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FOREIGN TRADE UNIVERSITY FACULTY OF INTERNATIONAL ECONOMICS MACROECONOMICS SUBJECT GROUP ASSIGNMENT TRANSFER PRICING IN MULTINATIONAL CORPORATIONS IN VIETNAM Instructor: Members: Hoang Xuan Binh, PhD Le Mai Anh- 1111150005 Faculty of International Economics Nguyen Thao My - 1117150024 Nguyen Nhu Ngoc - 1117150014 Nguyen Hoang Quy - 1113150022 Phuong Phuong Thao - 1112150129 Le Nguyen Khanh Trang - 1111150194 Le Thi Thu Trang - 1111150190 Nguyen Anh Viet - 1111150020 Nguyen Đinh Vinh- 1117150123 Hanoi, May 2013 h Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam TABLE OF CONTENT INTRODUCTION CONTENT I Overview of transfer pricing in multinational corporations (MNC) Concepts Signs of transfer pricing Motivations for transfer pricing: Scope of transfer pricing II Situation of transfer pricing in Vietnam 10 Legal environment in Vietnam 10 Typical types of transfer pricing in Vietnam 12 Impacts on Vietnamese economy 15 III Suggested solutions 18 Anti transfer pricing experience from other countries 18 Suggested solutions for the situation 20 CONCLUSION 23 REFERENCE 24 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam INTRODUCTION In recent years, along with the development of the globalization process, Foreign Direct Investment (FDI) in Vietnam has increased very sharply, contributing a lot to the development of Vietnam's economy, especially in the industry sector However, besides the positive results, this kind of investment has also brought equal complex issues The number of cross-border commercial transactions between associated companies is on the rise Due to the increasingly fierce competition, the problem of profit maximization for the corporation is always the main concern of foreign investors In addition to improving the performance of invested business, transferring pricing is considered one of the most effective methods that is often applied by the investors with the purpose of avoiding tax, which eventually increases total benefits of the firms The necessity of the topic While tasfe pie is a elatiel e pheoeo i Vieta’s tadig aea, eet transactions which have foreign elements appear to show increasingly more signs of this phenomenon Foreign companies have long been reported to use tortuous tricks to transfer pofits to thei othe opaies ithout haig to pa ta i Vieta Fo eaple, global beverage giant Coca-Cola has also been fingered for alleged transfer pricing fraud, a scandal that created a stir recently after the companies has operated in Viet Nam for about 10 years without ever reporting a profit Tasfe pie ot ol auses a aiet of daages to the host out’s goeet, partners as well as consumers due to tax losses, reduced profit of the investment contributor of the host country, but also has negative impacts on international trade The rules of free market and the fact that the law of supply and demand does not work in multinational corporations disturb the international circulation This leads to the situation of unfair competition This fat is alaig, espeiall he Vietaese goeet’s udget has ee suffering from a huge amount of tax losses due to transferring price of these companies It also causes more serious problems negatively affecting the macroeconomic policies, tax 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam policies, investment environment, the competiveness of the market, inequality between pate opaies… The purposes of the study on this topic This study aims at helping people to have a deep insight and thorough understanding about the concepts, the signs, methods, motivation as well as the negative impact of transferring price We also investigate the current situation of this issue in Vietnam and recommend some solutions, suggestions to relieve this situation from continuing, making equal chances as well as good competitive market, strict legal environment for both the local and foreign companies to develop in the future The scope of study Multinational companies/brand names have agencies operating in Vietnam The applicability of the topic Studying transfer price activities in MNC in Vietnam helps with the improvement of a clear and healthy investment environment in Vietnam It also supports the building of a more strict enterprise law, foreign investment law and some tax polices of the government Additionally, raising the awareness of the authorities about serious consequence of this problems, from that, having more strict constraints and appropriate punishment methods to prevent this situation from occurring is also one of the most important applications Finally, the management of these kinds of companies might apply some more special supervision systems, especially, taxes policies, foreign capital investment attraction policies should be more strict, systematical and synchronized The general structure of this study Our study contains main parts: I Overview of transfer pricing in multinational corporations (MNC) II Situation of transfer pricing in Vietnam III Suggested solutions 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam I Overview of transfer pricing in multinational corporations (MNC) Concepts a Multinational corporation - Definition: A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country It is a large corporation which both produces and sells goods or services in various