In our previous article, we discussed the implications of Thailand’s new transfer pricing (“TP”) law and what we may expect from the Thai tax authorities with respect to scrutinising a taxpayer’s related party transactions. In this article, we explain how taxpayers could leverage on Advance Pricing Agreements (“APAs”) to guard against the uncertainties of tax compliance in an era of increasingly complex tax rules.
There appears to be a growing sense of apprehension amongst taxpayers as we await further clarifications and guidance on TP compliance by the Thai Revenue Department. Even large enterprises are uncertain about the impact and implications that the new TP law would have on their operations.
Some enterprises are safe-guarding themselves by preparing robust and exhaustive documentation to provide support for their related party transactions. But given the adversarial nature of tax audits, even well prepared TP documentation would be put through stringent tests. The potential impact of an unfavourable transfer pricing tax audit could have a ripple effect through the tax treatments for the entire group of companies.
APAs could act as a safe harbour for taxpayers. Entering into an APA is quite common among multi-national enterprises for key or re-occurring transactions. This is done in order to avoid any potential tax disputes, or double tax challenges caused by a transfer pricing assessment.
Thailand allows taxpayers to apply only for bilateral APAs to avoid and eliminate double taxation. These are issued in accordance with the Double Tax Agreements (“DTAs”) entered into between Thailand and other countries. An APA also provides the taxpayer with the opportunity to engage in constructive discussions with the tax authorities on the Company’s business structure and transactions, as well as the underlying commercial rationales.
Though the process of securing an APA may take time and effort, it provides the taxpayer with certainty through a written confirmation on tax treatment for future accounting periods. It is noted that Thailand does not allow APAs to be applied retrospectively. Thus, APAs may only be effective for future accounting periods.
While data about approved APAs are not publicly available, it is estimated that there may have been over 50 APA applications filed, of which approximately 30 have already been approved. Even though there is no government fee charged for issuing APAs, the process involves both countries in the DTA, and will take time. It is advisable for a taxpayer to plan several years in advance.
Based on our discussions with the Thai Revenue Department, the tax officers have expressed their willingness to promote and encourage taxpayers to utilise APAs. Likewise, several ASEAN countries such as Malaysia, Singapore, Indonesia, and Vietnam also provide for APAs for taxpayers through DTAs.