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"Transfer Pricing" and its important key points you need to know

Transfer Pricing has long been a hot topic of great concern to businesses. In this article, RSM Vietnam will analyze the issues that businesses need to consider regarding transfer pricing. This will provide businesses with a deeper understanding of this matter to ensure compliance with the law.

Table of contents:

  1. Definition of Transfer Pricing

  2. Basis for the Occurrence of Transfer Pricing

  3. Identifying Signs of Transfer Pricing Activities

  4. Compliance Requirements Imposed by Tax Authorities on Businesses

  5. Which businesses will be subject to transfer pricing audits in the near future?

  6. What value can RSM Vietnam bring to businesses?

Transfer Pricing has long been a hot topic of great concern to businesses

In a market economy, economic relationships are established in various ways, but they all revolve around the common thread of self-interest. The emergence of economic conglomerates also stems from the motivation to maximize interests: the interests of the conglomerate itself and the interests of its subsidiary companies. Therefore, in intra-group transactions, although the pricing between the selling and buying parties is carried out through legal invoices and documents, the pricing basis often does not accurately reflect the economic essence of transactions between related parties based on market principles (meaning prices determined voluntarily based on buyer's desire for lower prices and seller's desire for higher prices).

The prices set for intra-group transactions are usually economically advantageous, meaning they minimize costs to maximize net profit, with taxes being a significant cost factor. Consequently, conglomerates tend to funnel their income to low-tax (or tax-free) locations and shift costs to high-tax locations. The means to achieve this purpose often involve the use of transfer pricing practices.

1. Definition of Transfer Pricing

Transfer pricing refers to the establishment of prices for internal transactions between affiliated enterprises within the same Group, where prices are not dependent on market factors. Prices are determined to minimize the tax burden on the Group on a global scale. For example, multinational corporations aiming to increase their profits often use internal transfer pricing between subsidiary companies in different countries to shift a significant portion of their profits to countries with lower tax rates, with the goal of minimizing the taxes to be paid while maximizing after-tax profits across the entire Group.

Transfer pricing is the internal price used for the exchange of inputs and products between branches or departments of a large enterprise. Simply put, this transfer pricing is used for buying, selling, exchanging, and borrowing among companies and enterprises with affiliated relationships.

2. Basis for the Occurrence of Transfer Pricing

Enterprises engage in Transfer Pricing by redefining the prices of intra-group transactions within multinational corporations for several reasons:

Firstly, it stems from the motivation to maximize profit. Enterprises and multinational corporations never pass up opportunities to reduce tax obligations to maximize profits.

Secondly, it arises from the right to autonomy in business operations. In a market economy, enterprises have the right to determine and act independently in their businesses. Therefore, the negotiation of prices for goods, assets, and services among parties involved in contractual relationships is entirely at their discretion, based on the prices they desire.

Thirdly, it arises from the interdependent relationship and mutual interests among subsidiary companies within a conglomerate. This is why when subsidiary companies within the same conglomerate engage in Transfer Pricing, it alters the total tax liability of the group, resulting in increased economic benefits within the group. Through transfer pricing practices, the tax obligations of the parties are shifted from high-tax locations to lower-tax ones.

Fourth, there are differences in the investment and business environment, particularly in tax policies, and tax incentives have become a prevalent and distinct feature in recent times. Many developing countries have implemented tax incentive policies to attract foreign direct investment (FDI). Additionally, tax havens exist worldwide, where company establishment procedures are easy, and corporate income tax rates are low or even zero to attract FDI for company registration, and to shift profits earned from global business operations to low-tax jurisdictions to minimize tax obligations.

>>> See more: Determining transfer pricing

3. Identifying Signs of Transfer Pricing Activities

Recognizing signs of transfer pricing is the first basis for tax authorities to implement control measures regarding transfer pricing issues. Typically, a business engaged in transfer pricing practices may exhibit one or more of the following signs:

  • The business has incurred losses for several consecutive years after its establishment or experiences alternating profit and loss results, making it unable to pay corporate income tax. Alongside this sign, the business continues to expand investments and extend its production and business activities.

