Transfer pricing in vietnam

Table of contents Abstract Acknowledgement Introduction Rationale Target Subject and Scope Method of Research CHAPTER 1: DEFINITION AND THEORIES OF TRANSFER PRICING I - Definition II – Determinants of transfer pricing 1- Internal determinants – External determinants III - Some usual behavior of transfer pricing .10 Modification of capital contribution .10 Technology transfer 12 Transfer pricing with a view to market domination: 13 Transfer pricing through differentials in tax rates: .14 Transfer pricing in the form of increasing management and administrative costs.16 IV Effects: 17 On MNCs .17 On the countries receiving foreign investment capital: 18 On the capital-exporting countries: 19 CHAPTER 2- BRIEF SITUATION OF TRANSFER PRICING IN VIETNAM SINCE “DOI MOI” AND SOME TYPICAL CASES 20 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com I – Brief situation of transfer pricing in Vietnam 20 II- Some typical cases about transfer price in Vietnam since economic reform 20 1- Transfer price in VNTRA 21 2- Transfer Price in Vietnam P&G 22 3- Transfer price in Coca cola Chuong Duong Joint Venture Company 23 CHAPTER 3- REGULATION AND MANIPULATION OF TRANSFER PRICING 25 I- Current approaches to transfer pricing .25 1- Significant regulatory achievements 25 3- Market price determination methods 26 3- Administrative and penalty methods 31 Thorough inspection of multi national corporations 32 II – Long term solutions .33 APA - Advance pricing agreements .33 Business morality and social responsibility establishment 33 REFERENCES 37 WORK DISTRBUTION AND PERSONAL RESPONSIBILITIES 40 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract The sophisticated economic phenomenon called “Transfer pricing” needs ultimate care from authorities in Vietnam due to its negative impacts on the economy as a FDI recipient In the event of Foreign Direct Investment capital being rapidly poured into this developing country, transfer pricing has made its widespread movement at alarming rate Meanwhile, as a newcomer to the global integration, Vietnam is faced with a lack of relevant experiences to deal with the problem There are both internal and external determinants of transfer pricing, among which taxation liability difference substantially contributes to the movement of profits from countries with high taxes to countries with low taxes Multi-national Corporations make use of every discrepancy in either Law or weakness of market through modification of capital contribution, unreasonable costs in technology transfer, differentials in tax rates to any augmentation of management and administrative costs for the purpose of escaping from tax duty and dominating Vietnamese market Transfer pricing has made enormous influences on MNCs, foreign capital recipients or even capital-exporting countries and yet adverse impacts on the receiving countries are most severe These could be listed as changes in capital structure, taxation loss, unfair competition, market domination by foreign enterprises and political dependence in the long term Vietnamese government had to intervene in the situation through legitimate documents with specific circulars giving instructions for market pricing determination in intra – group transactions Additional methods such as administration and penalty, thorough inspection of MNCs and particularly APAs (Advanced Pricing Agreements) – which is still new and has not yet implemented in Vietnam – are in great necessity of close co-ordination among all government bureaus As a follower, Vietnam shall learn from the precedent countries and accumulate essential experiences for itself to drive its economy towards a right direction to the goal of industrialization and modernization in the future LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgement The assignment was completed by invaluable contribution of many people Firstly, we would like to express our many thanks to Ms Cao Thi Hong Vinh and Ms Lu Thi Thu Trang for their precious instructions, corrections, comments, criticism, suggestions and their assistance during the development of this assignment under their supervision We also want to demonstrate our deep gratitude to authors mentioned in our reference for their valuable support to access the data sources We want to show our appreciation to our group members for their time and efforts in the making of this assignment Finally, we also would like to convey our sincere thanks to all of our friends for their constructive discussions, suggestions, sensible contribution and timely assistance LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Introduction Rationale When Vietnam joined WTO as the 150th member in 2006, a new era of economic opportunities was open to this developing nation, among which many experts have associated the increasing FDI attraction with golden eggs of the economy The Foreign Direct Investment (FDI in abbreviation) as we know it not only was poured into Vietnam with rapidity but also continued to hit new records in total capital investments during the period 2006 – 2008 The next three years were faced with declining trend (FDI was a bit off 2008 peak but still remained at high level ) due to a severe global economic recession; however, a brighter outlook is to be expected by the end of the year 2012 – it has been forecast that 2012 will see a rise of 17 million VND in FDI capital In addition to a surge in number of projects brought by FDI, that in project size and quality has been widely recognized, not to mention a great deal of nations ( America, Korea, Japan, Hongkong, the UK, Singapore ) as well as large Multi National Corporations are making headway towards Vietnamese market It is clear that the receipt of FDI creates golden chances for Vietnam to access