countries Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management Very large multinationals have budgets that exceed those of many small countries - Categories: There are four categories of multinational corporations: A multinational, decentralized corporation with strong home country presence A global, centralized corporation that acquires cost advantage through centralized production wherever cheaper resources are available An international company that builds on the parent corporation's technology or R&D A transnational enterprise that combines the previous three approaches - Characteristics: Large size Multinational companies have huge resources in terms of capital, technology, people and information Multi-country operations Multinational companies operate in several countries They can have production, marketing and service type of operations They cover large geographical areas They have assets and activities in two or more countries Various objectives 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Multinational companies pursue various objectives like: + Access to new market opportunities to expand market size + Access to cheap raw materials to reduce costs and increase competitive capacity + Access to cheap source of labor to reduce costs of labor and energy Various environments Multinational companies operate in various environments The political, legal, economic, social, cultural and technological forces differ from country to country Centralized ownership and control The ownership and control of multinational company is centralized in the home country They provide share ownership to local people in host countries Multiple currencies Multinational companies deal in currencies of several countries The risk is high because of changing values of currencies in host countries High efficiency Multinational companies are highly efficient due to: - Mass production leading to economic of scale - Use of advanced technology to increase speed of production - Professional management and marketing skills to use resources effectively b Transfer pricing in MNCs A tasfe pie is the pie at hih oe opa us ad sells goods o seies o shares resources with a related affiliate in its supply chain Aggressive transfer prices may inflate profits in low-tax jurisdictions and depress profits in high-tax countries Thus, tasfe piig is the sste of las ad paties used outies to esue that goods, services and intellectual property transferred between related companies are appropriately priced, based on market conditions, such that profits are correctly reflected in each 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam jurisdiction In other words, transfer pricing is a profit allocation method used to attribute a corporation's net profit or loss before tax to tax jurisdictions Transfer pricing is generally considered to be the major international taxation issue face d byMNCs today It is an enormously important issue for many countries, developing and developed Whenever goods cross national borders within the channels of a multinational corporation (MNC), a transfer price must be calculated for tax purposes When corporate tax rates differ on the two sides of the border, the MNC has an incentive to set its transfer prices in a way that reduces its tax burden by reporting higher profits in the country where corporate profits are taxed more lightly The purpose of this activity is to manipulate prices between the headquarter and the subsidiaries so that profits are highest in the low tax country Signs of transfer pricing The most common sign of transfer pricing is that firms declare losses for many consecutive years while still expanding their investments in one country and conducting significant business transactions in other countries There firms may have intentional loss for years, then the nest or years with little profit, so it has accumulated losses In order to turn profits into losses or set up a low profit rate, FDI enterprises can not work alone, they usually coordinate with those in the same organizations or groups These enterprises arrange the price through coordinating trade Also through this transaction, the companies in the group can reduce the total tax liability on a global scale, the profit after tax is then increased Another common phenomenon of transfer pricing is that the enterprises under production process business declare a high price level of inputs, and find ways to increase other costs (advertising, promotion cost) in order to eliminate the profit Compared with other enterprises in the same industries, it can be easily seen that the cost of FDI enterprises is often irregularly higher; also, some companies take advantage of the host country's preference for the reduction in advertising, promotion costs to advertise for the parent company 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Using interest expense is also another measure of FDI businesses When the parent company transfer materials, components and supplies that the host country can not produce, the companies in the host country report no money pickup, the parent company accepts deferred payment which will be made after selling the products, then they will have to pa a iteest fo this peiod “o the opa’s pofit is iluded i iteest epese, which leads to zero profit The real profit, through interest