Tax Avoidance in Thailand

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Tax Avoidance in Thailand

Chapter I


Background of The Problem

In the globalization, international business transactions have increased rapidly over the years. This is because the world economy has become increasingly integrated. Trade flows have grown as a proportion of national income and there is now a global capital market. Investment has increasingly expanded at an unprecedented rate in many states. These international business activities have led to the formation of groups of companies with mutual interests.

Commonly, the goal of business enterprise is to create profit. In practice, companies will make profit by generating and continuing the growth of business expansion. It can be enhanced through transfer pricing. Transfer pricing is about shifting profits from one business to a related business by charging transfer prices which may deviate from the market price. It operates by substituting the arm’s length price, for the purposes of calculating taxable profits, which can be either higher or lower than the world market prices in place of the actual terms of transactions between associated parties in order to reduce income and gain overall profit within the group.

Currently, since Thailand is a source income country and needs capital inflow and high technologies, multinational companies have influenced the development of Thailand through their investment. The problem of transfer pricing has existed since then but it is hard to clearly identify the matter. This is because of a lack of information and the nature of trans-border business transactions of multinational companies. Information and documentation are also often kept in the parent corporations established in other countries.

In general, purchase or sale of goods always occur within the group of companies whereby the parent companies, typically developed countries, sell and ship raw and processed materials, manufactured products as well as mass-produced goods from their countries to Thailand, developing country, for manufacturing of the finished products. Prices of products charged under these transactions are likely to be lower or higher than prices charged among independent parties.

Moreover, machines have often been used in head offices or parent corporations for several years and then later on they will be sold to subsidiaries or branches in Thailand for investment with high prices. Parent companies can then draw money back from Thailand where they invested at the beginning. They receive disguised dividend without paying tax to Thai government—corporate income tax or dividend withholding tax.

After that Thai subsidiaries or Thai branches will export finished goods to their parents or other affiliated companies that situate in tax havens or countries which have a lower corporate tax rate than that in Thailand. This method is an ordinary practice in trans-border trading of multinationals for the movement of goods and tends to avoid tax in Thailand, a host country. This technique also creates inequitable treatment for tax sharing between developing and developed states.

The Thai Revenue Department has no specific rule for controlling the manipulations employed by these multinationals. Tax authorities must use their own discretions and judgments which may create uncertainty, a lack of consistency, and unfairness for all taxpayers. This loophole would damage the country in the long term.

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Increased cross border intercompany transactions

Manipulation of transfer prices in order to reduce the tax liability

Tax authorities should regulate transfer prices

Thailand lose a huge amount of tax revenue

Aim of the Dissertation

The objective of this dissertation is to seek the clarification to the problem of transactions concerning transfer pricing issue and to find a proper solution to be adopted in Thai tax system by observing approaches used in many jurisdictions. This paper will mainly study and analyse the relevant provisions in relation to transfer pricing under Thai law. Then, the rules dealing against transfer pricing of the model tax conventions and other selected jurisdictions will be discussed in order to find out which approaches should be adopted in Thai tax regime to prevent and solve the manipulative transfer pricing in Thailand.

Thesis Statement

Under the Thai tax law, there is no specific rule to counter the manipulative transfer pricing; therefore, Thailand should introduce specific provisions and other supported mechanisms regarding transfer pricing into Thai legal system.

Study Methodology

This dissertation was consummated by means of a documentary research by studying and gathering information, analysing legal provisions, legal orthodoxy, textbooks, cases, and journals including Thai and English journals. The process additionally includes discussion among people and academic in the regarded field.

Scope of the study

To establish conceptual framework on transfer pricing, this dissertation will focus only on the transfer pricing transaction on a purchase and sale of goods of the cross-border transaction of multinational enterprises. The price transferred between local corporations in Thailand will not be in the scope of the study. Besides, it will focus only on a sale of tangible properties. The transfer or sale of immovable intangible properties such as intellectual properties and transfer of technology will not be discussed in this dissertation. Other related issues and aspects of the problems will be briefly discussed when it is deemed necessary.

Structure of the Dissertation

To address the problems, the dissertation consists of 6 chapters. To help the reader understand the concept of this paper, introduction will be provided first in Chapter I. This chapter will contain a brief description of background of the problem, which will present the reason of this study, the purposes of the paper, and also the structure of the dissertation. Then chapter II will demonstrate how companies avoid tax through transfer pricing. The terms ‘transfer pricing’ and ‘associated multinational corporations’ will be defined to provide the reader with the basic understanding of the issue. The general rationales and methods of the abusive transfer pricing will also be mentioned in this chapter.