advanced scientific degree as well as high-level global economic management and approach a resolution of generating more jobs for the unemployed Not surprisingly FDI appears as one of the most important capital suppliers and motivators to the economy which possibly paves the way for a dynamic and competitive market in the near future Enormous economic effects from FDI are what we refer to as positive contributions Yet there lie massive dangers caused by this source of investment unless reasonable managerial and synchronous measures are to be carried out In recent years many FDI enterprises have declared to suffer from losses, resulting in a tax deficit to Vietnamese Government - which directly affects national budget and reduces fair competition for domestic firms More seriously, this has decreased efficient use of FDI capital and weakened the financial management mechanism as well as badly influenced the Government’s objectives of attracting and controlling FDI LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Among all of the possibly listed reasons, transfer-pricing is worth considering It is a sophisticated matter that is regularly executed by corporations to escape from tax duty The Government decided to interfere with the situation by issuing the circular 66/2010/TT-BTC on April 22, 2010 – in place of 117/2005/TT-BTC on Dec 19, 2005 – which gives instructions for market pricing determination in intra - group transactions The question of how transfer pricing could be treated has aroused concerns among economist circle While transfer pricing is making its vast movements in Vietnam at an alarming rate, the country lacks relevant experiences to resolve this headaching problem All things considered, we chose “Transfer pricing in Vietnam” as our research topic based on the urgency of the circumstance and particularly the great necessity of approaching timely measures towards the phenomenon Target Our research paper is aimed at providing a deep analysis of transfer pricing in Vietnam for the last several years when FDI is being poured into our nation with increasing rapidity and multi-national corporates have apparently become so dynamic We would like to contribute some measures in dealing with transfer pricing for the establishment of more effective administration over FDI enterprises and improvement of national budget brought by more tax income from these transfer pricing companies Besides, this research paper would enable domestic firms to take a closer look at international transfer pricing and find out solutions for protecting themselves against risks in cooperating with foreign partners Subject and Scope - Subject: FDI enterprises in Vietnam - Scope: transfer pricing of FDI enterprises operated in Vietnam since 2006 Method of Research - Methods used are statistics, listing, comparison and analysis of data source - Data source LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: DEFINITION AND THEORIES OF TRANSFER PRICING I - Definition According to Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines for multinational enterprises and tax administrations (1995), Transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises For managerial purposes, transfer pricing may be used by multinational enterprises to measure and evaluate the business performance of specific individual units of a multinational enterprise By evaluating the transfer prices charged for intra-group transactions, a manager can decide whether to buy or sell products and services internally or externally When used properly, transfer pricing can help to more efficiently manage profit and loss ratios within the company From a tax perspective, prices of transactions between related enterprises (transfer prices) are crucial for both taxpayers and tax administrations Transfer prices determine in large part the income and expenses, and therefore, the taxable profits of the associated enterprises in different tax authorities Nowadays, many countries have regulations to prevent the use of transfer pricing as a means of evading taxes or similar unethical and illegal activities II – Determinants of transfer pricing 1- Internal determinants As be concerning with internal cause of transfer pricing, Mrs Le Thi Thu Huong, deputy head of the Hochiminh city Taxation Department answered an interview in The Saigon Times in 14 July 2011: “Other companies opened many offshoots to fake a successful business result to lure investments For instance, after one subsidiary is listed on the stock market, the other subsidiaries will transfer their profits to that listed subsidiary to increase its stock value to attract investors.” To create a positive insight into company’s financial conditions in the public eye (including shareholders and other related parties), in some case, MNCs’ managers make some unforgiving mistakes in brief strategy, products research and development, new market penetration or unreasonable advertising cost that result in long term loss Hence, to attract shareholders and other related parties, managers must conduct transfer pricing that is used for allocating price among subsidiaries, diminishing loss, even taxation payable and falsifying artificial profit ( to deceive innocent investors) Furthermore, one of the most favorable MNCs’ ambitions is to penetrate into and occupy a new market, especially rapid developing economies According to Mr Nguyen Van Phung, the deputy head of the Taxation Policy Department, Ministry of Finance in LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Electric Finance, 15 June 2011, has connected transfer pricing to this determinant In such circumstances, they must cooperate with some local enterprises, which are traditionally acquainted with domestic customer and have their own distribution