payments, is moved to the parent company Motivations for transfer pricing: a External motivations: Evading tax: Differences in corporate income tax rates between countries create profitable opportunities for MNCs to engage in transfer pricing MNCs often artificially raise or lower transaction price such as the purchase price of raw materials, the selling price and exporting price of goods and hence transfer part of the profit from the countries with higher tax rates to the countries with lower tax rates so that they can minimize corporate income tax burden and maximize profits after tax Dodging risks: MNCs may face a number of risks in the course of operation, and they often use the transfer pricing to dodge risk + The first risk is the risk of exchange rate movements In recent years, the worldwide foreign exchange market is unstable, and currency par in various countries fluctuates very largely and frequently, which makes MNCs exposed to large foreign exchange risk MNCs usually take the opportunity to select the appropriate exchange rate to pay, and use the transfer pricing to enhance the effectiveness of this approach, so that the risk can be further reduced In addition, MNCs also wish to preserve and develop the initial capital investment in original currencies Based on the forecast of the exchange rate that the MNC can implement 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 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transfer pricing is political risks In the case of occurrence of political turmoil or economic policy changes in the host country which affect benefits of MNC subsidiaries, MNCs will implement transfer pricing in order to reduce risks and reserve business capital MNCs may transfer the material and equipment confiscated by the local government to subsidiaries or affiliates at low prices, or acquire goods of other subsidiaries at high prices By doing this, MNCs have transferred plenty of funds outside the host country and reduce the impact of political risks Moreover, when some governments in host countries implement the policies of market price control in order to limit and manage the operations of MNCs, MNCs could also use the practice of transfer pricing as a counter measure to avoid the price limit Opportunity cost: The opportunity cost is also a driving force behind the implementation of transfer pricing The MNC realizes that their profits may only be transferred to the parent company after the end of the fiscal year and the close inspection by the tax authorities, under the control of foreign exchange management agency Therefore, the investment opportunity may be missed Hence, MNCs will engage in transfer pricing procedure in order to recover quickly the initial investment and seize other investment opportunities Adjusting the flow of internal funds to gain competitive advantages: In order to improve the competitiveness of overseas subsidiaries, MNCs often provide extremely low transfer price in granting their subsidiaries raw materials, components or finished products and so on, so that their subsidiaries can have a price advantage, improve the business reputation, and increase the market competitiveness in the host country in order to beat some opponents and expand the international status of the corporation In 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam addition, in order to avoid excessive profits to the investors in the host countries, the acquisition of local shareholders, the demand of the government in the host country and even the risk of retaliatory behaviors, the MNC can also depress the profitability of their subsidiaries, then they can buy goods from the subsidiaries with lower price or sell goods to the subsidiaries with higher price b Internal motivations: Aside from the external engines mentioned above, transfer pricing is also motivated by the inside engine In the typical case, the MNC has internal motivations for setting a transfer price such as performance evaluation of subsidiary managers, better tracking of intrafirm flows, efficient resource allocation within the MNC group and so on In addition, when the business activities of the parent MNC or its subsidiary companies fall short of expectation, reasons for possible loss are mostly mistakes in business planning, mistakes in researching and introducing new products to the market, or overly high managing costs and advertising expenses In order to create a brighter financial picture for the company in front of shareholders and stakeholders, transfer prices help the MNC share losses among members, thereby reducing the amount of tax payable and creating misleading business situation picture that violates the corporation law Last but not least, transfer pricing is designed for and ideally suited to internal management and accountability of corporate profit centers and cost centers, thereby contributing to better overall management of corporate operations Transfer pricing can potentially distort this very useful activity, if the focus is solely on tax minimization, and does not consider the goal of better management and accountability Scope of transfer pricing Transfer pricing with the meaning of transferring value in internal relation must be osideed ithi the sphee of the assoiated sujets’ tasatio Atile of the OECD Model Tax Coetio o tasfe piig eoded