Transfer pricing audits for FDI enterprises have long been a hot topic receiving significant attention from businesses and organizations. The tax authorities have stated that during tax inspections, they have timely discovered violations and tax fraud. So, what should FDI enterprises pay attention to regarding transfer pricing audits to be best prepared? The answer will be analyzed in-depth in the following blog by RSM Vietnam.
Table of contents:
Transfer pricing activities
Current status of related party transactions in Vietnam
Differences between regular tax audits and transfer pricing audits
Transfer pricing audits - What should businesses be aware of?
How can RSM Vietnam support businesses during transfer pricing audits?
According to the Foreign Investment Agency - Ministry of Planning and Investment, as of the end of 2020, there were 33,070 active FDI projects in the entire country with a total registered capital of $384 billion USD. It can be seen that the FDI sector has made a positive contribution to economic growth and provided employment for millions of workers. The presence of FDI enterprises is not only an important link but also a lever for Vietnam to deeply integrate into the global value chain, as evidenced by significant contributions to exports. In 2020, the FDI sector recorded a trade surplus of $34.6 billion USD, including crude oil, offsetting the $15.6 billion USD trade deficit of the domestic sector, resulting in an overall trade surplus of about $19 billion USD for the country (Foreign Investment Agency, 2020).
Foreign Direct Investment (FDI) has become a crucial source of resources for the overall socio-economic development of Vietnam, fostering economic structural shifts and addressing employment issues. However, the activities of FDI enterprises have revealed various limitations, including the issue of transfer pricing to evade or minimize tax obligations.
1. Transfer Pricing Activities
Along with the process of globalization and international economic trade cooperation, cross-border transactions among parent companies, subsidiaries, and companies within the same group with intertwined ownership are increasingly common and frequent. This is a normal business trend in the production and supply chain. Transactions involving the purchase and sale of goods, the supply of raw materials, the sale of finished products, and the provision of services in these activities are referred to as related-party transactions.
If a business conducts related-party transactions with abnormal pricing to shift profits between parties for tax avoidance or tax evasion purposes, it is considered transfer pricing activities (formerly referred to as transfer pricing). This activity is a violation of the law. According to experts, transfer pricing activities often occur more frequently in cross-border related-party transactions, focusing on businesses with FDI investments with a foreign parent company or companies within the same group. However, it can also occur in related-party transactions between companies within a domestic linkage system.
2. The situation of related-party transactions in Vietnam
As of December 20, 2020, there were a total of 33,070 FDI projects in the country, with a significant portion primarily engaged in the production of export goods as specified by multinational corporations or parent companies. There is a large number of businesses with related-party relationships and related-party transactions. However, compliance with tax regulations regarding transfer pricing activities has not been well-implemented. For example, some businesses fail to report these activities to the tax authorities or do not prepare reports to determine the prices of related-party transactions. This non-compliance poses challenges for tax authorities in terms of management and supervision.
The tax authorities have reported that during tax inspections of various businesses, they have timely detected violations and tax evasion activities. Subsequently, accountants and legal representatives often fail to grasp tax policies, laws, and may declare losses over several years or report thin profits while continuing to expand their investments.
According to the tax authorities, transfer pricing management is complex, and monitoring related-party transactions in FDI businesses is considered a challenging task. Furthermore, the current legal framework regulating transfer pricing activities does not comprehensively cover all entities, and financial institutions' roles in this regard remain unclear, which creates difficulties in inspection and auditing processes.
3. Differences between regular tax inspection and transfer pricing inspection
To understand the differences between regular tax inspections and transfer pricing inspections, we provide a summary table as follows:
Regular Tax Inspection
Regular Tax Inspection Burden of Proof for Violations: Tax authorities must prove violations by taxpayers (Taxpayer).
Inspection Timeline: Adheres closely to current regulations.
Primary Focus: Detecting and addressing tax violations. Determining taxes owed is less common, following established tax laws.
Database Establishment and Selection of Independent Enterprises: Requires lower-level requests and less complex procedures.
Human Resources: Sufficient (experienced).
Taxpayers receive support from experienced auditing firms: Less common.
Transfer Pricing Inspection
Burden of Proof for Violations: Taxpayer (TP) must prove "they are correct." If the TP cannot prove it, the tax authority determines.
Inspection Timeline: Typically, it extends beyond regulations due to various reasons.
Primary Focus: Determining taxes with procedures specified in current regulations.
Database Establishment and Selection of Independent Enterprises: Requires a high level (mandatory) with complex procedures.
Human Resources: Limited (Few experienced personnel).
Taxpayers receive support from experienced auditing firms: Very common.
4. Transfer Pricing Inspection - What should businesses pay attention to?
Currently, disputes and tax disagreements are signaling a fierce storm from various competitive factors to businesses. Tax inspection and examination are becoming more determined and aggressive than ever, along with increasingly challenging inspection and litigation activities to avoid additional tax liabilities or damage to the reputation of the enterprise. At the same time, legal regulations require taxpayers to be more transparent, especially after Decree 132/2020/NĐ-CP was issued, imposing additional compliance burdens and information requirements (such as global group information files, country-by-country profit reports, national files, annual reports, etc.).
5. How can RSM Vietnam support businesses during transfer pricing audits?
In the event that Vietnamese tax authorities are inspecting a customer's transfer pricing method or any tax-related issues, RSM Vietnam can provide advice on the customer's transfer pricing situation, develop a strategy for explaining and assisting customers in effectively dealing with government agencies and tax authorities. Many tax authorities in Vietnam have established teams to inspect and examine transfer pricing in provinces and cities nationwide and continue to recover taxes from taxpayers throughout the tax inspection and examination process.
Similar to the tax inspection and examination process, full compliance with tax laws and a thorough understanding of the significant risk assessment methods of tax authorities are essential factors. RSM Vietnam, with its extensive experience in communicating with competent authorities and tax inspection and examination activities, has successfully assisted many companies in resolving these disputes.
Our services include:
Fulfilling compliance obligations (preparation of transfer pricing documentation, including national files, global group files, and country-by-country profit reports, and related transaction disclosures).
Preparation/review of documents and support policies related to transfer pricing determination.
Planning and restructuring related to transfer pricing determination.
Assisting in negotiations in cases where businesses are under scrutiny for transfer pricing determination.
Keeping updated with transfer pricing regulations in related party transactions.
>>> See more Transfer Pricing Advisory Services
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