system By conducting illegal transfer pricing, augmenting intra-transactions cost and basing on their abundant financial resource, MNCs create an artificial loss in their subsidiary, thereby posing a threat to local partners who are relatively smaller in terms of capital capability and gradually pushing domestic ones out of joint venture enterprise After occupying the new market, MNCs make a decision to raise the price to offset the previous losses A high proportion of this kind of transfer pricing could be observed in nations which are regarded as inferior management countries such as Vietnam, Laos or almost African countries – External determinants a- Taxation liability difference Nowadays, taxation policies in a wide variety of countries are as different as chalk and cheese, thereby creating favorable conditions for MNCs (Multi-national Corporations) to transfer pricing Some countries refer to tax haven because they find they not need to charge as much as industrialized countries in order for them to be earning sufficient income for their annual budgets or this is a way to encourage conglomerates from industrialized nations to transfer capital as well as needed skills to local population The table below illustrates the corporate tax rates in variety of nations around the globe in 2011 that are ranked in ascending order From this graph, in general, nations which are more developed also impose higher corporate tax rate than less-developed nations According to Sikka and Willmost in “The dark side of transfer pricing: its role in tax avoidance and wealth retentiveness 2010”, since costs and overhead allocation them to particular products/services and geographical jurisdiction, such discretion can enable them to minimize taxes and thereby swell profits by ensuring that, wherever possible, most profits are located in low-tax or low-risk jurisdictions Suppose that there two subsidiaries, one in a high-tax country, and the other in a low-tax country To reduce the combined tax liability of two subsidiaries (that is, to increase the combined after-tax profit), the subsidiary located in the high-tax country will sell goods to the other subsidiary at lower than normal prices, and buy from it at higher than normal prices By applying transfer pricing, although revenues of MNCs only change a little owing to transaction cost or other incidental expenses, after-tax profit would increase drastically, as a result, resulting in loss in host countries’ loss of taxation revenue and unequal business environment Corporate Tax Rates 2011 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Country Rate (%) Country Rate (%) Bahrain Vietnam 25 Bahamas United Kingdom 28 Macau 12 The Philippines 30 Hongkong 16.5 Pakistan 35 Russia 20 United States 40 China 25 Japan 40.68 (Source: Corporate and Indirect Tax Survey 2011, KPMG) b- Economic and financial conditions The underlying economics of how a company conducts business is the key to determining proper transfer pricing policies But those underlying economics can and change, both to the evolution of a company’s business can and change, both due to the evolution of a company’s business, and more generally, to changed economic and financial conditions (Kash Mansori, Ph.D, Transfer pricing in 2009: three reasons to consider it carefully) including exchange rate and inflation, the two most crucial elements in macroeconomics Firstly, the exchange rate should play a role in the process of transfer pricing, because it affects the competitive position of a subsidiary operating in a foreign market Demand in the foreign market depends on the foreign-currency price, which also depends on the exchange rate If the foreign currency depreciates against the domestic currency, the foreign-currency price will rise and this may affect the competitive position of the subsidiary adversely, particularly if the demand for the product is elastic In this case, the transfer price measured in domestic currency terms must be lower, or MNCs show an inclination to withdraw their capital, which has been invested at that subsidiary to keep their fund undamaged As the result, MNCs not only gain profit from usual activities but from exchange rate fluctuation Secondly, the problem of inflation within the context of its effects upon the purchasing power of internal consumers and depresses effect on export trade, to be more precise, inflation exerts an erosive effect on monetary assets within countries experiencing hyper inflation In most cases, MNCs use generally recognized practices to mitigate the deleterious effects of inflation in host countries A preferable method is to withdraw funds to a safer haven by charging to a subsidiary located in rapid growing inflation higher than normal prices and being charged at lower than normal prices Thus, transfer LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com pricing can be, and actually are, used as a device to counteract inflationary erosion of assets and preserve MNCs’ initial capital investment c- The correlation between interest of joint venture partners and of MNCs Transfer pricing can be used to preserve the MNCs’ share in the profit generated by a joint venture To accomplish this objective, the MNCs charge the joint ventures high transfer prices, hence, this kind of practice would create conflict between MNCs and the foreign partners in the joint ventures, because the foreign partners prefer low transfer prices from MNCs and they prefer high transfer prices to the foreign partners If parties cannot make a concession for the sake of agreement, interest of both parties would be affected negatively This is why the transfer pricing policy should be agreed upon prior to the establishment of a joint venture d- Political instability Shulman (1968) in “Transfer pricing in the multinational firm” has added a new determinant influencing transfer pricing to some extent: when a MNC operates in a country in which there has been a tendency for the government to be overthrown (or shaken by a sudden coup) with recurring regularity, it is to the interest of the company to keep as little cash as possible in that country The high feelings of nationalism which often accompany a revolutionary regime further endanger assets of foreign businesses, and exportation is a risk in such situations Therefore, removals of profits and cash outflows by way of transfer pricing give some assurance of stability to the MNCs’ aftertax profit III - Some usual behavior of transfer pricing In reality, tax authorities, custom authorities - in the implementation of tax inspection, management and supervision - have fought and struggled with transfer pricing and make punishment on thousands of cases of enterprises for fraud in price or service charges every year Among those fraud cases, it is transfer pricing that accounts for the most However, the outcome is just a reimbursement of import-export tax, value-added tax and corporate income tax; and those cases are unfortunately not put into the process of statistical classification and analysis regarding the issue of transfer pricing Based on review of cases of transfer pricing which were inspected in recent years, it is reasonable to recognize the signs of transfer pricing under the following forms: Modification of capital contribution As Vietnam has opened its economy to attract more foreign cash-flows with the expectation of improved tax revenue, employment and economic activities, numbers of 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com between tax authorities and made transparent between the taxpayers and tax authorities The tax reform strategy for 2011-2020, approved by the Prime Minister’s Decision 732/QD-TTg dated 17 May 2011, plans introduction of regulations on a number of complex transactions: business restructuring, asset valuation, thin capitalization, and advance pricing agreement 2- OECD and the transfer pricing regulations OECD has played an important role in the international development of rules for transfer pricing The Transfer Pricing Guidelines for Multinational Enterprises and Tax administrations (the guidelines) and the OECD Model Tax Treaty together with the U.S regulations are the most important sources of inspiration for the regulations of transfer pricing for the developed world The international standard that OECD-members have agreed upon for determining transfer prices for tax purposes is the arm’s-length principle According to the arm’slength principle, related parties should determine the price for inter-company transactions as if they were unrelated parties The two corporation involved in the transaction should choose the price as if they were dealing at arm’s-length distance, with market competition deciding the price If the price decided is different from what two independent corporations would have charged, according to the arm’s-length principle, the tax authority in that country has the right to include in the taxable income the profit that would have accrued if the parties would have been dealing on arm’s-length The guidelines provide five different methods to find the arm’s-length price: the comparable uncontrolled transaction price method, the resale price method, the cost plus method, the comparable profit method, the profit split method The methods principally use other transactions between unrelated parties to guide how two related parties should price there transactions 3- Market price determination methods By applying a range of market price determination method, the government will have proof as well as a legal basis to regulate transfer pricing in Vietnam The methods of determining market prices of products in associated transactions specified at Circular 66/2010/TT-BTC as well as the guidelines of OECD include: - The comparable uncontrolled transaction price method; - The resale price method; 26 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - The cost-plus method; - The comparable profit method; - The profit split method; Depending on each of these methods, the market price of products may be used as a basis for directly calculating the unit price of products or indirectly through the gross profit ratio or profitability ratio of products However, for the methods of indirect price calculation, it is not necessary to calculate specific unit prices when determining business results for enterprise income tax declaration and calculation purposes a-The comparable uncontrolled price method The comparable uncontrolled transaction price method is based on the unit price of products in an uncontrolled transaction for determining the unit price of products in an associated transaction when these transactions have comparable conditions Example: Company V, a Vietnam-based enterprise with 100% capital invested by foreign company S, is engaged in processing textile and garment products In the year 200x, it had two transactions of processing trousers of cat 347 as follows: - Transaction 1: Processing for parent company S 1,000 dozens of trousers at the price of USD 60/dozen and delivering the goods at port X in Vietnam (S will he responsible for exporting them) - Transaction 2: Processing for country N’s company M 1,000 dozens of trousers at the price of USD 100/dozen and delivering the goods in city Y of country N Assume that: - Company M is not associated with company V and company S - These two transactions are comparable in transaction conditions, except a material difference which is the freight and insurance cost of USD 3/dozen for the delivery of the goods from port X to city Y of country N