To etepises osidered Associated Enterprises if one engages in the management, administration or capital otiutio to the othe eithe dietl o idietl o though iteediaies. Management, administration or capital contribution is the main factor that decides the impact, the harmony in interests of these entities so it is also the base to determine the 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam associated relationship The characteristics of these expressions are not principle Thus, associated enterprises can be formed in the same country or in many different countries Therefore, transfer pricing happen not only in the international transactions but also in domestic transactions In fact, the transfer pricing situation is more often concerned with international transactions due to the evident difference in tax policies between countries Meanwhile, because of the principle of national treatment, tax obligations from domestic transactions form less disparity Therefore, most countries now usually have only transfer pricing regulations for international transactions Accordingly, international transactions are defined as transactions between two or more associated enterprises involving a nonresident entity The main difference lies in the disparity of income tax rate of each country A transfer value through profit rates from an associated enterprise residing in countries with high tariffs to another in low-tax countries By contrast, an amount of the increasing cost of the purchase price will reduce the local income in countries with high tax rate In both case, the total after-tax income as the the entire associated group increases On another aspect, the domestic transactions can benefit from incentives and tax exemptions II Situation of transfer pricing in Vietnam Legal environment in Vietnam Transfer pricing is a mal-practice in business However, many multination corporations i Vieta hae take it ito patie oadas The easo fo all that is thee has’t ee any appropriate kind of solutions for that issue Fortunately, we are working on that thoroughly to shield Vietnam economy system The government has imposed some rules that share a lot of patterns with Organization for Economics Co-opeatio ad Deelopet’s OECD OECD’s egulatios ae oduted in many countries all over the world Though Vietnam is not a member of the organization, these egulatios ae osideed uiesal iteia i easuig ad otollig MNC’s practice of transfer pricing 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Vietnam has established an open economy since 1986, however, transfer pricing was only introduced in 2005 It started with 117/2005/TT-BTC at // It’s aout evaluating the market price in business transactions among partners Reflected through reality, this regulation has shown some flaws, most of which are related to transfer pricing database and applying supervision to real transactions practice Alongside with taxation law, and most importantly, tax supervision, management in recent years, the Ministry of Finance has imposed 66/2010/TT-BTC to guide people to evaluate market price in transactions After this regulations, we have gradually had suitable manner and intention to this serious issue Tax management has been taken into account and improved considerably in the practice of supervising and examining Transfer pricing through this is understood as a profit allocation ethod used to attiute a opoatio’s et pofit o loss efoe ta to ta juisditio, ith the aim to minimize the amount of tax that firm has to pay the government This Decree came to reality 45 das afte eig siged Its tagets ae podutio hais, tadig fis,… Thee ae oditios that fis hae to eet ith this egulatio: it’s a fi; it has transactions with relating parties; it also has the obligation to pay tax to Vietnam government Decree 66 shows that it applies to all practices as selling, buying, trading, borrowing, lending goods and services while having co-operation To define clearly about partnership and co-operation, Article 66 also mentions below types: Firstly, one party directly or indirectly involves in running, controlling, investing to another party Secondly, one party being directly or indirectly run, controlled, invested by another party Thirdly, all parties directly or indirectly involve in running, controlling, investing to other parties The podut’s pie of tasatios, hih is defied i this Deee, is ealuated ased o the aket’s pie The opae assoiated tasatios to idepedet tasatios, following out of methods, which are: comparig idepedet tasatios’ pie; tadig price; adding equity to retained earning; comparing profit or extracting profit 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Typical types of transfer pricing in Vietnam a Transfer pricing through increasing inputs price: Increasing the prices of inputs is the most common way that the MNCs use to transfer price In this case, two associated companies or corporations in different countries sign a contract that one party (the selling party) will provide the products that is also the inputs of the other party Hence, they negotiate with each other to raise the price of their transactions to a higher level than that in the market Using those expensive inputs, the buying party (usually a children company or a subsidiary in foreign country) produces outputs and by contrast, sells them in the market with a very cheap