Chapter III will discuss about the nature of the transfer pricing problem on sale of goods and its impacts in Thailand which will demonstrate why the issue of transfer pricing has gradually become an essential problem in Thailand. Next, Chapter IV is ‘approaches under Thai tax system and the applicability to prevent the abusive transfer pricing on sale of goods’. This chapter aims to assist the reader to have the basic essential understanding of the in-depth view of taxation system related to transfer pricing in Thai tax law, including tax implication on transfer pricing of the Thai Revenue Department, Thai Customs Law, and double tax treaties.

After that it will study the current action of Thai tax authorities and the contemporary problems to Thai legal framework which obstruct the application of the said provisions in practice. Subsequently, chapter V will research approaches under model tax conventions as well as other selected jurisdictions to the problem of transfer pricing which lead to suggestions at the end of this dissertation—chapter VI. The last chapter will conclude all issues occurred in Thailand and finally will seek to find the best solution which would be appropriate to the Thai tax system. The findings will also be discussed to meet with the dissertation’s objectives.

Chapter II

How Companies Avoid Tax Through Transfer Pricing


The tax rates and tax systems differ from country to country which may lead to the distortions in the pattern of production and trade. It may influence the countries in which goods or products are manufactured, and the countries from which saving are derived and in which investment takes place. The existing differences between effective taxation burdens in various countries give rise to great difficulties for the assessment officers in each country who tax multinationals.

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Moreover, these corporations themselves put substantial endeavour into reducing overall tax burden by transferring capital and profits around the world. This is because most countries do not tax company groups as a single entity. Therefore transfer pricing becomes a problem for tax purposes due to the need to establish the amount of taxable profit for each taxable entity to reduce the tax burden of company groups as a whole. Furthermore, it is important when computing how much profit belongs to a part of a company which is located in another tax jurisdiction such as a permanent establishment.

For the above reasons, most jurisdictions have legislation that aim to protect their tax base from manipulative transfer pricing practices by deeming that intra-group transactions must calculate taxable profits, for tax purposes, at market value using the ‘arm’s-length principle’. Though, establishing market value is not that simple because it is difficult to determine what arm’s length prices between connected parties should be since information on comparable transactions in the open market is unavailable. Besides, governments are concerned to ensure that the profits reported by related companies reflect a fair commercial level of profit. However, they do not want to be so harsh that they fail to attract investment from multinational groups. This is a particular problem for developing countries.

2.2 Definition of Transfer Pricing

Black’s Law Dictionary defines the term ‘Transfer price’ as follow.

‘The price charged by one segment of an organization for a product or service supplied to another segment of the same organization; esp., the charge assigned to an exchange of goods or services between a corporation’s organizational units.’

According to the above definition, transfer pricing simply means pricing of business transactions between related corporations. It governs the way in which group companies charge each other for intra-group goods or services. However, the definition does not mention taxation but when discussing about transfer pricing in an international tax context it usually means the artificial manipulation of internal transfer prices within a multinational group, with the intention of creating a tax advantage.

Therefore, transfer pricing is about shifting profits from one business to a related business by charging transfer prices, such as prices which do not conform to an arm’s length standard. It operates by substituting arm’s length terms in place of actual terms of transactions between connected parties. Normally, arm’s length price is the price that would be charged in an uncontrollable transaction, for instance, when parties are unrelated.

There are two most common methods to find an arm’s length standard: first, checking the price in a similar transaction between two totally different parties (for example, AàB vs. CàD); and second, checking the price in a similar transaction between one of the involved parties and one unrelated party (for example, AàB vs. AàC). Arm’s length price also has the meaning attached to it under OECD Model Convention, Article 9(1). It specifically provides that the transfer-pricing rules are to be interpreted in accordance with Article 9 of the OECD Model Convention and the OECD Transfer Pricing Guidelines of 1995.

Under Thai law, there is no definition of the market price provided in the Revenue Code. Such definition however exists in the Departmental Instruction No.Paw.113/2545. Market price under the instruction means the price of remuneration, service fee or interest, which is fixed in commerce between independent contractual parties in good faith, for the transfer of property, rendering of service, or lending of money, of the identical character, type, or kind, on the date that the transfer of property, rendering of service, or lending of money, is conducted.

