The Ministry of Economy and Finance issued Prakas No. 986. MEF.P. (“Prakas 986”) dated 10 October 2017 to provide rules and procedures for allocating income and expenses in business operation among related parties. To ensure appropriateness of transfer pricing among related parties, principles, procedures, and supporting documents for implementing transfer pricing shall be used and declared sincerely and accurately by taxpayers.
This Prakas covers the implementation of all business operations between two or many related parties. Among those related parties, at least one of them is a resident taxpayer.
The term “Related Party” refers to
a. A member of taxpayer’s family
b. An enterprise which controls or is controlled by, or is under common control with, the taxpayer. The term "Control" means the ownership of 20 percent or more in the value or voting power of the equity interests in the enterprise or voting power in the enterprise’s board of directors. To determine the degree of control for a taxpayer who is a physical person, all equity interest owned by the taxpayer and those owned direct or indirect by his/her spouse shall be included.
To allocate income and expenses appropriately in accordance with an arm’s length principle, pre-condition is required to have a comparable analysis by comparing a controlled transaction with uncontrolled transaction. This comparison is applicable if any condition among the two below is met:
a. Transactions or enterprises having transactions which is the objection for comparison shall not have any difference that essentially effects on market price or
b. Reasonable and accurate adjustment can be applied to eliminate an essential impact of those differences.
Under the arm’s length principle, to determine a comparability, conditions between controlled transaction and independent-enterprise transaction shall be compared. Comparison of characteristic related to economic status shall be compared in details based on a similarity or likeness by using the following factors:
Methods for Allocation of Income and Expenses under Arm’s Length Principle
Pursuant to Article 18 of Law on Taxation, to allocate income and expenses among related parties under arm’s length principle, taxpayers can apply one or more methods as follows:
a. Comparable Uncontrolled Price (“CUP”)
b. Resale Price Method (“RPM”)
c. Cost Plus Method (“CPM”)
d. Transactional Net Margin Method (“TNMM”)
e. Profit Split Method (“PS”)
For transfer pricing purpose, recording, controlling, and maintaining accounting books, supporting documents, and other financial documents will benefit to taxpayers by mitigating a risk from tax audit and adjustment from tax administration under the arm’s length principle. Not only limited to the below information, the taxpayers having related parties’ transaction have an obligation to arrange the following information in advance:
a. General information of enterprise and its related parties
b. Information of enterprise’s transactions
c. Information of transfer pricing
Without considering other punishments, if taxpayer fails to comply with an obligation as stated in Section 18 of this Prakas, the taxpayer will be seized certificate of compliance status or re-assessed tax compliance status and will be penalized as stated in article 133 of the Law on Taxation. In necessary case, the tax administration may file a law suit against the taxpayer and impose a criminal violation on tax provisions as stated under article 134 to article 138 of the Law on Taxation.
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