prices, sometimes even lower than the cost of production This action brings in effects for both sides: To the buying company, with expensive inputs and cheap outputs, their revenue will hardly be able to make up for the manufacturing cost, so the negative gross profit is easy to occur By making little profit or even a loss in business, the company will have to pay just a little amount or not have to pay any income tax in the host country of their company So, if the company cannot make a profit, why does the company still keep up their business? In the transactions mentioned above, by charging high prices, the revenue of the mother company (the selling party) will increase considerably, and their profit will definitely increase as a result Therefore, the whole corporation has made very large profit, and they will continue producing and selling outputs in the market The loss of the children company, as a matter of fact, has been made up by its mother company Their loss, in fact, is just the cover that the MNC put on to avoid paying taxes In other words, they still make profits but all of these have been captured by its mother company in domestic country b Raise the value of investment capital MNC often own some machines, facilities or equipment with modern technology Making use of this advantage, MNC pool the capital by these modern machines and euipet Beause Vietaese opoates hae’t had eough apait ad ualifiatio to evaluate or verify the price of these kinds of modern machines, equipment; therefore foreign corporates would utilize this deficit to set the price of these higher than the real value of them This high pricing strategy would raise the value of foreign investment capital 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Hence, this is the foundation for foreign partners to own the right of controlling as well as managing the companies Meanwhile, Vietnamese companies generally pool the capital by land usage value or natural resources due to lack of financial potential Thus, Vietnamese partners often have low value of investment capital High price setting of initial investment helps MNC transfer a large amount of money to the mother companies at the first stage of investment For example, a joint venture hotel between Saigon Tourism Company and VinaGroup ealuate the alue of ViaGoup’s iestet apital as U“D,, Hoee, according to the evaluation of an international price verification company, the value of ViaGoup’s iestet apital as ol U“D2,990,000 Therefore in this case, Vietnamese partner suffered a loss of USD1,350,000, equivalent to 45.2% The situation of raising the value of pooling assets cause the loss to all three sides: Vietnamese partner, Vietnamese government and Vietnamese consumers Firstly, Vietnamese companies have to suffer the loss due to the difference between the real value ad the epoted alue of foeig pates’ iestet apital Hee, total apital of Vietnamese companies become relatively smaller than that of foreign ones Secondly, Vietnamese government suffers tax loss Finally, Vietnamese consumers have to buy products with higher price than their real value By this activity, the proportion of foreign pate’s iestet apital to Vietaese pates’ oe eoes highe As a esult, there is likelihood that the corporates would be oriented toward their aims: prolonging loss situation to evade corporate tax At the same time, Vietnamese partners would also not have enough financial potential to continue running They have to resell their pooling capital In the end, a variety of joint venture companies steadily become 100% foreign investment companies Through the form of increasing the value of fixed assets contribution, foreign companies will increase depreciation expense, reduce taxable income and gradually annex all the corporate A survey by Ministry of Trade and Industry showed that over 40 enterprises under the control of this Ministry had set the price of their pooling fixed assets higher than actual value up to USD50billion Typically, beer production line of BGI joint venture company in Tien Giang has been priced at USD30.85million by BGI, however SGS company verified this price and it was only USD23.55million 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 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operating based on Law of Foreign Investment Its two partners are Food II Company in Ho Chi Minh city and Heineken International Behler in Holland Until 1994, the joint venture partner changed to Asia Pacific Breweries PTE Ltd in Singapore Total investment capital is USD49.4million and authorized capital is USD17million Vietnamese partner accounts for 40% and Singapore partner accounts for 60% Production and business industry of this joint venture is beer for consumption domestically and abroad When conducting business operation, the corporate was continuously in the situation of loss over years The main reason is that Vietnamese company had to pay high fee for technology license and this fee even increased more and more through years Given the frequent loss of the company, Vietnamese partner had to suffer seriously loss whereas foreign partner remained unharmed because they still fully received copyright fee and this fee tend to increase more Other example, Mercedes-Benz (Germany) claimed copyright fee for technology transference at USD42million However, after