MNCs) may minimise their tax payments by transferring profits to their affiliates in lower-tax jurisdictions. For example, an MNC may be better off leaving most of its profits in Singapore, where the tax rate is 17 per cent, instead of in Thailand where the tax rate is 23 per cent - recently reduced from 30 per cent. Companies can transfer profits among one another by adjusting their goods prices, service fees, royalty payments and interest rates.
For Thailand, where multiple tax rates exist and consolidated filings are not submitted, transfer pricing is not just a pure cross-border issue. Most companies pay their corporate income tax rate at 23 per cent. Loss-making companies do not pay corporate income tax. Companies under Board of Investment (BOI) promotion with tax holidays are either exempted or pay half of the usual rate, for some or all of their product lines. Therefore, it appears rational for a group of related companies to want to have their profits left with entities paying low or no taxes rather than entities paying high taxes. Possible scenarios include 1) shifting profits from a profitable entity to a related loss-making entity; 2) shifting profits from a non-BOI entity to a related BOI entity or shifting profits from a non-BOI-eligible product line to a BOI-eligible product line within the same BOI entity.
Suppose Company A, a manufacturer, sells finished goods to Company B, a related distributor, at Bt100 per unit which is considered the market price. As a result, Company A incurs a loss of Bt50 million and Company B achieves a profit of Bt120 million. The overall tax payment of the group would be Bt27.6 million (23 per cent of 120). The group can minimise its overall tax payment by shifting the profits from Company B to Company A. Suppose Company A increases the price of the products to be above Bt100 per unit and this results in Company A ending up with zero profit and Company B with a profit of Bt70 million. The overall tax payment of the group would be Bt16.1 million.
The Revenue Department could review Company B's transfer pricing practice and conclude that Company B's purchase price is above the market price. The excess amount may then be disallowed as COGS for tax purposes under Section 65 ter (15) of the Revenue Code, resulting in additional corporate income tax assessment for Company B. Company B will also have to pay a surcharge of 1.5 per cent per month (capped at the amount of the tax assessment). Ultimately, in the case where the Revenue Department issues a summons, a penalty equal to the amount of the tax assessment will also be charged.
Although the excess amount is disallowed as Company B's expenses, from Company A's side, there is no corresponding adjustment. This is different from some cross-border cases as certain DTAs allow for corresponding adjustments. Although under this scenario, Company A still pays no taxes, it loses the opportunity of utilising the loss carry forward in a later period.
In conclusion, transfer pricing should be considered crucial from both cross-border and domestic perspectives. In addition, shifting profits among affiliates, either internationally or domestically, can still be done "appropriately". To do so, a group should plan its tax structure so that the functions, risks and assets are allocated appropriately among the entities and the transfer prices are set to reflect these attributes. Proper documentation is important along with principal documents in line with Paw 113/2545.
Niphan Srisukhumbowornchai is a director and Voraprapa Nakavachara is a deputy manager at PwC Thailand.