Legal Regulations and New Changes in Transfer Pricing for 2023/2024: Updates from Vietnamese Tax and Legal Authorities

In the context of a globalized economy, affiliated businesses not only face opportunities to expand their markets but also encounter risks related to taxes and legal regulations. Transfer pricing plays a crucial role in determining the value of transactions between affiliated companies, directly influencing the profits and tax obligations of each member company.

The new changes in transfer pricing regulations for 2023/2024, introduced by tax authorities and legal documents, have set higher requirements for transparency and compliance. Companies need to stay updated on these changes to avoid legal risks, optimize their tax policies, and maintain their reputation and sustainability in business operations. The following article will delve into the new regulations, analyze their impacts on businesses, and provide useful recommendations.

Overview of Transfer Pricing

What is Transfer Pricing?

Transfer pricing is the method used to determine the value of transactions between companies within the same group or affiliated entities. These transactions can include sales, service provision, technology transfers, or loans between related parties. The main objective of transfer pricing is to allocate profits fairly among the companies to ensure that each entity is taxed in accordance with its actual business activities.

Role and Importance

• Ensuring Tax Fairness: Transfer pricing helps ensure that profits are allocated appropriately, preventing the shifting of profits across borders to minimize tax rates.

• Transparency and Control: Strict transfer pricing regulations provide tax authorities with additional tools for monitoring, reducing the likelihood of tax evasion and fraud.

• Optimizing Costs and Profits: For businesses, applying a reasonable transfer pricing policy helps optimize costs, ensure competitiveness, and maintain stable profits.

• Meeting International Requirements: Multinational companies need to comply with international transfer pricing standards, which facilitates cross-border trade and investment activities.

Legal Regulations Related to Transfer Pricing in Vietnam

Previous Legal Context

Previously, transfer pricing regulations in Vietnam were primarily based on international standards such as the OECD Guidelines. While there were clear rules regarding the documentation, reporting, and examination of related-party transactions, many businesses still faced challenges in applying and complying with these regulations, leading to disputes with tax authorities.

New Changes in Transfer Pricing Regulations for 2023/2024

In 2023 and 2024, the tax authorities and other relevant agencies made significant updates to improve management efficiency and reduce the risk of tax fraud:

Expanded Scope of Application

• Target Groups: The new regulations expand the scope of application, including not only multinational enterprises but also small and medium-sized enterprises (SMEs) with related-party transactions, both domestically and internationally.

• Transparency Requirements: All related-party transactions must be transparent, with complete and properly stored data to ensure that tax authorities can track and audit them at any time.

Requirements for Reporting and Documentation

• Transfer Pricing Documentation: Businesses are required to prepare detailed transfer pricing documentation, including pricing methods, relevant evidence, and comparisons with similar transactions in the market.

• Increased Inspections: Tax authorities are allowed to conduct thorough inspections, including periodic audits of businesses with related-party transactions, to detect and address any violations in a timely manner.

New Pricing Methods

• Comparable Uncontrolled Price Method: Companies must refer to equivalent transactions in international markets to establish reasonable pricing and avoid profit shifting.

• Use of Technology: The adoption of software, data management systems, and data analysis tools is encouraged to enhance accuracy and transparency in transfer pricing reporting.

Regulations on Handling Violations

• Heavier Penalties: The new regulations impose stricter penalties for businesses that violate transfer pricing rules, including adjustments to payable taxes and the application of interest fines.

• Dispute Resolution Mechanisms: To ensure fairness and transparency, dispute resolution mechanisms between businesses and tax authorities have been improved, providing companies with an opportunity to counter-argue and present their case in transfer pricing disputes.

Integration of International Standards

• OECD Guidelines: The updates in Vietnam not only comply with but also integrate OECD standards, making it easier for businesses to compare and adjust according to global benchmarks.

• Harmonization with Regional Regulations: This also helps create a unified legal environment between Vietnam and other countries in Southeast Asia, reducing trade barriers.

Impact Analysis of New Regulations on Businesses

The changes in transfer pricing regulations for 2023/2024 can have a range of effects on businesses, from positive to negative. Below is a detailed analysis:

Positive Impacts

• Increased Transparency and Trust

  • Building Investor Confidence: When businesses fully comply with the new regulations, it not only enhances their reputation but also builds trust among investors, both domestic and international.