negotiating with Vietnamese partner, this fee reduced to just USD9.6million, down by 77% Another example also in car production industry, Mitsubishi Motor Corporation (Japan) in joint venture Star carmaker claimed USD61million for its technology Nevertheless, after negotiating, this number decreased to only USD4.4million, i.e down nearly by 15 times d Transfer priceto avoid excise tax Other types of transfer pricing that mentioned above are transfer pricing through the tax differences between countries But in this case, there havemany companies that transfer the price to avoid Vietnamese excise tax Thee is a tpial eaple aout this ase, hih is the situatio of Foste’s Vieta i Foste’s Vieta is a FDI opoatio i eing sector At that time, the price a keg 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37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam of Foster beer was VND,/keg With the eise ta ate of %, the sot that Foste’s Vietnam had to pay was [ ] per keg Thus, with the price of VND 240,000; Foster had obligation to pay the government VND102,876.25 per keg Having to face a large amount of tax, Foster contrived to avoid the ta estalishig the Foste’s Vieta Co., Ltd This liited opa had the task of osuig the poduts fo Foste’s Vietnam The pie of a keg that Foste’s fato sold to the Foste’s Vieta Ltd as ol VND,; hih eas the aout of eise ta they had to pay reduced to only [ ] per keg Along with the 5% Value Added Tax, the total amount of money that the investor had to pa as . VND pe keg Copaed to the ta efoe estalishig Foste’s Vieta Ltd, the investor successfully avoided 31.6% of excise tax In this case, the authoities a suspet Foste’s Vieta fo the tasfe piig activity, but at that moment, the tax law of Vietnam still had many gap so the company can not be penalized for tax evasion In addition, many brewing companies are now learning the Foster case, finding for them a specific distribution channel to sell the products with low price If they success, the tax agency will suffer a large amount of tax loss Impacts on Vietnamese economy a To the Multinational Corporations Positive impacts Transfer pricing activities from the perspective of MNCs will be considered in two different ways, which help MNC easily conduct their business plans and objectives dealing with profits and taxes Taking advantages of their financial potentials and incentives (such as taxes, quotas, investment fields, etc.) that MNCs receive in order to attract investment, MNCs are 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam able to perform transfer pricing activities to minimize their responsibility for taxation in the host countries Transfer pricing makes it easier for MNCs to transfer their profits to other countries and to conduct their business plans faster without missing any opportunities This method is often used by MNCs in countries with tight financial policy Transfer pricing also helps MNCs occupy the domestic market and take over smaller domestic companies using their ample financial resources When a MNC starts to annex the market, the costs will be shared among the mother company and its subsidiaries Therefore, in terms of financial situation, MNCs will not be under much pressure when it comes to losses MNCs will establish a taxation plan in an overall scale so that they gain the best benefits Then based on the gap of taxes among different countries, they will conduct internal transactions or transfer pricing if necessary to fulfill their taxation objectives By selling outdated property and equipment at a high price, MNCs may upgrade their technology at a lower price, and on the other hand collect the payback from Vietnam With back and forth purchases, MNCs can avoid the risks during product research and development as these activities are usually costly and have low success rates Furthermore, MNCs will be able to reduce other risks of exchange rates, product consuming market, the stability of material suppliers, the quality of materials and so on Negative impacts Besides the benefits that MNCs gain from transfer pricing, these companies will also have to bear serious penalties if being detected by tax agencies They will have to pay a large amount of money, their business licenses may be confiscated and all of their business activities in that country may be terminated Moreover, their reputation in the world market will be affected severely and they will become the focus of attention of tax agencies in other countries that MNCs are based in b To other companies in the same sector Positive impacts 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam They can gain experiences from other companies in the same sector to avoid repeating mistakes Other MNCs i the sae seto oside thei opetitos’ transfer pricing activities as lessons to help them apply successfully in a whole new market Furthermore, they will protect the influence of not only MNCs in the same sectors but also all MNCs participating in the market share in the host country Negative impacts By performing transfer pricing activities in order to occupy the market share when first entering the market, MNCs will overuse advertisement and promotion that leads to market manipulation Other domestic companies not have enough financial capacity to compete, therefore, they will gradually go bankrupt or have to move to another