Common Mistakes in Transfer Pricing and How to Address Them Effectively

In the context of global economic integration, transfer pricing transactions between enterprises have become increasingly complex and are closely monitored by tax authorities. Transfer pricing plays a crucial role in profit allocation among related parties and ensuring tax transparency. However, many businesses—ranging from large corporations to small and medium-sized enterprises (SMEs)—still make common mistakes when applying transfer pricing methods. This article will explore these frequent errors, their underlying causes, and effective solutions to help businesses optimize financial performance and minimize legal risks.

Overview of Transfer Pricing and Its Role in Tax Administration

What is Transfer Pricing?

Transfer pricing is the process of determining the value of transactions between related enterprises within the same corporate group. These transactions may include:

Purchase and sale of goods.
Provision of services.
Transfer of technology.
Lending or guaranteeing.

The main objective of transfer pricing is to allocate profits reasonably among related parties, thereby ensuring that each enterprise bears a tax liability corresponding to the value generated from its business activities.

The Role of Transfer Pricing in Tax Administration

Transfer pricing regulations are important tools to:

Prevent non-transparent profit shifting: Help businesses avoid shifting profits between related parties to reduce tax obligations.
Enhance transparency: Require enterprises to prepare comprehensive and transparent related-party transaction documentation, contributing to the development of an effective internal control system.
Ensure tax fairness: Ensure that each enterprise pays tax based on the actual profit it generates.

Common Mistakes in Transfer Pricing

During the implementation of transfer pricing, enterprises may encounter various mistakes that affect the determination of transaction prices and tax obligations. Below are some common mistakes:

Mistakes in Identifying the Scope of Related-Party Transactions

Errors in identifying related parties: Many businesses sometimes mistakenly define the scope of related-party transactions. For example, considering a loan from a commercial bank as a related-party transaction despite the absence of any actual control, management, or capital relationship.
Lack of clarity in related-party transaction documentation: Failure to prepare complete and accurate documentation for related-party transactions leads to the risk of tax authorities making adjustments, increasing tax liabilities, or imposing administrative penalties.

Mistakes in Choosing the Transfer Pricing Method

Applying methods that do not match the nature of the transaction: Some businesses use inappropriate transfer pricing methods (e.g., applying the cost-plus method to service transactions), resulting in prices that do not reflect the true market value of the transaction.
Failure to update comparable data in a timely manner: The comparable uncontrolled price method requires enterprises to use updated data. If the data is outdated, the transfer price may be inaccurate.

Mistakes in Technology Application and Data Management

Insufficient application of technology: Many businesses, especially SMEs, still rely on manual management processes and do not implement integrated IT systems, leading to errors in data storage and processing.
Ineffective data synchronization: Lack of integration among accounting, finance, and operations departments causes related-party transaction data to be scattered and inconsistent, affecting the reporting and comparison processes.

Mistakes in Training and Human Resource Management

Lack of professional knowledge: Personnel in charge of preparing related-party transaction documentation are not adequately trained in transfer pricing, leading to data entry errors and omissions in reports.
Failure to keep legal information up to date: Transfer pricing regulations are frequently updated. Businesses need to regularly organize training sessions to stay informed of new knowledge and avoid using outdated methods or report templates.

Effective Solutions to Common Transfer Pricing Mistakes

To address the common mistakes mentioned above, businesses should take the following steps:

Clearly Define the Scope of Related-Party Transactions

Review and classify related-party transactions: Enterprises need to conduct a comprehensive review of all transactions to accurately identify the scope of related-party dealings.
Prepare detailed documentation: Ensure that all relevant information such as financial statements, documents, and transaction contracts are stored in accordance with the standard templates issued under Decree 132/2020/NĐ-CP and its subsequent amendments.

Choose an Appropriate Transfer Pricing Method

Assess the characteristics of the transaction: Before application, businesses should analyze the nature of the transaction (manufacturing, services, finance) to select a suitable method such as the cost-plus method, CUP, TNMM, or the profit split method.
Update comparable data: Ensure the use of regularly updated comparable data from reliable sources to determine accurate transfer pricing.

Apply Modern Technology and Management Systems

Implement ERP systems and financial management software: This helps automate the reporting process and ensures accurate storage and processing of related-party transaction data, reducing human error.
Integrate data across departments: Build a centralized data management system to ensure synchronization between accounting, finance, and operations departments, resulting in accurate and timely reporting.

Enhance Human Resources Capacity and Professional Training

Organize regular training: Ensure that the team responsible for transfer pricing is well-trained on new legal regulations and the application of IT in financial management.
Collaborate with consulting experts: Businesses can work with professional consulting and auditing firms to receive guidance and independent reviews, clarifying issues in the transfer pricing process.

Conduct Regular Reviews and Evaluations

Establish internal audit mechanisms: Enterprises should set up a regular internal review schedule to assess and adjust related-party transaction documentation in line with tax authority requirements.
Promptly respond to tax authority updates: Monitor and stay up to date with new notifications and guidance from tax authorities to promptly adjust internal procedures.

According to Mr. Nguyen Thanh Lam, Partner of RSM Vietnam, Director of RSM Hanoi, “Mistakes in transfer pricing often stem from a lack of thorough understanding of legal regulations and insufficient preparation in terms of data and management systems. If businesses proactively invest in information technology and staff training, they will not only minimize tax risks but also optimize financial costs, creating a more transparent and efficient business environment.”

Mr. Lam also recommended that “Collaborating with professional consulting firms is the best way for businesses to gain a comprehensive perspective and practical advice on how to apply transfer pricing methods suitable to their business models. This will help enterprises avoid common errors and ensure that related-party transaction documentation is always updated in compliance with legal regulations.”

Conclusion

Mistakes in transfer pricing not only affect the deductibility of expenses and tax obligations of a business but also directly impact its reputation and financial performance. Proactively reviewing, selecting appropriate methods, embracing digital transformation, and investing in staff training are key solutions to help enterprises overcome common errors.

Businesses need to build a robust, transparent related-party transaction management system that integrates modern technology to ensure that all transactions are priced at arm’s length and comply with tax authority requirements. In addition, collaboration with consulting experts plays an important role in providing practical solutions, thereby helping businesses optimize their financial strategies and minimize legal risks.

With lessons learned from real-world Vietnamese enterprises, businesses can apply these solutions to improve their transfer pricing systems, create added value, and ensure sustainable growth in an increasingly competitive global environment.