  • Improved Relations with Tax Authorities: Maintaining complete and transparent records helps businesses communicate effectively and resolve any issues with tax authorities, minimizing legal disputes.

• Optimizing Financial Management

  • Accurate Profit Allocation: Properly applying pricing methods allows businesses to allocate profits fairly between departments, optimizing tax costs.

  • Supporting Financial Planning: With clear data and reports, businesses can forecast and adjust their financial plans, ensuring stable and efficient operations.

• Enhancing Corporate Governance

  • Strengthening Risk Management: Adhering to regulations helps businesses proactively identify and manage risks associated with related-party transactions.

  • Employee Training and Development: Companies will invest more in training and improving staff capabilities in tax and finance, contributing to the development of a professional management system.

Negative Impacts

• Pressure on Costs and Resources

  • Initial Investment Costs: Establishing reporting and documentation systems according to the new requirements demands businesses to invest in management software, staff training, and upgrading technological infrastructure.

  • Administrative Pressure: Small and medium-sized enterprises (SMEs) may struggle to meet reporting and audit requirements due to limited specialized human resources.

• Legal Risks and Penalties

  • Penalties for Non-compliance: The new regulations impose stricter penalties for businesses that fail to comply with transfer pricing rules, creating legal risks if companies are not adequately prepared.

  • Disputes with Tax Authorities: During audits, if there are discrepancies in records or reports, businesses may face disputes, which could negatively affect their reputation and financial standing.

• Challenges in Applying Pricing Methods

  • Valuation Difficulties: Applying new pricing methods, especially the market comparison method, requires businesses to have complex data collection and analysis systems in place.

  • Discrepancies Between Domestic and International Markets: Businesses may face difficulties comparing internal transactions with those in international markets, leading to challenges in determining appropriate transfer pricing.

Measures and Recommendations for Businesses

To effectively respond to the 2023/2024 transfer pricing regulations, businesses need to take proactive steps and adjust their strategies accordingly. Below are some specific recommendations:

Establish a Robust Management and Reporting System

• Invest in IT Systems: Implementing financial management software and electronic data storage systems will help businesses accurately and transparently record, report, and store transfer pricing documentation.

• Prepare Complete Documentation: Create detailed transfer pricing files, including supporting documents for pricing methods, market comparisons, and internal reports, which will facilitate the tax authority's inspection process.

Train and Enhance Employee Capabilities

• Conduct Internal Training: Provide in-depth training for accounting, finance, and legal teams on the new regulations, helping them understand the content and apply it correctly.

• Collaborate with Experts: Businesses should partner with tax and legal consultants to gain deep insights, stay updated, and receive guidance tailored to the current situation.

Monitor and Regularly Update

• Regulation Monitoring: Set up an internal monitoring system to track changes from tax and legal authorities. This will help businesses stay proactive and adjust their practices accordingly.

• Participate in Seminars and External Training: Regularly attending seminars on taxation and transfer pricing will help businesses stay on top of trends and optimal solutions for business operations.

Seek Legal and Tax Advice

• Utilize Consulting Services: For complex issues related to related-party transactions, businesses should seek advice from auditing firms, tax specialists, or legal consultants to ensure full compliance.

• Discussions and Knowledge Sharing: Collaborating and exchanging experiences with other businesses in the industry is also an effective way to learn and respond to regulatory changes.

Conclusion

The transfer pricing regulations for 2023/2024 in Vietnam represent significant progress in ensuring transparency, fairness, and effectiveness in managing related-party transactions. These changes not only provide benefits in terms of ensuring tax equity and enhancing trust from tax authorities but also impose stricter requirements on businesses regarding the management, reporting, and analysis of related-party transactions.

For businesses, timely understanding and application of these new regulations are critical to optimizing financial operations, minimizing legal risks, and establishing a foundation for sustainable growth. Additionally, developing management systems, providing internal training, and collaborating with consulting experts will help businesses proactively address challenges and navigate the increasingly complex business environment.

Ultimately, closely monitoring new policies and regulations from tax authorities, as well as keeping up with timely analyses from experts, is essential for businesses to stay prepared for changes in the globalized and integrated economic landscape. Only by doing so can businesses optimize resources, ensure sustainable operations, and create significant value in a highly competitive environment.