How the Revenue Department views service fees to a Thai subsidiary

01Why this gets close attention

Management fees, technical service fees and royalties paid by a group to related parties offshore are one of the most direct routes for profit to leave Thailand. So the tax authority looks at this kind of expense on two levels: whether the amount is reasonable (pricing), and whether the expense should be deductible at all (substance). The two levels are independent — pricing can be perfectly reasonable and the deduction still be refused for want of evidence of substance.

For Chinese-invested companies the pain is usually on the second level. Head office really did provide support, but nothing was left behind in a form the Thai tax authority accepts as evidence. The same question sits underneath every route money takes out of the country — see how profits are repatriated to China compliantly.

02The first test: the arm's length principle

Pricing between related parties should match what unrelated parties would agree in comparable circumstances. The tax authority has the power to adjust transactions that do not meet that principle. In practice this means:

• the pricing method has to be explainable — why this rate, why this allocation base;
• there has to be comparability support behind it, not "this is what the group has always charged";
• once a method is adopted it should be applied consistently, rather than switched each year to whichever basis happens to suit you.

Companies above a certain revenue threshold also carry a related-party disclosure obligation and must file the disclosure form with the annual return. The threshold is whatever the rules in force say. But note that being under the threshold does not release you from the arm's length principle — it only means you do not file that form.

03The second test: is the expense deductible at all

This level is the more practical one. Thai tax law sets a general requirement for deductible expenses — they must be incurred to generate profit or for the business — and expressly lists a class of items that are not deductible. For intra-group service fees, what matters in practice is the benefit test: did the Thai subsidiary genuinely get something out of the service.

You need to be able to answer these questions:

• Did the service actually happen? Who did it, when, what they did, and whether there is a work record.
• Did the Thai company benefit? Or was this a shareholder activity of head office — work done for group consolidated reporting, for example — which is usually not deductible.
• Is it a duplicate charge? A function the Thai company already performs itself, charged again by head office.
• Is the allocation base reasonable? If costs are allocated by headcount, revenue or hours, the base itself has to be shown to relate to the benefit received.
• Is there a contract? Scope, pricing basis and period written down, and what actually happens matching what the contract says.

The most common failure looks like this: a one-page contract saying "management service fee, X per month", plus an invoice, and no work records at all. The pricing may be entirely reasonable, but the chain of evidence does not stand up.

04Two separate obligations at the payment stage

When you pay a related party offshore, deductibility is not the only issue. The payment itself triggers two independent obligations: withholding tax and reverse-charge VAT. Whether you withhold, and at which band, depends on how the income is characterised and whether a tax treaty applies; treaty relief normally requires the recipient to provide a certificate of tax residence. These are two separate returns, and filing one while missing the other is very common in practice. See what has to be withheld on payments abroad.

05How to make it hold up

• Contract first, payment second. The contract should set out scope, pricing basis and period, and it has to line up with what is actually done.
• File the evidence quarterly. Do not wait for an audit to reconstruct it. Work records, meeting notes, deliverables and correspondence, filed once a quarter, cost very little.
• Run the benefit test on yourself. Take the five questions above once a year; where you cannot answer one, adjusting in advance is cheaper than explaining afterwards.
• Prepare the documents treaty relief needs ahead of time. Asking for them at the moment you need them often misses the filing deadline.

Whether your existing related-party arrangements stand up, whether the evidence chain has gaps, and whether you have crossed the disclosure threshold all have to be checked item by item against the contracts, payment records, work evidence and annual return data. This review is better done before the annual corporate income tax filing than after someone asks — see what to finish before the annual corporate income tax filing.