Comparability analysis: - In comparing transaction I (associated transaction) with transaction (uncontrolled transaction), it is found that transaction I did not accurately reflect the market price Therefore, company V shall adjust the revenue from the transaction with company S as follows: 27 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com (USD 100 - USD 3) x 1,000 = USD 97,000 - Company V shall declare the processing charge received from company S being USD 97,000, instead of USD 60,000 b - The resale price method The resale price method is based on the resale price (or selling price) at which products are sold by an enterprise to an independent party for determining the price (cost) at which these products are bought from the associated party Example: Enterprise V, a Vietnam-based associated party of foreign company H, deals in the distribution of watches supplied by company H has the following information: - In the year 200x, company H delivered to enterprise V 1,000 watches and requested enterprise V to pay an amount of USD 330,000 (inclusive of CIF price and tax: import tax was paid by company H) - At the end of the year, the net revenue earned by enterprise V from the sale of all of these watches to consumers in Vietnam was USD 400,000 - Enterprise T, an independent enterprise in Vietnam, also deals in the distribution of watches Enterprise T's gross profit ratio for the year200x was 20% Assume that enterprise T is eligible for being selected for comparison of the gross profit ratio with enterprise V Enterprise V shall declare deductible reasonable expenses for the purchase of watches from company H as follows: [USD 400.000 - (USD 400,000 x 20%)] = USD 320,000 Enterprise V may only deduct reasonable expenses from the cost of goods of USD 320,000, instead of the payable amount of USD 330,000 In case company H also provides the goods sale consultancy service and requests enterprise V to make a payment for this service (allowed to be accounted as sale expense), this transaction shall be separated and one of the transaction price determination methods stated in this Circular must be used to determine reasonable expenses deductible for this service c - The cost plus method 28 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The cost plus method is based on the cost (or cost price) of products for determining the selling price at which such products are sold to an associated party Example: Vietnam-based enterprise A, a subsidiary company of parent company T (country Y), processes shoes for export according to the designs and models assigned In company T, the parent company is responsible for supplying input materials and auxiliary materials and quality inspectors, and paying for international transportation and insurance Enterprise A shall be paid processing charges based on product units and bear all expenses incurred in the processing of products In the year 20xx, information on enterprise A’s processing activities is as follows: - Net revenue (processing charge): VND 15 billion - Cost of goods sold: VND 13 billion - Sale and enterprise management expense: VND 1.8 billion Assume that: - There are some other independent enterprises also producing and processing shoes for foreign organizations and individuals and receiving a processing charge being the sum of total cost (= cost of goods sold + enterprise management expense + sale expense) and 7% of total cost - The independent transactions of these enterprises are eligible for being selected for comparison with transactions of enterprise A In this case, revenue from the processing of shoes shall be re-determined as follows: (13 billion + h.8 billion) + [7% x (13 billion + 1.8 billion)/ = VND 15.836 billions Thus, enterprise A shall declare its revenue of VND 15.836 billions, instead of the previous-figure of VND 15 billions d -The comparable profit method The comparable profit method shall be based on the profitability ratio of products in an uncontrolled transaction selected for comparison, serving as a basis for determining the profitability ratio of products in an associated transaction when these transactions have similar transaction conditions Example: Enterprise L operates in the domain of manufacture and assembly of 4-seat cars of marks N and S: 29 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - Cars of mark N are sold to independent parties - Cars of mark S are all sold to enterprise L1, a company with 100% capital invested by enterprise L - All purchasing transactions for the manufacture and assembly of cars of the aforesaid two marks are uncontrolled ones In the year 200x, enterprise L's accounting statistics were as follows: + Net revenue from the sale of cars of mark N was USD 18,000 (an uncontrolled transaction) + Net pre-tax profit from the sale of cars of mark N was USD 2,000 + Net revenue from the sale of cars of mark S was USD 25,000 (an associated transaction) + Net pre-tax profit from the sale of cars of mark N was USD 1,800 + Company L provided company L1 with a loan with an interest of USD 100 at the market rate The ratio of net pre-enterprise income tax profit to net revenue for cars of mark N: 2,000/ 18,000 x 100%= 11.1% The ratio of net pre-enterprise income tax profit to net revenue for cars of mark S: 1,800/ 25,000 x 100% = 7.2% Assume that material differences between two transactions of selling cars of mark N and mark S have been adjusted so that the result of the transaction with company L1 achieves the ratio of 11.1% of net profit before enterprise income tax and before payment of interest to net revenue In this case, figures on the transaction of selling cars of mark S shall be re-determined as follows: Total cost: USD 25,000 -1,800 - 100 = USD 23,100 Net revenue: USD 23,100/(1- 0.111) = USD 25,984 Net