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7 methods to determine Transfer Pricing

Today, many multinational corporations worldwide employ transfer pricing to avoid taxes in their home countries. Multinational companies (MNCs) are legally allowed to use transfer pricing methods to allocate income among their subsidiaries and affiliates as part of the parent organization. However, sometimes companies misuse this pricing method to manipulate their income, thereby reducing their tax liability.

Table of contents:

  1. Common transfer pricing methods

  2. Typical transfer pricing cases

  3. Penalties for businesses violating transfer pricing in related-party transactions

  4. What businesses should do when engaging in transactions with related parties to avoid tax risks

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The determination of Transfer Pricing is used to avoid taxes in the host country

"Transfer pricing in taxation and accounting, pertains to the rules and methods used to determine the pricing for transactions between affiliated entities. Since cross-border transactions among related parties can result in income disparities subject to taxation, tax authorities in many countries may adjust internal transfer prices differently from transactions between independent entities based on the arm's length principle (independent transaction principle)."

1. Common transfer pricing methods

1.1 Increase the value of fixed assets when capital contribution

Foreign investors contribute capital to domestic enterprises (FDI enterprises) with outdated machinery, equipment, or fully depreciated assets but are significantly overvalued compared to their actual value. By calculating the fixed asset value higher than reality, foreign investors have inflated the contributed capital, leading to revenue losses for the budget. At the same time, the depreciation of fixed assets increases accordingly, raising the cost of products, resulting in reduced profits or losses. Therefore, the enterprise only needs to pay little or no Corporate Income Tax (CIT) in Vietnam.

1.2 Raise the price of imported raw materials

FDI enterprises purchase raw materials from related parties at prices higher than the market price, increasing production input costs, thereby reducing profits or incurring losses.

1.3 Transfer intangible assets/ services received

Foreign investors, when investing in subsidiary companies, often transfer some intangible assets or provide services such as technology transfer, technical know-how, copyrights, general management services, procurement support, quality inspection, IT support, and more. FDI enterprises can manipulate transfer pricing by setting high prices for the transferred intangible assets/services.

1.4 Receive high-interest rate loans

Another common practice is for FDI enterprises to receive loans from related parties with interest rates exceeding standard regulations.

1.5 Reduce the price of goods

FDI enterprises can also engage in transfer pricing by applying lower prices for the sale of goods to related parties compared to prices for unrelated parties, thus reducing profits and corresponding taxes.

1.7 Profit shifting (from aboard to Vietnam)

Profit shifting (from abroad to Vietnam) by a part of an FDI enterprise in the country can enjoy significant tax incentives, including reduced corporate income tax rates and tax exemption periods for corporate income tax.

1.8 Transfer pricing among domestic enterprises

Transfer pricing among domestic enterprises with related-party relationships and different corporate income tax incentives.

2. Typical transfer pricing cases

2.1 Adidas

Specifically, according to the leadership of the Ho Chi Minh City Tax Department, Adidas Vietnam operates under a business registration license for wholesale distribution. However, the expense list of this enterprise includes many expenses typically associated with a retail business, such as expenses related to supporting retail premises, international marketing expenses, area management fees, and notably, Adidas Vietnam, which is not a manufacturer, incurs copyright fees.

In reality, Adidas Vietnam pays a 6% copyright fee to Adidas AG, a 4% international marketing expense based on net revenue for products consumed, and the value of licensed products. Additionally, Adidas Vietnam also has to pay a procurement commission to Adidas International Trading B.V., at a rate of 8.25% of the transaction value.

Furthermore, according to the Southeast Asia service agreement between Adidas Singapore and Adidas Vietnam, Adidas Singapore and its local subsidiaries, including Adidas Vietnam, provide a service and agree on the collection of related fees. The excessive intermediate input costs have caused the import prices of Adidas products in the Vietnamese market to rise unreasonably, resulting in Adidas Vietnam consistently reporting losses and not having to pay corporate income tax.