2.3 Definition of the Associated Multinational Corporations

2.3.1 General

Associated corporations generally mean at least two entities that are owned or controlled either directly or indirectly by the same interest which are so-called ‘a group of companies’. A group of companies will comprise at least a parent company which controls another company known as a subsidiary. Therefore, if two companies form a group, they are then free to set price within the business group in a way which minimises the tax payable.

2.3.2 UN

Section 1(a) of The Code of Conduct on Transnational Corporations provides the definition of multinational corporations. Multinational corporations mean companies that have the same decision making system and perform their businesses in more than one country.

2.3.3 OECD

‘Article 9 – Associated enterprises (1) Where

a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.’

Article 9 of the OECD Model treaty is the main provision which provides the interpretation of the associated companies’ relationship for the transfer pricing aspect. Under this article, the adjustment will be made in case transactions have been made between parent and subsidiary companies and companies under common control. Associated multinational corporations under this Article are therefore implied mean companies that have the same common control.

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2.3.4 Thailand

Under the Departmental Instruction No.Paw.113/2545, the term ‘independent contractual parties’ means any contracting parties which have no relationship of management, control, or joint investment, between them, whether directly or indirectly. Therefore, associated multinational corporations would mean on the contrary to this definition which are companies that have relationship whether directly or indirectly of management, control, or joint investment between them. This implied definition is also consistent with the concept of ‘associated enterprises’ in the OECD’s transfer pricing guidelines.

2.4 Rationales of Transfer Pricing Between Multinational Corporations

Normally, the purpose of business enterprise is to maximise profit. Practically, purposes of companies are creating profit, generating growth of business expansion as well as continuing the business corporation. In fact, transfer pricing is not the purpose in itself but the matter will lead to the rationales of multinational enterprises. Those rationales include the reduction of tax expenses, the avoidance of host country’s limitation, the maximization of profit, the allocation of profit, and the start up the market.

2.4.1 Reduce Tax Expenses

Multinational companies often apply transfer pricing to decrease their worldwide tax. They want to pay tax as least as possible, so they reduce profits by adding expenses through a higher transfer price. Commonly, prices of goods or raw materials charged between related companies are habitually different from prices charged between independent parties. The latter price is always the price set up in the actual market dictated by the free market competitiveness. In contrast, prices between related companies tend to disguise the free market price. This mechanism is an artificial transfer pricing so as to pay no or less corporate income tax.

For example, the parent company or head office often exports raw materials with the high price to its subsidiary or branch in a host country for manufacturing finished goods. The finished goods will later be sent back to the head office with the lower price. If the host country has the higher effective tax rate than that in the home country, then the multinational corporation can save overall tax burden.

In contrast, in case the host country has lower effective tax rate than that in the home country, the head office in the home country will then control and set the exported price charging to its subsidiary or branch in the host country in an excessively low price and set the exported price charging to the parent corporation in an overly high price. By this way the multinational corporation will also save more tax.

Avoid Host country’s Limitation

The transfer price can be utilised to avoid the impact of the limitation policy of the host country when multinationals in the host country remits money back to their parent in the home country. Money remittance can be in the form of management or royalty fees.

Create Profit on Variation of Currency

Transfer pricing method is also an efficient tool for multinational enterprises in order to create profit on variation of currency in other countries.

Maximise Profit

The key objective of a company is to make money and maximise profits. This goal can be achieved through transfer pricing method which creates tax advantages to multinationals much more than expected. The international transfer pricing helps multinational companies to make the right decision to maximise their own profits and at the same time the global profits of the multinational enterprises as a whole. This mechanism can be employed by promoting business in the host country. In some specific kind of businesses, the government in particular host countries will grant tax incentives and other privileges to draw investment, capital, and technologies from developed countries.

Generate an Allocation of Profit

Transfer pricing techniques can be exploited in order to allocate proper income within the group. Moreover, multinational companies can transfer profits out one the country in case they consider that the political circumstance in that country is not stable or there is a strict policy in controlling their business segments.

2.4.6 Open Up the New Market

This is the temporary purpose of multinational companies. The strategy of these corporations is that, for example, the parent company will sell products to its subsidiary in the host country with the cost lower than the normal market value so that the subsidiary has the opportunity and is capable to access the new market. The subsidiary can then amplify its market share in the host country, bring in new merchandises into the market, and discourage the growing competition from other companies.

2.5 Methods of Transfer Pricing of International Business Transactions

The techniques or methods of transfer pricing of international business transactions of connected multinational companies will be discussed in this part. These methods are purchase and sale of goods, transfer of intellectual property knowledge, certain intra-group services, and debt finance.

