Currently, Vietnamese law does not have a clear definition of the term Transfer Pricing. However, from the perspective of tax management, transfer pricing can be understood as a form of not declaring or declaring a price inconsistent with the actual value of the transaction for the purpose of profiteering and tax evasion.
Why does transfer pricing appear?
Normally, transfer pricing takes place between affiliated parties as determined in Article 5 of Decree 132/2020/ND-CP. The reason for this problem is that affiliated businesses take advantage of the freedom of business decision-making to achieve common benefits. Besides, depending on the purpose set by the controlling party in promoting the business activities of which enterprise in the affiliated group decides to implement transfer pricing.
To determine a transfer pricing transaction, a common way is to compare the value of the affiliated transactions with similar independent transactions taking place on the market.
In order to increase profits, businesses often tend to increase deductible expenses when calculating taxable income to reduce the tax payable to the state. Another aspect of transfer pricing is to shift tax liability from places where high tax rates are applied to places where tax incentives or lower tax rates are applied to profit.
However, when transfer pricing is discovered, tax management authorities shall set prices for affiliated transactions, or apply other sanctions to ensure the prevention of tax evasion from occurring.
From the above analysis, it can be seen that transfer pricing is mostly meaningful for transactions carried out between entities with affiliated relationships. To implement transfer pricing, parties in the corporation or affiliated group establish policies to price transactions so that they can achieve the highest profits.
In Vietnam, many cross-border transactions have implemented transfer pricing for the purposes of reducing taxes and increasing profits. Therefore, one of the measures to limit this situation is that the parties in the affiliated transaction must explain the transaction pricing method.
Transfer pricing is carried out in many forms
1. Increase the value of fixed assets when contributing investment capital
This is an extremely popular form. Parties participating in investment capital will overstate the value of fixed assets contributed as capital such as houses, land, machinery, and technological equipment. Accordingly, the increased depreciation of fixed assets helps investors quickly pay back capital, minimize risks, and reduce the amount of tax payable to the state budget.
2. Import raw materials at high prices
Businesses understand that reasonable input costs will be deducted when calculating corporate income tax. When importing raw materials at high prices, the deductible costs will increase and the tax payable will decrease. Furthermore, taking advantage of the 5-year loss carry-forward policy, businesses have an extreme advantage in reporting losses even though the business earns a lot of profits.
3. Receive transfer of intangible assets at high prices
Pricing intangible assets is extremely difficult, like pricing brands and business secrets. Therefore, this is a form for businesses to increase their costs and expenses without too many risks when declaring prices. This price increase will help businesses reduce the amount of tax they have to pay to the state.
4. Increase administrative management costs
Raising administrative management costs such as warehouse costs, premises, advertising costs, and meeting and reception costs to the allowed ceiling is one of the forms of transfer pricing taking place in Vietnam. Therefore, many businesses report losses but still expand their scale of operations by opening more stores and business locations.
5. Take loans with high interest rates
Loan contracts with clearly recorded high-interest rates will be a form of increasing deductible input costs when calculating corporate income tax. Besides borrowing capital from credit institutions, enterprises are allowed to carry out irregular borrowing and lending activities. Taking advantage of this regulation, some businesses in the affiliated group have increased lending interest rates for reasonable reasons such as low collateral value, long loan term, and high-risk ratio.
6. Transfer profits from abroad to Vietnam
For FDI enterprises that enjoy preferential tax rates, making a profit while enjoying preferential tax rates is extremely beneficial. Therefore, in many cases, businesses in affiliated groups have transferred profits from countries applying high tax rates to Vietnam to enjoy preferential tax rates. Then, through other transactions, the parties return the benefits to each other.
Besides forms of price transfer through affiliated transactions, in Vietnam there are also some other forms of price transfer through independent transactions such as raising sales prices and sharing commissions. Accordingly, the seller still enjoys preferential tax rates and the buyer can increase input costs.
In conclusion, it can be seen that transfer pricing is a deliberate violation of the law for the purpose of profiteering and loss of state budget revenue. Therefore, when implementing transfer pricing, businesses need to be aware of the risks they may face such as having tax authorities fix transaction prices, conducting tax inspections at businesses, or applying other measures to ensure compliance with tax laws.