A key weapon used by tax authorities in combatting tax evasion by MNEs (Multinational Enterprises) around the globe has been transfer pricing (TP) rules. These rules attempt to prevent MNEs from shifting profits to low or no tax countries through the pricing of intra-group transactions.  They do this by requiring MNEs to prove that the transactions between the related parties in the group are priced based on “arm’s length” prices.  Arm’s length prices are prices which would be expected in transactions between independent parties in the same or similar conditions.

Transfer pricing rules are not new to Thailand.  Prior to 2019, Thailand had general provisions within its corporate tax laws, which allowed the Thai Revenue Department to adjust income or expenses which were not determined on an arm’s length basis. From 2019, the Thai Revenue Department now has specific transfer pricing laws which require companies to prepare transfer pricing documentation to support that the pricing of their related party transactions is determined on an arm’s length basis.

Whilst the transfer pricing laws provide tax authorities with a tool for preventing MNEs from reallocating profits amongst the group companies to reduce overall global tax liabilities, there were still concerns that the arm’s length standard does not fully address the realities of digitalization of the economy and globalization. 

After years of discussion under the auspices of the OECD as part of the BEPs (Base Erosion and Profit Shifting) project, a package of important proposed changes were agreed in 2021 by the OECD, G-20 and countries in the inclusive framework, which includes Thailand.  One of these proposed changes (referred to as “Pillar 2”) was the adoption of a minimum tax on global income.  The objective of this measure was to address unhealthy tax competition between countries aimed at attracting investment.  Specifically, countries competing for investment may offer low or no taxes on profits.

Pillar 2 works by establishing a floor on tax competition between countries through the introduction of a minimum corporate tax of 15%. 

Pillar 2 applies to MNCs with consolidated group revenues of more than Euro 750 million.  This is consistent with the revenue threshold for country-by-country reporting (CbCr), which Thailand introduced in 2021. 

The Pillar 2 rules are complex, but broadly speaking, the MNE will need to calculate their effective tax rate for each country in which they operate.  A top-up tax applies to the extent that the effective tax rate is less than the 15% minimum rate.  The top-up tax will be subject to tax either in the country where the ultimate parent is located or, in the case of an MNE where the ultimate parent jurisdiction does not impose such tax, in the countries where other group companies are located and impose such tax.  There is also provision for countries to introduce their own domestic minimum top-up tax, which would allow them to preserve the tax rights on income from domestic sources.

A number of countries have already announced their timeline for adoption of the Pillar 2 rules.  The Thai Government Cabinet approved in principle the intention to adopt the Pillar 2 measures earlier this year with implementation expected for 2025.  The domestic top-up tax is expected to be included in the Thai rules.  Whilst there has not been any additional update provided by the Thai Revenue Department, we understand that they are currently drafting the laws.  This will need to involve careful consideration of how these laws interact with existing tax laws.

Interestingly, the Thai Board of Investment (BoI) has already notified measures to alleviate the impact of Pillar 2 for companies which obtain BoI corporate tax holidays given that their effective tax rate may be less than the 15% threshold.  In short, the BoI will provide an option to companies to pay corporate tax at 10% (50% of the corporate tax rate) for double the number of remaining years that they would have been entitled to the corporate tax holiday up to a maximum of 10 years.  This will have the impact of minimizing the top-up tax.  Companies (both existing and new investors) considering this option should carefully evaluate the cash flow impact of the options available.

So, the question arises as to what extent the traditional way of doing transfer pricing may be replaced, or at least eroded by Pillar 2.  Whilst, as a TP advisor I may be biased, it seems clear that traditional transfer pricing will continue to be a significant issue for MNEs.

The Pillar 2 model rules issued by the OECD themselves require that the pricing of transactions between companies in the MNE group are based on the arm’s length principle.

There will be a significant number of smaller MNEs, which are not covered by Pillar 2 given the revenue threshold of Euro 750m.  The traditional TP measures will still need to be employed to ensure these companies are not diverting profits into low or no tax countries.

For those MNEs within the scope of Pillar 2, it is likely that the measures will disincentivize the more aggressive forms of TP planning involving the diversion of profits to tax havens given that the profits would, in any event, end up in the MNE’s corporate tax net. Arguably, however, this type of planning has already been discouraged due to the level of transparency and disclosures required to be made under the CbCR.

Whilst there continue to be differences between countries corporate tax rates, which are above the 15% threshold, there is likely to be continued concern from tax authorities that they are not getting their fair share of the tax pie.  For example, with Thailand’s corporate tax rate at 20% and Hong Kong’s at 16.5%, the Thai Revenue Department may still be concerned with a transfer of profits to Hong Kong through transfer pricing on related party transactions between these countries.

The TP rules will therefore continue to play an important role in ensuring MNEs pay their fair share of tax.  The introduction of Pillar 2 will, however, mean an added layer of complexity in tax compliance which MNEs will need to ensure they comply with.

Stuart James Simons, Partner | Transfer Pricing

Deloitte Thailand