2.5.1 Purchase and Sale of Goods

This dissertation will mainly concentrate on the method of transfer price on the purchase and sale of goods by connected companies so as to decrease their overall tax liability within the group. However, this method will be independently discussed in Chapter III.

2.5.2 Transfer of Intellectual Property Knowledge

This method is often used by developed countries investing in developing countries since developing countries as host countries need high technologies for developing their infrastructure projects. These technologies include know-how, patents, trademarks, technical assistance and trade name. For this reason, parent corporations in developed countries, the owner of these technologies, will charge at whatever amount that unrelated companies would be charged for the use of the said technologies in similar circumstances.

Moreover, this transfer of technology transaction between connected parties is regularly conducted in the form of licensing agreement for the use of technologies. The royalty fees charged under the agreement will normally be extremely high and these fees are to be transferred out of affiliated companies in developing countries to their parents in developed countries.

Most countries normally impose tax on royalty; nevertheless, the tax rate for royalty is often lower than corporate income tax and dividend tax. This encourages companies (subsidiaries and affiliated companies) to be imposed excessive royalty fees by their parents in order to transfer money back in the form of royalty rather than in the form of dividend. Hence, a group of companies can save overall tax.

Certain Intra-Group Services

Parent corporations always provide a wide range of services to their subsidiaries in the related business field. These services include administrative, technical and commercial services. The service charge among these multinationals is various according to the type of services. Besides, profits of these multinational corporations can be moved from country to country by transferring profits from one country to another in the form of service fees. For instance, the company in the low tax jurisdiction will charge the huge amount of service fees from the company located in the high tax jurisdiction, for tax purposes, in order to minimise the overall tax liability of the group.

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Debt Finance

Capital is the fundamental nature of investment. Capital can come from either equity or loan. The returns of equity and loan (debt capital) are treated differently for tax purposes. The returns to shareholders on equity investment are disallowed as a tax deduction for the paying company, being distributions of profits rather than expenses of earning profits. By contrast, the returns to lenders on debt, usually in the form of interest, are generally deductible for tax purposes for the payer in arriving at income assessable to corporation tax.

This financial strategy is important for the group since the tax cost of debt financing is normally less than the tax cost of equity finance while the interest rate charged for loan among associated enterprises is usually higher than unconnected enterprises. This can then result in endeavours by multinational enterprises to present what is in essence equity investment in a company in the form of debt and thereby to attain a more constructive tax treatment. In some situations, parent company may establish an entity in countries where treaties provide more tax benefits such as deduction of interest tax.

It should be highlighted that in most cases these methods tend to manipulate the transfer price within the group; however, it does not mean that all cases have to be an abusive transfer price. Multinational companies may apply these methods to allocate their management fund without reducing or avoiding tax liability. Further, associated companies related to the transfer pricing case are usually located in high tax jurisdictions.

Chapter III

Nature of the Transfer Pricing Problem On Sales of Goods And Its Impacts In Thailand

3.1 Nature of the Transfer Pricing Problem on Sale of Goods

Regularly, tax will be imposed on profits of companies that arise in the relevant period. Profits may be calculated differently in each particular country according to the tax system in that jurisdiction. However, purchase or sale of goods always occurred within multinational corporations. The subsidiaries or branches in developing countries like Thailand normally import raw materials from their parent companies located in developed countries, for manufacturing the finished goods. After that those subsidiaries or branches in Thailand will export such manufactured products back to either parents or other affiliated companies established in the tax havens or other countries where there is little or no corporate income tax.

This method is a common practice for the movement of goods in international trading within associated multinational corporations. Parent corporations usually provide raw materials along with other processed materials to their subsidiaries or branches located in other jurisdictions. Prices of these materials charged under these transactions are likely to be lower or higher than the price charged between unconnected companies. Frequently, parent corporations have used machines for many years before selling and shipping to source income countries for investment with an excessively high price, for tax purposes.

These prices are controlled by parent companies and obviously tax benefits will be obtained in the group of these multinational companies as a whole. Parent companies can then receive their money back from countries they invested at the beginning without paying tax, such as corporate income tax and dividend withholding tax, to those source income countries. Such income is so-called ‘disguised dividend’. This kind of transfer price method is likely to avoid tax of the host country—Thailand. It also creates inequitable treatment for allocating of tax revenue between developing and developed countries.

For example, assume that Thai Co., a Thai subsidiary, conduct its business in manufacturing a transformer. The processed materials are composed of copper coil and iron core. Frequently, Thai Co. purchases copper coil from local company in Thailand but imports the iron core from its parent company or other affiliated companies within the group, Foreign Co.

