Business operators urged to brace for Thai transfer pricing law, tax and legal changes in digital economy

Stocks and Financial Services Press Releases Monday October 22, 2018 15:12
Bangkok--22 Oct--PwC Thailand

Businesses are steadily moving towards more diverse online and offline platforms. MNCs are now emerging from survival mode and focussing once more on growth and opportunities. This drives massive opportunities and also poses challenges for companies when planning their business growth.

The government is also looking at ways of changing the long-established principles governing law and taxation. Because of this, Thai businesses need to understand their tax risks and adopt the right strategies to manage their tax costs, and crucially need to be aware of the potential changes and their impact as well as how to manage disruption to business models, and harness opportunities, PwC Thailand says.

Somboon Weerawutiwong, Lead Tax Partner of PricewaterhouseCoopers Legal & Tax Consultants Ltd., said during PwC Thailand's Symposium 2018 (Managing challenges to unleash corporate growth) that "Business operators should equip themselves for the change to the digital economy and get themselves ready for the draft transfer pricing provisions (which will be enacted soon), and the draft data protection bill."

Judging by the reported growth figures, the business sector is steadily growing and beginning to create thriving businesses through acquisitions by share deals or asset deals for both inbound and outbound investment.

This focus is because acquisitions are a preferable solution to enhance business leadership and maximise income and is the fastest means of generating cash flow for companies. In order to achieve their strategic objectives, it's vital that companies are able to identify and effectively manage the key tax and legal challenges arising from acquisitions, deal executions and post-deal integration as well as the risks amid the planning opportunities available, to maximise their business and shareholder value.

The absence of proper preparation or tax and legal risk management could expose business operators to a higher tax burden and operating costs to a degree that could offset the expected gains and benefits from business expansion.

Also, activities of companies may create challenges for their tax operations as a result of changes in the business environment. One key concern would be payments to related parties, since this is one of the simplest ways to shift profits out of a company and is a very common technique used in tax planning.

However, MNCs need to be aware that these payments are a favourite target of the Revenue Department, and their deductibility for corporate income tax will also be challenged. Compliance with the withholding tax and VAT laws will also be closely scrutinised. These kinds of issues can lead to unavoidable tax exposures if wrongly determined. Now is the time to revise tax operations and discover the previously hidden risks.

Above all, the Revenue Department has a five-year development plan for a tax collection system that will accommodate the digital economy, linking government agencies together according to government policy.

This will mean revisiting and improving the tax collection system in line with the changing direction and revising the law to make the country's tax collection law modern and correspond with international tax collection policies. This is reflected in the current tax laws being amended and new laws being drafted. And the one that is the most talked about, and is drawing public attention is the draft transfer pricing provisions.

Since Thailand is now a member of the OECD's Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and it has to be bound by and adopt certain principles of which transfer pricing measures are one.

At this stage, the transfer pricing bill has been reviewed and approved by the National Legislative Assembly and will soon be announced in the Royal Gazette for its official enactment. Once enacted, business operators who fall within the criteria set by the law and who undertake transactions with their subsidiaries and affiliated companies must prepare and submit a report disclosing related party transactions to the Revenue Department.

Therefore, business operators need to study and understand the provisions of the law and regulations that will follow so that they can fully comply with the law when undertaking related parties transactions. Good preparation includes having in place transfer pricing policies and documents since those documents will be concrete evidence and significant tools to assess and manage potential tax risks thereby reducing the exposure during a tax investigation.

"The absence of proper preparation can translate into higher operating costs for taxpayers if they attempt to resolve problems when they're challenged by the tax authority. On the other hand, proper tax planning will enable taxpayers and business operators to formulate strategies to effectively manage tax risks once the transfer pricing bill becomes law," Somboon said.

Somboon also made a final remark about legal compliance which is a significant issue for the government authorities. During business operations, it might be sceptical whether business operators are fully compliant with the laws such as the foreign business law or the investment promotion law.

The risk of non-compliance could lead to legal sanctions and in the worst-case scenario, business disruption or even cessation. Furthermore, the nature of business is now changing from traditional to online so handling this switch properly can lead to tremendous growth. New technology leads to digital transformation and a huge increase in online transactions, prompting the government to impose new laws and measures to monitor any fast growing businesses. Therefore, business operators need to study and understand those laws and regulations and related practices concerning e-commerce or the disclosure of personal data and others.

Managing legal risk is vital to the success of business performance. Companies need to be more aware of legal non-compliance issues so that proper controls can be put into place to increase the standard of business compliance and to prevent internal fraud.

Therefore, MNCs and business operators need to prepare themselves to be ready to manage legal and tax challenges so that they can effectively plan and deal with the changes in the way business is conducted and to expand their businesses. Effective risk management will reduce the tax costs and the risk of non-compliance which otherwise will cause unnecessary disruption to the business.

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