  • The business engages in transactions with related parties that are transferred from affiliated enterprises in countries with low tax rates.

  • The business has a significantly lower profit margin compared to other companies operating in the same industry or other businesses within the same group or competing rivals.

  • They generate substantial profits during tax incentive periods, tax exemptions, or reductions, and then experience a decrease in profits or no longer show profitability after the tax incentives expire. They may also undergo mergers, change legal forms, or restructure their operations before or immediately after the tax incentives or exemptions.

  • They make payments for management fees, insurance expenses, advertising costs, consulting fees, intellectual property rights, brand usage, technical fees, guarantees, or new product development expenses to related companies.

  • They have long-term debt obligations that exceed their repayment capacity or bear significantly higher interest rates than the market rate for borrowing. They may also have accounting entries representing inter-company receivables among affiliated units or group member businesses that extend over time, with either no interest or interest not corresponding to market rates.

  • They lack complete and reliable accounting records and documentation to substantiate the pricing of related-party transactions.

Transfer Pricing indicators are the first basis for tax authorities to take transfer pricing control measures

4. Compliance Requirements Imposed by Tax Authorities on Businesses

Since the 2020 fiscal year, Decree 132/2020/ND-CP ("Decree 132") has been issued, replacing Decree 20/2017/ND-CP and the previous Circular 41/2017/ND-CP. Decree 132 requires transfer pricing documentation to include:

  • National-level information on related-party transactions of local taxpayers (Local file).

  • Information on the global group, including standardized information on all members within multinational companies (MNCs) (Master File).

  • A report on assets and global transactions of MNCs (Country-by-country Report).

Taxpayers are required to prepare transfer pricing documentation before the deadline for annual corporate income tax settlement and must keep and present it upon the tax authority's request. When tax authorities conduct inspections or audits of taxpayers, the deadline for providing transfer pricing documentation is determined by the inspection and audit authorities in accordance with the law on inspection.

Additionally, Decree 132 also requires taxpayers to declare four transfer pricing disclosure forms, which must be submitted no later than the last day of the third month from the end of the fiscal year (Forms 01-04 submitted with the annual corporate income tax return).

5. Which businesses will be subject to transfer pricing audits in the near future?

Assessing the severity of transfer pricing issues among multinational companies and foreign-invested enterprises, the General Department of Taxation has planned transfer pricing audits for businesses with transactions with related parties that exhibit the following characteristics:

  • Businesses incurring continuous losses over multiple years.

  • Businesses engaging in transactions with related parties in low-tax jurisdictions or tax havens.

  • Businesses with a significant proportion of their total revenue or total costs related to related-party transactions.

  • Businesses enjoying tax incentives but reporting minimal or no profit.

  • Businesses with negligible net profit compared to their business scale.

  • Businesses not fully complying with the obligations to declare and prepare transfer pricing documentation.

Indeed, for businesses engaged in transactions with related parties, especially foreign-invested enterprises (FDIs), non-compliance with the requirements for filing returns and documentation can lead to the risk of tax authorities reassessing transaction prices or taxable profits and imposing penalties and interest charges during transfer pricing audits.

6. What value can RSM Vietnam bring to businesses?

With our extensive experience in assisting businesses in preparing over 300 Transfer Pricing Documentation reports, and a team of seasoned experts, we are ready to support your company in the following areas:

  • Assisting your business in complying with tax regulations and determining transfer prices.

  • Providing essential tools to help your business minimize the time and effort required when addressing tax authority queries during tax audits or transfer pricing examinations.

  • Aiding your business in reducing potential penalties that may be imposed if the tax authorities adjust transfer prices that your business has determined.

  • Enhancing your company's internal control over adherence to transfer pricing principles, including early identification of necessary adjustments and tax planning opportunities.

>>> See more Our transfer pricing advisory services


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