In computing profits, Thai Co. will deduct the costs of copper coil, iron core, and all costs incurred in mixing and packaging the feed from its sale proceeds. As a consequence, a simple balance sheet may be as follow.

Sale Proceeds : 200,000 Baht

Cost of Copper Coil : 100,000 Baht

Manufacturing : 20,000 Baht

Cost of Iron Core : X

Profit on Sale : 200,000-(10,000+20,000+X) Baht

Noticeably, the amount of profits subject to tax in the hands of Thai Co. will vary according to the price charged to X.

In case Thai corporate tax rate is higher than that where Foreign Co. is located, then it is likely that a high value will be charged to X irrespective of the manufactured cost of the iron core. This way will reduce the total amount of tax borne by the group.

In contrast if Thai corporate tax rate is lower than the corporate tax rate in the jurisdiction of the Foreign Co., then the price charged to X may be lower than the market price. This procedure will assist the group of companies in saving its overall tax. This method will be even more efficient where the company is granted an investment promotion through the Board of Investment of Thailand since the corporate tax would be exempted in such case.

3.2 Impacts of a Manipulative Transfer Pricing On Sale of Goods In Thailand

An abusive transfer pricing always generates an inequitable share of tax revenue between countries, especially between developed and developing countries. Thailand is also considered as a developing country and it is likely that Thailand has been impacted by an abusive transfer pricing. Normally, Thai subsidiary or Thai branch would purchase raw materials from its overseas parent company.

The price set between overseas parent company and Thai subsidiary or Thai branch is often higher than the real market price. Thai subsidiary or Thai branch then attain a lower profit than actual which finally minimise the corporate tax burden to be paid to the Government of Thailand. Taxation on dividend and taxation on remittance profit will also be reduced accordingly.

Later on, the Thai subsidiary company and Thai branch office would sell, at the discretion of the parent company, manufactured products back to the parent or other affiliated companies established in other countries with the intention so as to reduce their overall tax burden. The price in this transaction is likely to be lower than normal. Consequently, Thai subsidiary or Thai branch can reduce its profit to zero so that little or no corporate income tax is imposed and collected by the government of Thailand. Not only is there a loss of huge amount of tax revenue of the country, the government of Thailand will also lose foreign currency. These transactions demonstrate that the revenue is likely to leaving out of the country rather than coming in.

Thailand has no specific provision dealing with transfer pricing issue engaged by these multinational corporations. In most cases, tax authorities use their own discretion and judgment which then creates uncertainty, a lack of consistency, and hence potential for unfairness for all Thai taxpayers. The system of tax collection in Thailand can be further exploited by this loophole.

Moreover, Thai government has been promoted incentives to foreign companies to run business in Thailand through the Board of Investment in order to attract the flow of investment and know-how to Thailand. Thai government claims that these foreign investments create a number of jobs for Thai people in the country and also high technologies will be transferred to Thailand. However, the investment promotion policy has been granted to these foreign companies without taking into consideration of the transfer pricing issue. Multinational corporations may take this chance to manipulate the transfer price within the group in order to save their global tax liability.

For example, the exemption of the corporate tax for eight years is one of promotion incentives granted to foreign corporations. Within this period and thereafter the promotion expired, these companies may also import raw materials without any requirement to report or disclose the price of goods imported. Similarly, there is also no need to report or disclose the price of goods exported. By this way, those multinational enterprises could reduce their overall tax burden. It can be said that the investment promotion through the Board of Investment of Thailand may not be at all beneficial to the country since there is a lack of such information appeared in the Thai tax system.

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To sum up, the impacts of transfer pricing transactions of multinational enterprises are that (1) Thailand loses an enormous sum of tax revenue. (2) There is no actual technology transfer to Thailand as well as no actual technology trained by Thai workers. (3) Trade balance problem and monetary payment balance problems may occur in Thailand. (4) The policy of investment promotion of Thai government through the Board of investment would be ineffective and may not be at all beneficial to Thailand as for the primary objective. (5) Other instruments with the purpose to control prices of goods, exchange control or correct the trade balance might not be applicable in practice if multinational companies continue to manipulate the transfer price.

Chapter IV

Approaches Under Thai Tax System and The Applicability To Prevent Abusive Transfer Pricing On Sale of Goods

The sole purpose of transfer pricing rules is to prevent tax loss by the charge of transfer prices. The rules require that the price of the goods or services is deemed to be a market

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