pre-tax and -interest profit: USD 25,984 - 23,100 = USD 2,884 Net pre-tax profit: USD 2,884 - 100 = USD 2,784 30 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Company L shall declare the net pre-enterprise income tax profit of USD 2.784 from the transaction of selling cars of S mark, instead of the previous figure of USD 1.800 in the accounting book e-The profit split method The profit split method is based on the profit earned from a combined associated transaction conducted by many associated enterprises so as to determine an appropriate profit of each of such enterprises in such a way that the independent parties share profits in comparable uncontrolled transactions Example: Vietnam-based enterprise A and foreign-based enterprise B have the following information: - Both are member companies of group T engaged in producing electronic products - Both participate in producing a new product of LCD televisions - A is responsible for designing and manufacturing television cabinets and picture tubes and delivering them to B for assembly with other parts (circuits, electronic chips, etc.) invented and manufactured by B Finished products will then be sold to C, an independent distributor, at the price of USD 550 per set - The total cost price per product delivered by A to B is USD 300 while the cost incurred by B for further manufacture is USD 150 The profit allocated to A is calculated as follows: [(550 - (300 + 150)):450] x 300 = USD 66.66 3- Administrative and penalty methods Implementation of administrative reforms in the process of receiving procedures and licensing investment is extremely important When getting and licensing the investment projects the government has to carefully inspect the economic efficiency that project brings to Vietnam both in the short and long term Although Vietnamese economy needs foreign investment for economic development but we still have to cautiously choose technologies and projects associated with our investing environment and sustainable development Should not select projects with large investment but using old technologies, the selected project must be in harmony with the objectives of the regional plan of development The time of implementing the procedures of business registration and licensing after being approved should be simplified and shorten to create favorable 31 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com conditions for investors, avoiding overlapping procedures which extend the registration time and cause unfortunate problems Furthermore, basing on other countries’ legal documents against transfer pricing, Vietnam should issue and implement its own methods regulate transfer pricing In case any discrepancies between price quoted by Multi-national companies (MNCs) and market price and the enterprises not have their own reasons proving these differences, tax authorities will be responsible for imposing 20%-40% penalties on these MNCs (depends on each particular case) The size of the penalty differs from one country to another In the US a penalty will be somewhere between 20 to 40 percent of the underpayment of income tax while the Canadian Income Tax Act (ITA) impose a penalty of 10 percent As tax authorities inspect these discrepancies and compare individual profit with average sector’s profit, they could apply an appropriate penalty rate, which also defer other firms from breaching tax regulation In the draft law amending and supplementing the Law on Tax Administration, the Ministry of Finance has proposed additional regulations Accordingly, the tax agency must coordinate with other agencies such as customs, oversea tax authorities to grasp the input costs of enterprises Then the tax agencies will particularly discuss the price situation with the enterprises Also, the Ministry of Finance has plans to direct the coordination between specialized sector and local tax agencies in implementing solutions synchronously In particular, the Ministry of Finance should coordinate with the Ministry of Planning and Investment to consider and check the legal status of the active projects which has loss exceeding equity Ministry of Natural Resources and Environment will consider not issue the land use rights or land for lease for the projects of expansion or new investment of business owners doing business in Vietnam, which has loss exceeding equity Ministry of Public Security will investigate to clarify violations in transfer pricing cases transferred by the tax authorities in accordance with the law, also, require the enterprises’ leader to correct and reorganize the business activities relating to transfer pricing Thorough inspection of multi national corporations The aforementioned appropriate authorities should regularly inspect intra-transactions within MNCs, collect authentic proofs that would be used for deferring them from transfer pricing and altering their behaviors The corporations selected should be those who announce a loss in two financial years and ones who have a profitability ratio is much lower than average industry If MNCs are specified that they have transferred pricing, the authorities will be responsible for imposing more taxes (such as corporation tax, value-added tax or tariff) on these immoral corporations 32 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com II – Long term solutions APA - Advance pricing agreements An APA is a contract, usually for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its relatedcompany transactions These programs are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process APA looks at the risk mitigation tool wherein you have more certainty that if tax authorities agree, there will be no transfer pricing adjustment in future So it reduces the uncertainty of whether your transfer pricing