Transfer Pricing refers to the prices set for transactions of goods or services between entities within the same corporate group. Any agreement between companies under the same owner or parent company—or under the same control—is subject to transfer pricing rules. These laws prevent profit shifting to related companies in lower-tax jurisdictions or areas with special tax incentives.
These guidelines were established by the Organization for Economic Cooperation and Development (OECD). Each country then adapts them to meet the specific needs of their business and government sectors.
In Thailand, the Revenue Code Amendment Act (No. 47) B.E. 2561, Section 71, clarifies the duties of those required to file transfer pricing reports. This applies to legal entities with an annual revenue exceeding 200 million THB that have related companies or juristic partnerships.
“Related companies or juristic partnerships” are determined by direct or indirect shareholding of at least 50% of the total capital, or entities with relationships in terms of capital or management such that they cannot operate independently from one another.
The “Arm’s Length Principle” is based on the assumption that if companies subject to transfer pricing rules conducted business in the same way as independent businesses in a similar environment, they should achieve similar levels of profitability.
There are various methods to determine a justifiable transfer price. The most popular is the Transactional Net Margin Method (TNMM), which compares the ratio of net profit to sales costs of other companies with similar business characteristics and no controlling power. The price used should not exceed the Interquartile Range.