Thailand: Cash Pooling between related Companies

Cash pooling is a form of money management to ensure that all related companies in the supply chain will have enough cashflow to conduct their business. This can either be carried out by the actual transfer of money or by notation between companies. In any case, the OECD rules require that all related companies charge the market interest rate.

Although Thailand is not a member of the OECD, the Revenue Department of Thailand follows the OECD protocol regarding the arm’s length principle in order to assess related party transactions.

The current practice in Thailand is that the Revenue Officers only accept interest rates that:

1. are not below the fixed deposit interest rate in Thailand; and
2. are not below the company’s own borrowing rate; and
3. are not below the market interest rate.
    

If the interest rate charged between related parties does not comply with the above rules, the Revenue Officers have the power to adjust the interest rate and the respective company’s income accordingly.

The Thai Revenue Department has published various tax rulings in the past, but the case law on this matter is limited. A notable judgement was passed by the Thai Supreme Court in 2015: the assessed company borrowed money from its foreign affiliate at the group interest rate of 5% and lent the money to its affiliate in Thailand at the same rate. However, the market interest rate in Thailand at that time was around 8%. Since the funds did not originate from the assessed company’s own business operation, the Thai Supreme Court ruled that it cannot use the group rate or fixed deposit rate because these rates are below the market rate. (Source: Thai Supreme Court judgement no. 7126/2558.)

In summary, companies should set the interest rate for cash pooling as follows:

1. If the funds originate from the company’s own business operation, it can use the fixed deposit interest rate.
2. If the funds originate from a third-party loan, the company should use the market interest rate or the group interest rate, whichever is higher.
    

Furthermore, it is important to know that companies which grant loans to foreign affiliates require a foreign business license. This makes it quite cumbersome to include Thai foreign-owned entities in a cash pooling concept.

Read the WTS Global Transfer Pricing Newsletter here.