policy will be accepted by tax authority or whether there will be any double taxation With this certainty, the taxpayer is more confident about future transactions and then can focus on its business rather than dealing with the uncertainty In terms of challenges, the question is time and resources because generally APA takes around one to three years to negotiate and conclude According to Ernst & Young, the US APA program was established in 1991.Revenue Procedure 2006-9 sets forth the procedures that the taxpayer must follow to negotiate an APA Taxpayers may seek unilateral, bilateral or multilateral APAs User fees for an initial APA are generally $50,000, but a small taxpayer APA is available with lower user fees in certain circumstances As of 31 December 2009, the IRS (Internal Revenue Service) APA Program had completed 904 APAs since inception and had 352 pending The IRS completed 63 APAs during the year ended 31 December 2009, consisting of 21 unilateral (with IRS only) and 42 bilateral/multilateral (with both IRS and tax authority of US treaty partner) agreements Although APA has not been applied in Vietnam, if the draft law amending and supplementing the Law on Tax Administration is adopted, the APA will be applied from 2014 and the tax sector will find out the fundaments to prevent transfer pricing in Vietnam Business morality and social responsibility establishment According to Eden and Smith in “Ethics of transfer pricing”, moral ethics is considered as a solution to reduce abusive transfer pricing The moral ethics view argues that merely complying with legal norms is not necessarily ethical MNCs’ executives should take into account the social impacts on their action, including the impacts of their transfer pricing policies Back to Vietnam, since the Sixth Party, Congress proposed a great plan named Economic Reformation (Doi Moi) in 1986, it has concentrated all its capital as well as human resources on economic growth in a quantitative way with the goal of creating a socialist oriented market economy As a result of the new proposal, Vietnam has gained numbers of achievement in economic, educational, health care, and other social matters which are 33 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com also offset at the expense of social morality In this case, transfer pricing is also regarded as a moral matter Every corporation in Vietnam including stated owned, private or foreign ones are not only allowed to treat equally based on Vietnamese legal basis, but also are encouraged to get rich legally without contradicting to ethics By attaching MNCs’ social responsibility to social responsibility and consolidating business morality, negative aspects of market economy will be deferred and all positive aspects will be multiplied and become social achievement for every citizen ( as appreciated in socialist oriented economy) Above the others, business morality and social responsibility establishment are the best solution to tackle transfer pricing in Vietnam and other nations To summarize, all aforementioned administrative policies could not settle transfer pricing to every root if foreign invested enterprises try to deliberately, therefore, only by applying ethical principles and transfer pricing will be prevented in the long term: Let nature take its course 34 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Conclusion Throughout this research paper, we are confident that transfer pricing is a complex economic phenomenon that needs utmost care from the authorities, particularly in the event of global integration with FDI inflow currently being extended to the full Since the collapse of financial market in the United States in autumn 2008 followed by a global economic recession and a depressing period, the world economy has shown some signs of recovery Stability is gradually being maintained, which gives hopes of an upcoming thriving stage Along with this trend, Vietnam has succeeded in overcoming global economic recession at a higher speed than many countries and thus, proved itself to be a strong self-defense country from one of the most disastrous economic incidents According to provincial FDI management departments and enterprises whose projects are in cooperation with foreigners, many foreign corporations and investors have the tendency of returning to Vietnam to complete their unfinished projects after long time of delay due to the global crisis It is obvious that the disbursement of FDI capital will be greatly encouraged These positive signals indicate a recovering economy but yet we have to cope with transfer pricing as carefully studied in this research paper It is obvious that the phenomenon spreads various negative influences on the FDI recipient’s economy including changes in capital structure, taxation loss, unfair competition, market domination by foreign enterprises, political dependence in the long term and more seriously misleading orientation in developing national economy Authorities and domestic investors shall be ultimately conscious and fully aware of so many tricks and behaviors that associated companies might use to escape from tax duty However transfer pricing is a sensitive and hard-to-avoid point of investment from which all countries will have to suffer and then find the way to fight back Market pricing determination methods and strict penalties surely help to lessen the severity of transfer pricing Nonetheless, efficient administration over this matter requires close coordination between government and functional departments, particularly tax and custom agents APAs (Advanced Pricing Agreements ) – though not having been implemented yet – could be a good recommendation for us in the future 35 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com It is