2.2 Metro Vietnam

Metro Vietnam started its business in Vietnam in early 2002 with an initial capital of 120 million USD, of which the legal capital was 36 million USD. After about 12 years of operation, from 2002 to 2013, Metro Vietnam changed its business license six times, increasing its total investment capital in Metro Vietnam to over 301 million USD in May 2013.

According to the data from the General Department of Taxation, during the period from 2002 to 2013, the franchise fee that Metro Vietnam had to pay to its parent company in Germany amounted to 731 billion VND. In addition, the expenses for salaries, bonuses, and allowances for the board of directors and foreign experts paid to individuals through Metro Cash & Carry GmbH (MCC) in Germany were also substantial, totaling 699 billion VND.

>>> See more Potential risks in determining transfer pricing

3. Penalties for businesses violating transfer pricing in related-party transactions

The tax authorities have the right to determine taxes in the following situations:

  • When a business does not fully comply with accounting, invoices, and documentation requirements.

  • When the taxpayer does not declare or provides incomplete information, or fails to submit Form 01.

  • When the taxpayer does not provide complete information in the Transfer Pricing Documentation required by Form 02 or Form 03.

  • When there is no Transfer Pricing Documentation submitted within 15 days of the tax inspection decision.

  • When the taxpayer uses misleading information about independent transactions. This can include relying on illegal or invalid documents, data, or records, or failing to specify the origin of the data to determine prices and profit margins.

The penalties for transfer pricing violations include:

  • A fine ranging from 10% to 20% of the amount of tax underpaid.

  • Interest on late payments at a rate of 0.03% per day of the amount of tax underpaid.

  • Penalties for tax evasion ranging from one to three times the amount of tax underpaid, depending on the nature of the violation.

Non-compliance with requirements for filing tax returns and explanatory documents can lead to various risks for businesses

4. What businesses should do when engaging in transactions with related parties to avoid tax risks

According to RSM Vietnam's experience, businesses should make complete declarations and prepare a full set of transfer pricing documentation. When done correctly, businesses have full control over selecting independent comparable companies. However, if a business does not comply, tax authorities have the right to make direct adjustments. In such cases, the profit margin will entirely depend on the tax authorities. Typically, the selected comparable companies will be highly profitable, which can be disadvantageous for the business.

For businesses engaging in transactions with related parties, especially foreign-invested enterprises (FDIs), non-compliance with the requirements for filing tax returns and explanatory documentation can lead to the risk of reassessment of transaction prices or profit for tax purposes, along with penalties and interest on late payments. These adjustments can have even larger consequences, including changes to the tax records and negative public relations.

Therefore, with a team of experienced transfer pricing consultants, we are ready to assist businesses in preparing transfer pricing documentation and providing transfer pricing advisory services on various issues, including:

  • Supporting businesses in compliance with tax regulations and transfer pricing rules.

  • Providing essential tools to help businesses save time and effort when addressing tax authority queries during tax audits or transfer pricing audits.

  • Assisting businesses in minimizing potential penalties that may be imposed when tax authorities make adjustments to transfer prices determined by the business.

  • Enhancing the internal control of the business with regard to compliance with transfer pricing principles, including early identification of necessary adjustments and tax planning opportunities regarding transfer pricing.

5. Conclusion

Determining transfer prices in related-party transactions is an important tax topic for every business and corporation. This article has shared some common transfer pricing methods currently in use. If you're interested in this topic, please contact RSM Vietnam to receive tax advice from top experts and professional services based on the Power of Understanding.

Our service hotline is +84 988 139 090.

Learn more about our services:

>>> Learn more about Transfer Pricing Consulting Services

>>>Corporate Income Tax Advisory Services

>>>Value Added Tax Advisory Services

>>>Customs and International Trade Advisory Services


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DECREE NO. 64/2024/ND-CP ON EXTENDING THE DEADLINE FOR PAYING TAXES AND LAND RENT IN 2024 Issued by: Gorverment Issued date: 17 June 2024 Effective date: 17 June 2024 Expiration date: 31 December 2024



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