Asia Transfer Pricing Brief: Q1 2025

In our Asia Transfer Pricing Brief for Q1 2025, we highlight the latest transfer pricing developments across key Asian markets:

• Thailand has introduced significant tax reforms aimed at aligning with global tax standards, particularly the OECD’s Global Minimum Tax under Pillar Two of the Base Erosion and Profit Shifting (BEPS) 2.0 framework.
• Sri Lanka’s Inland Revenue Department (IRD) has issued the Advance Pricing Agreement (APA) Guidelines, enhancing the predictability of tax compliance for foreign enterprises by clarifying processes and timeframes.
• The Government of Vietnam has issued Decree No. 20/2025/ND-CP, introducing key amendments to the rules on related party transactions and transfer pricing in Decree No. 132/2020/ND-CP.

Thailand’s implementation of top-up tax: Aligning with global tax standards

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Effective January 1, 2025, the Emergency Decree on Top-Up Tax B.E. 2567 (2024) (the “Decree”) introduces a 15 percent global minimum effective tax rate for multinational enterprises (MNEs) operating in Thailand. These reforms are aimed at curbing tax avoidance, enhancing Thailand’s tax competitiveness, and ensuring a fairer tax environment for all businesses.

The introduction of the Top-up Tax addresses long-standing tax avoidance practices by MNEs, many of which have been shifting profits to low-tax jurisdictions or tax havens. This measure ensures that Thailand can retain taxing rights over these entities, protecting the country from revenue losses.

Scope of application and taxpayer responsibility

The Decree applies to entities in Thailand that are part of MNE groups with consolidated revenue exceeding the threshold of EUR 750 million. This consolidated revenue is to be evaluated over a period of at least two accounting periods within the four fiscal years before the relevant tax period.

Certain entities are exempt from these provisions, such as state agencies, international organizations, non-profit entities, pension funds, and investment vehicles with specific tax characteristics.

Each constituent entity in Thailand that is part of an MNE group is responsible for paying the Top-up Tax.

Top-up Tax: Domestic and international mechanisms

The Decree introduces both domestic and international mechanisms to enforce the 15 percent minimum effective tax rate and prevent profit shifting to low-tax jurisdictions:

• Domestic Minimum Top-up Tax (DMTT): Applicable to MNEs operating in Thailand with a local effective tax rate below 15 percent. If the effective tax rate is lower, Thailand will impose an additional tax to bring the rate up to the minimum threshold.
• Income Inclusion Rule (IIR): Applicable to Thai-based entities with ownership in low-tax foreign jurisdictions. These entities must include certain foreign income in the parent company’s taxable income. If MNEs with foreign subsidiaries are paying a tax rate lower than 15 percent in Thailand, they will be required to pay additional taxes to comply with the global minimum tax rate.

Reporting and payment obligations

MNEs subject to the Decree must meet specific reporting obligations set by the Thai Revenue Department. The submission deadline falls 15 months after the ultimate parent entity’s (UPE) accounting period concludes.

Required submissions include:

• Relevant MNEs documentation;
• GloBE Information Return;
• Thai Top-up Tax return; and
• Any required supporting documentation and payments.

Entities liable for the Top-up Tax may apply for an installment payment plan of up to three years.

The required reports must include, among other details, information on the UPE of the MNEs, their jurisdiction, as well as the filing status of related entities under BEPS rules.

The Thai Revenue Department is in the process of drafting subordinate legislation aligned with OECD standards. All submissions—including returns, payments, and notifications—will be handled through an electronic filing system.

Authority of the assessing officer

The assessing officer is authorized to assess Top-up Tax liability within a period of 10 years from the final filing deadline of the GloBE Information Return.

If there are reasonable grounds to suspect inaccurate or incomplete filings, the officer may issue a summons to the filer and witnesses within five years from the date of filing. With the Director-General’s approval, this period may be extended to a maximum of seven years.

Appeal process

Entities that disagree with the assessment of their Top-up Tax may appeal to the Tax Appeal Committee within 30 days of receiving the assessment notice. If unsatisfied with the decision of the appeal to the Tax Appeal Committee, the entity may file a lawsuit with the Tax Court within 30 days of receiving the committee’s decision.

In cases where the disagreeing entities exercise their right to dispute resolution under an international agreement related to the GloBE rules (to which Thailand is a party), it may submit a written request to the Tax Appeals Committee to temporarily suspend the appeal review until the dispute resolution process has been concluded.

However, filing an appeal or initiating dispute resolution under an international agreement does not suspend the obligation to pay the top-up tax.

Surcharges, additional charges, and criminal penalties

If a taxpayer fails to pay the Top-up Tax within the prescribed deadline, they shall be subject to a surcharge of either:

• 100 percent of the unpaid tax if they have submitted the GloBE Information Return but underpaid the tax; or
• 200 percent of the unpaid tax if they failed to submit the GloBE Information Return or did not file the Top-up Tax return within the deadline.

In addition, if the tax remains unpaid or is only partially paid, an extra charge of 1.5 percent per month or fraction thereof (excluding the surcharge) will be imposed. However, the Director-General, with the approval of the Minister, may issue an order to waive or reduce the surcharge. All surcharges and additional charges form part of the top-up tax liability.

Beyond these financial penalties, the Decree also prescribes criminal liability for certain violations related to Top-up Tax obligations.

Sri Lanka’s APA Guidelines: Strengthening regional tax collaboration frameworks

On January 6, 2025, Sri Lanka’s Inland Revenue Department (IRD) issued its Advance Pricing Agreement (APA) Guidelines to provide multinational enterprises with ex ante rulings (or advance rulings) on the pricing of connected transactions to avoid the risk of double taxation arising from subsequent transfer pricing investigations.

The guidelines’ main components include:

Types of APA

Enterprises may apply for unilateral, bilateral, or multilateral APAs. In particular, application for bilateral/multilateral APA requires Sri Lanka to have an active Double Taxation Avoidance Agreement (DTAA) with the relevant jurisdiction(s).

APA implementation process

The APA procedure comprises five stages:

• Pre-filing consultation
• Formal application
• Analysis and evaluation
• Negotiation and agreement
• Annual compliance report.

Sri Lanka’s Inland Revenue Department (IRD) will complete the full process within 24 months from the date of formal acceptance. The pre-filing consultation stage is limited to a maximum of six months in principle.

Validity and renewal

Advance Pricing Agreements are valid for a maximum period of four years, and taxpayers must apply for renewal at least six months prior to the expiry of the current APAs. In the case of significant changes in the nature or pattern of connected transactions, a fresh application is required.

Fee structure

For unilateral APAs, the fee is LKR 1 million (US$3,300) for the initial application and LKR 750,000 (US$2,475) for renewal. For bilateral and multilateral APAs, the fee is determined on the basis of the actual expert hourly rate incurred and other cross-border negotiation costs.

Related party transactions in Vietnam: Key provisions under Decree 20

On February 10, 2025, the Vietnamese government introduced Decree No. 20/2025/ND-CP (“Decree 20”) to amend certain provisions under Decree No. 132/2020/ND-CP (“Decree 132”). The new decree, effective March 27, 2025, aims to provide a more transparent guide for tax compliance relating to transfer pricing.

Decree 20 amends and supplements several articles in Decree 132 concerning the tax administration of enterprises involved in related party transactions. The decree applies from the financial year 2024 onward. The move marks Vietnam’s further alignment with international tax standards and its commitment to strengthening compliance regulations for cross-border transactions.

Below are the core provisions that Vietnamese enterprises going abroad need to pay attention to, along with suggestions on how to respond.

Adjustments to the criteria for determining related parties

Changes in the determination of related parties through financial borrowings

Decree 20 amends conditions to determine an entity as a related party via financial borrowings, which provides that the outstanding balance of covered borrowings must be:

• 25 percent of the borrower’s equity; and
• 50 percent of the total outstanding balance of medium and long-term liabilities.

However, the decree also supplements two exemptions for financial institutions, disqualifying them as related parties under the following conditions:

• No common controllership: The lender or guarantors, as a financial institution, and the borrower do not have direct or indirect control over each other. The financial institution does not participate in the borrower’s management, capital contribution, or investment.
• Shared control by a third party: Both the lender, as a financial institution, and the borrower are under the common control of another party.

Expanded scope of related party definitions

Decree 20 modifies descriptions for certain related party relationships as follows:

• Branches considered related parties: A branch is considered to be a related party if it meets at the three of the following conditions: it is an independent branch; it pays corporate income tax; and it exercises actual management, control, and decision-making over another enterprise’s production and business activities.
• Credit institutions with subsidiaries/controlling companies/affiliates: Credit institutions with subsidiaries, controlling companies, or affiliates are regarded as related parties if they satisfy the criteria set forth in the Law on Credit Institutions and any applicable amendments, supplements, or changes.

Upgraded disclosure and regulatory requirements

New template of Appendix I

Decree 20 introduces a revised version of ‘Appendix I – Disclosure of Related Parties and Related Party Transactions,’ updating the framework for reporting related party relationships. This updated template, effective from the financial year 2024, replaces the existing one outlined in Decree 132.

Enhanced inter-agency collaboration

The State Bank of Vietnam (SBV) is authorized to cooperate with tax authorities by providing information on related party transactions, including:

• Loan turnover rate, interest rate, actual funds drawn, details of debt repayment, etc.
• Information on executives, major shareholders (≥1 percent of charter capital), and affiliates of credit institutions.

Transitional arrangements and tax treatment

If, during the tax years of 2020 to 2023, taxpayers engaged solely in related party borrowing transactions with financial institutions under Decree 132 and are no longer considered related parties from 2024 due to the updated criteria in Decree 20, they may allocate non-deductible interest expenses evenly across the remaining years. Specifically, non-deductible interest expenses as of the end of 2020 may be split equally between 2024 and 2025 for deduction purposes.

Recommendations for businesses

The updated regulations on related party transactions are part of Vietnam’s ongoing efforts to address taxpayers’ challenges under Decree 132, align with international standards, and improve transfer pricing compliance. As the new decree applies retroactively, businesses are encouraged to take the following steps to avoid non-compliance issues:

• Ensure accurate disclosures for the 2024 tax year: Use the updated Appendix I of Decree 20 beginning with the 2024 financial year. Businesses should also review transactions with their independent branches for disclosure accuracy.
• Review historical non-deductible interest expenses: Businesses must reassess non-deductible interest expenses from 2020 to 2023, especially if past borrowings were with financial institutions that now fall outside the related party definition. Any previously disallowed expenses may be evenly allocated to the respective remaining years for claiming a deduction.
• Consult tax professionals: Seeking expert advice on the implications of Decree 20 will help businesses navigate Vietnam’s transfer pricing compliance requirements more effectively.

About the Brief:

Asia remains one of the world’s primary investment hubs, attracting an increasing number of businesses that have either expanded or are contemplating expansion into its high-performing emerging markets. For multinational enterprises (MNEs), transfer pricing is an important issue that demands attention sooner or later.

Transfer pricing concerns the pricing arrangements between associated enterprises (AE) operating in different tax jurisdictions for their intercompany transactions. In alignment with international regulations, Asian taxpayers engaged in transactions with other group entities must substantiate that these dealings adhere to the “arm’s length standard.” This standard necessitates taxpayers to prove that their transactions with related parties mirror those with third parties in a similar manner and under comparable conditions.

Nevertheless, the transfer pricing landscape has grown more complex in recent years and can be challenging for MNEs to navigate successfully. Apart from the international transfer pricing initiatives spearheaded by the Organization for Economic Co-operation and Development (OECD), individual governments are intensifying their own tax and regulatory frameworks overseeing transfer pricing. This heightened focus aims to protect their tax revenue amid financial constraints caused by the three-year COVID-19 pandemic and to manage domestic jurisdiction compliance in a dynamic global business environment.

In this scenario, it is crucial for foreign investors to stay on top of international and regional transfer pricing updates in order to effectively address their global transfer pricing concerns. Consequently, starting Q3 2023, our team of Dezan & Shira transfer pricing and tax professionals has taken the initiative to produce a quarterly Asia Transfer Pricing Brief. This brief will succinctly summarize timely transfer pricing news, aiming to provide you and your Asia-based business with a strategic advantage in managing international taxation issues and ensuring compliance.

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