recommendable that Vietnam, as a follower, learns from the precedent nations, sort out suitable experiences for itself and closely monitor regional as well as global transfer pricing updates The construction of economic policy shall be based on precious experiences of precedent countries and future visions In this way we might drive our economy towards its right direction and successfully accomplish our goal at industrialization and modernization Hopefully our country will be a modern industrial nation in the near future REFERENCES 36 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com SOURCE: - Organization for economic co-operation and development, “Transfer pricing guidelines for multinational enterprises and tax administrations”, 1995 -Kash Mansori, Ph.D, “Transfer pricing in 2009: Three reasons to consider carefully, Jefferson Wells”, 2009, p1 - Robert Miller, Jackglen, Fredjaspersen, and Yanniskar, “International Joint Ventures in Developing Countries”, International Finance Corporation’s Economic Department, March 1997 - KPMG , “Corporate and Indirect Tax Survey 2011” - Jame S Shulman, “Working paper for Alfred P Sloan Scholl of Management: Transfer pricing in the multi national firm”, Massachusetts Institute of Technology, June 1968, p10-11 - Prem Sikka and Hugh Willmost, ”The dark side of transfer pricing: its role in tax avoidance and wealth retentiveness”, University of Essex, UK, February 2010, p3 - John H Barton, “New trends in technology transfer – implication for national and international policy”, Stanford School of Law, February 2007, p1 - Lorraine Eden, Professor of Management, and L Murphy Smith, Professor of Accounting,”The ethics of transfer pricing”, Imperial College, April 2011, p7 - Kimberly A Clausing, Department of Economics, Reed College, USA, “The Impact of Transfer Pricing on Intrafirm Trade”, 2000 http://www.nber.org/chapters/c10724 - The Ministry of Finance, “Circular No 66/2010/TT-BTC”, 2010 - The Ministry of Finance, “Circular No 117/2005/TT-BTC, 2005 - Kim Chi, the economic specialist, “Transfer pricing skills plentiful” – The Special Report of Vietnamnet Bridge 30/03/2012 edition, http://english.vietnamnet.vn/en/special-report/19873/transfer-pricing-skills-plentiful.html - Le Thi Thu Huong, the deputy head of the Hochiminh City Taxation Department ,”Vietnam lacks effective anti-transfer pricing measures”-The Saigon Times,14 July 2011 edition http://english.thesaigontimes.vn/Home/interviews/businesstalk/18113/ 37 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - Le Thi Thu Huong, the deputy head of the Hochiminh City Taxation Department, “Law provisions on anti-transfer pricing” – Law News, 21 March 2012 edition http://thuvienphapluat.vn/tintuc/vn/thoi-su-phap-luat/tai-chinh/2661/luat-hoa-cong-tacchong-chuyen-gia - Nguyen Van Phung, the economic specialist, the deputy head of the Taxation Policy Department, Ministry of Finance, ”Fraudulent Prices and transfer pricing– the matters set up with regard to officials” - E-Finance, 31/10/2011 edition http://www.taichinhdientu.vn/Home/Gian-lan-gia-va-chuyen-gia nhung-van-de-dat-radoi-voi-cac-nha-quan-ly/201110/117826.dfis - Duong Thi Nhi, Financial Advisory Group, Ministry of Finance, “Anti-transfer pricing – a difficult task”, The Online Finance Magazine, 24 May 2011 edition http://www.tapchitaichinh.vn/Qu%E1%BA%A3ntr%E1%BB%8Bn%E1%BB%99idung/ ViewArticleDetail/tabid/56/Key/ViewArticleContent/ArticleId/4140/ - Nguyen Dinh Tan, Hochiminh City Taxation Department, “Anti-transfer pricing: Should we withdraw the business licences of “always-at-a-loss” FDI enterprises”, Website of Tax Audit, 14 January 2012 http://kiemtoan.com.vn/news/phong-van/chong-chuyen-gia-nen-rut-phep-doanh-nghiepfdi-lo-lien-tuc-2643/ - Le Xuan Truong, The Academy of Finance, “Anti-transfer pricing in Vietnam: Keep on completing the legal framework”, The Online Finance Magazine, 20 May 2011 http://www.tapchitaichinh.vn/Qu%E1%BA%A3ntr%E1%BB%8Bn%E1%BB%99idung/ ViewArticleDetail/tabid/56/Key/ViewArticleContent/ArticleId/4114/ - Hochiminh Department of Taxation www.hcmtax.gov.vn/ - A case in ABB courses.csusm.edu/mgmt461go/ABB.doc - The case of Vietnam P&G http://www.eiu.com/index.asp? layout=VWArticleVW3&article_id=1824619582&country_id=1010000301&channel_id =180004018&category_id=280004028&refm=vwCat&page_title=Article 38 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com WORK DISTRBUTION AND PERSONAL RESPONSIBILITIES 1- Work distribution  Tran Vu Trung : Acknowledgement , Chapter ( including all I, II and 1,2 in III) and Chapter (including II-2)  Nguyen Duy Hai: Chapter (including all IV and 3, and in III)  Nguyen Anh Dung: Chapter (including all part 3, except II-2)  Ho Thi Hang: Chapter (including all I and in II)  Nguyen Thuy Linh: Chapter (including 1, in II)  Nguyen Phuong Ly Ly: Abstract, Introduction and Conclusion Other Personal Responsibilities  Content responsibility: Tran Vu Trung  Revision responsibility: Nguyen Duy Hai  Form and Slide-making responsibility: Nguyen Anh Dung, Nguyen Phuong Ly Ly  Consulting responsibilities: Ho Thi Hang, Nguyen Thuy Linh 39 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 40 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... situation of transfer pricing in Vietnam 20 II- Some typical cases about transfer price in Vietnam since economic reform 20 1- Transfer price in VNTRA 21 2- Transfer Price in Vietnam. .. establishment of a joint venture d- Political instability Shulman (1968) in ? ?Transfer pricing in the multinational firm” has added a new determinant influencing transfer pricing to some extent:... pricing and technology transfer are not two sides of a coin, they must be redefined clearly for avoiding transfer pricing in technology transfer Transfer pricing with a view to market domination: