Abusive Transfer Pricing and Anti-Avoidance Measures in Thailand

Economic contacts between countries have steadily increased over the years. This in part reflects the rapid growth of international economy and the increased investment in several countries. These international business activities have led to the formation of a group of company conducting business activities in two or more countries, which is known as MNEs or multinational enterprises. Nowadays a lot of Thai companies increasingly invest in foreign countries; meanwhile foreign companies also choose Thailand as a location to invest and transfer profits back to their home countries. Definitely, those profits before being sent out of Thailand must be taxed in Thailand. Therefore, MNEs investing in Thailand sometimes create taxation schemes to pay tax as little as possible. The more they pay less taxes, the more profits they will gain. For this reason, abusive transfer pricing, as one of tax avoidance strategies, is used by MNEs to minimize tax burdens in their group. The negative effect goes directly to those source countries since it causes revenue loss of those source countries. Transfer pricing plays very important roles in MNEs. Approximately 60 percent of the intra-group transactions are transfer pricing. Recently, more attention has been paid, since it has influence on tax incentives, production costs, skilled labor force, infrastructure etc. Consequently, transfer pricing which is not in good faith or aims at tax avoidance would be kept an eye on and prevented by anti-tax avoidance measures. The UK and the USA are the first two countries where specific transfer pricing provisions were introduced during the World War I. Due to the fact that transfer pricing affects the total profits of the groups of companies and some of them abusively use it to avoid taxes, these provisions aim to prevent profit shifting between the groups of companies through under or over-pricing of cross-border transactions. As for Thailand, Thailand is a country which investment has been vividly encouraged, since Thailand could gain benefits from the flow of foreign currency, particularly in country development. To attract foreign investors to invest in Thailand, in the past many years, new laws concerning investment were introduced and some laws were amended to give benefits to foreign investors, for example; corporate income tax is exempt for three to five years. Therefore, including internal factors e.g. low labor cost, Thailand is definitely a very interesting destination in Asia to invest. Once a lot of foreign investors come to invest in Thailand, abusive transfer pricing as one of company’s tax strategies is likely to occur and probably leads to negative effect to Thailand like revenue loss. Considering anti-transfer pricing measures, very few transfer-pricing provisions in Thai legal system and an internal guideline for tax officials are found. Therefore, the main purpose of this thesis is to study whether or not Thailand has sufficient measures to prevent abusive transfer pricing and those measures are effective. The author, eventually, would give recommendation to enhance the effectiveness of anti-transfer pricing measures in Thailand.