Intercompany transactions vietnam
Transfer pricing is no longer a new issue, but it is becoming a major challenge for tax authorities worldwide. This article will help you better understand transfer pricing, its causes, common forms, and the anti-transfer pricing methods applied in Vietnam.
1. What is Transfer Pricing?
1.1. Concept of Transfer Pricing
Transfer pricing is a term in accounting and taxation that refers to determining the price for transactions between companies within the same group, especially parent and subsidiary companies.
Specifically, transfer pricing is the determination of the fair price that companies within a group will apply when transacting with each other. These transactions may include goods, services, assets, or loans between companies with a controlling relationship.
1.2. Examples of Transfer Pricing
Transfer pricing is easily observed in multinational corporations, where parent companies are headquartered in countries with high tax rates and subsidiaries are located in countries with low tax rates. These companies often use transfer pricing to shift profits from high-tax countries to low-tax countries, in order to minimize the amount of tax payable.
Example: Company A in the US has a subsidiary in Singapore (a country with a low tax rate). Company A purchases raw materials from its subsidiary at a price lower than the market price to reduce production costs in the US, thereby reducing taxable profit in the US and transferring profit to Singapore.
In this case, Company A can reduce production costs and taxes payable in the US, while increasing profits in Singapore, where the tax rate is even lower. However, if international transfer pricing regulations are not followed, this practice may be detected and penalized by tax authorities.
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1.3. Purpose of Transfer Pricing
The primary purpose of transfer pricing is to optimize taxes and profits for companies within a group. Specific objectives of transfer pricing include:
Tax optimization: Businesses can use transfer pricing to shift profits from countries with high tax rates to countries with low tax rates, minimizing tax payable.
Increased profits in low-tax countries: Applying transfer pricing allows businesses to shift profits to countries with lower tax rates, maximizing profits for the entire group.
Cost reduction: Transfer pricing also helps businesses adjust costs appropriately among companies within the group, thereby reducing overall costs and improving financial efficiency.
However, transfer pricing needs to be implemented in a reasonable and transparent manner to avoid legal and tax problems. Countries and international organizations, such as the OECD (Organization for Economic Cooperation and Development), have issued guidelines and regulations to help businesses apply transfer pricing legally and appropriately.
2. Common Forms of Transfer Pricing Today
Below are common forms of transfer pricing currently applied in many different industries and sectors. These forms help businesses minimize corporate income tax payable while maximizing profits by adjusting the value of assets, costs, and profits between affiliated companies.
2.1. Transfer pricing through increasing the value of contributed assets:
One of the common forms of transfer pricing is increasing the value of contributed assets when a business contributes capital to a subsidiary or affiliated company. The main purpose is to increase the profit share while minimizing tax obligations. Specifically, in joint venture projects, increasing the value of contributed assets helps increase the FDI enterprise’s capital contribution, thereby increasing its control over key project decisions. This not only helps increase profit margins but also creates a stronger influence on the joint venture’s strategic decisions.
For companies with 100% foreign capital, increasing the value of contributed assets helps increase the annual depreciation rate, increasing input costs and reducing corporate income tax payable. This also helps investors quickly recoup their investment and minimize financial risks.
For multinational corporations, this approach can be applied through the transfer of tangible fixed assets such as machinery and equipment at a value higher than the market value, thereby optimizing income and asset liquidation costs, while transferring income to countries with low tax rates, maximizing profits.
3.2. Transfer Pricing Through Inflating the Value of Intangible Assets:
Intangible assets such as software copyrights, trademarks, patents, or intellectual property rights can be inflated in value to increase the investor’s equity stake. This increases the control of foreign investors and optimizes net profit.
In cases where businesses contribute intangible assets as capital, they can transfer technology or collect royalties from subsidiaries, shifting profits to countries with low tax rates. In this way, businesses can reduce corporate income tax in high-tax countries while maintaining profits in low-tax countries.
3.3. Transfer Pricing Through the Purchase and Sale of Raw Materials, Semi-Finished or Finished Products:
This form of transfer pricing is carried out by adjusting the purchase and sale prices of raw materials, finished products, and semi-finished products between related companies. The goal of this is to minimize tax payable by adjusting internal transaction prices, creating a situation of “fictitious losses and real profits.” Specifically:
If a company with a high corporate income tax rate sells raw materials to a subsidiary with a low tax rate, the selling price of the raw materials will be reduced, decreasing the profit of the selling company and thus reducing the tax payable.
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Conversely, if a company with a low tax rate buys raw materials at a high price from its subsidiary, the pre-tax profit of the subsidiary will decrease, helping to reduce corporate income tax payable.
Transfer pricing is a crucial issue that all businesses, especially multinational corporations, need to address. Understanding transfer pricing regulations, identifying different transfer pricing schemes, and applying the right anti-transfer pricing methods will help businesses avoid tax risks and ensure financial transparency. The Vietnamese government has taken strong steps to control transfer pricing, but businesses still need to be more proactive in complying with regulations and maintaining a sound transfer pricing strategy to ensure sustainable business operations and avoid unnecessary tax disputes.
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