business sector MNCs will become monopoly and control the domestic market In addition, they will suffer injustice when conducting legal business and be inferior to transfer pricing enterprises in terms of images, capital accumulation, etc c To the consumers Positive impacts It is beneficial for consumers that the product remains the same due to the tax evasion Besides, they can enjoy the convenience of products in process of improvement technique Furthermore, they will have benefit from the social programs established by those MNCs Negative impacts Consumers will loss of confidence in those companies (moral hazard problems) d To the government Positive impacts It seems like there is only negative impact of transfer pricing to the government, but in face there still exists some positive one such as: 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam Benefit from the social programs of the company, thereby improve terms living standards of many people Creating more jobs for workers Create a financial bond network between countries Create condition to integrate into the world financial market Attract more foreign investment Negative impacts The very first one should be mentioned here is that tax evasion reduces the government budget, indirectly affects other field of the society such as education, health services Secondly, since the government limits the number multinational company in VN, the multinational company should have responsibility to the government Hence, when those MNCs perform transfer pricing activities, it circumvent the policies and plans of the state Consequently, the government will have difficulties in planning macroeconomic policy to promote domestic industry Furthermore, through transfer pricing activities, MNCs overvalue their inputs and therefore reduce the time of capital recovery As the result, the capital tend to flow out of the host country, which may leads to a misleading reflection of business activities in Vietnam If those activities o’t e stopped i tie, i log te, the host out - in this case is Vietnam will depend heavily on the foreign country in both economic and politic III Suggested solutions Anti transfer pricing experience from other countries a China Before 2008, China enforced two tax systems at the same time, one for domestic enterprises and the other for foreign enterprises A survey conducted in 2005 pointed out that the two tax systems created a 10% gap of taxes between domestic enterprises and foreign ones, which was favored by foreign investors However, on March 16th 2007, the Congress issued a new Enterprise Income Tax Law that applies the same level of tax – 25% – 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam to both kinds of enterprises The purpose of Enterprise Income Tax Law is to make transfer prices of China consistent with regulations applied in other developing economies all over the world Chia’s egulatios o ati tasfe piig ae ased o the guidae of OECD, hoee, they own several differences: The obligations to pay taxes in China are not consolidated If an economic group has subsidiaries in different provinces in China, they will be subject to a tax inspection The laws in China are against transfer pricing multiple times When a tax agency of one province accepts a tax issue, it does not mean another tax agency of another province will also find it acceptable This differs from the system in the USA: any tax issues accepted by one state are also considered acceptable in other states If a company is suspected to perform transfer pricing activities, then adjustments of transfer prices made by Chinese tax agency will be applied to all of the related taxes, such as Enterprise Income Tax, Value Added Tax, Tariffs, etc Meanwhile, tax agencies in the USA only request to recalculate Enterprise Income Tax In the US, adjustments of taxes are based on the mass media and common knowledge Yet Chinese tax agencies build their database according to confidential comparisons China also enforces specific punishments for transfer pricing activities According to Article 60-73 of Tax Administration Law, acts of violation will be fined, and such serious violations as tax evasion or tax fraud may be examined for penal liability Furthermore, Enterprise Income Tax Law clearly states that, from January 1st 2008, taxes which are not fully paid and are related to transactions between associated parties will be subject to an additional charge This amount of charge is calculated by adding the basic interest rate of the People’s Bak of Chia i the same period to a 5% charge However, if the company is able to provide relevant information and documentation, the 5% charge may be reduced or eliminated completely In the year 2009, Chinese Tax Agency especially focused on entities and companies which perform transactions with tax havens or the regions having low taxation Besides, tax agencies in the cities of Beijing, Shanghai or coastal provinces were really active in auditting transfer prices, strictly controlling transactions relating to copyright and labor service fees 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam At present, tax agencies are enhancing the use of modern tools like information technology and database to fight against tax evasion They also organize training courses, both short-term and long-term, for experts and employ graduate students majoring in relevent subjects to improve the anti tax evasion forces b Other ASEAN countries: Malaysia and Indonesia apply similar methods accepted by OECD to determine prices However, the two countries implement different levels of penalties to any entities or companies performing transfer pricing activities In Malaysia, the fine ranges between 100 to 300% of the tax fraud, while in Indonesia the penalty is to 48% of the tax fraud per month Thailand, in 2004, established a database of any companies at high risks They were the ones that reported losses more than years in a row, had negative total profit, did not pay taxes over a period or had lower profitability than other competitors The Tax Agency of Thailand concentrated on accurate evidence on prices, update douetatio eplaiig the opa’s pefoae ith eeues, opeatio results and international transactions between the company and associated parties Suggested solutions for the situation a Government should apply these methods in order to determine the reasonable price of goods and services of the corporations According to Circular 66/2010/TT-BTC, there are basic methods to determine the transfer price: "Comparison with the independent transaction" method: The firm is based on the unit price of product applied in the case of independent transaction having the same conditions with related-party transaction "Resale price" method: This method is applied in the case that there is no equivalent transactions or there is more production stages such as: processing, assembling , which increases the value of 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 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to determine the purchase price of product which is used to sell to the related party "Comparison with profit" method: The firm has to be based on the profitability of the product in the independent transaction chosen This method helps to calculate the net income before tax and the corporation income tax "Profit exclusion" method: The firm applies this method when there are many related parties together carrying out the same related-party transaction Excluding the profit of each related party is based on the way they divide the profit in the equivalent independent transactions b Government should perfect the Legal Corridor about Anti Transfer Pricing The Government should supplement Taxation Administration Act with more articles of law about Anti Transfer Pricing, build up synchronized the legal legislation system which is equivalent to the International law Besides, the Government should make sure that it has to catch up with the development of the current economy, facilitate the economic growth and effectively prevent the negative activities to the economy In the long run, it is very essential that we should issue the Anti Transfer Pricing Act and it will be the crucial legal basis for Anti Transfer Pricing activities Not only is it important for corporation income tax administration, but it is also necessary for Value-added tax, Excise tax, Royalty administration 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam c Tax incentives limitation The differences in corporation income tax among different countries and in the same country due to tax incentives application and tax exemption or reduction have led to Transfer Pricing of some corporations Of course, for some certain objectives, we need to apply tax incentives, but we also need to consider other methods such as: subsidies, support for infrastructure development to regulate the economic problems d Taxation Department should improve the investigation capacity of Taxation officials In the long run, when the Taxation Branch officials are trained and they are qualified enough to meet the requirement of an investigator, we should give the right to investigate for officials in Taxation Branch of provinces This solution not only helps Taxation agencies to carry out well the Anti Transfer Pricing activities, but it also make a good condition for tax administration in general e Improve the corporation among Taxation Departments There shouldimprove the cooperation between the related agencies and the Taxation Department, especially the coordination among overseas Foreign Affairs Departments of Vietnam about Anti Transfer Pricing f It is necessary to improve the data and information system of taxpayers General Taxation Department should expand the scope of information collection through enhancing the operating activities of the deputy of information processing and management Moreover, it also has to accelerate the building-up procedure of electronic Government It will help to guarantee the connection and information exchange between General Taxation Department and other Departments such as: Public Security, Procuracy etc 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.99 h 37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.C.33.44.55.54.78.655.43.22.2.4.55.2237.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.55.77.77.99.44.45.67.22.55.77.C.37.99.44.45.67.22.66 Foreign Trade University Macroeconomics Assignment Group No Transfer pricing in MNCs in Vietnam CONCLUSION Since Vietnam participated in WTO, FDI capital invested into Vietnam market tends to increase more and more dramatically in term of both quantity and scale It can not be deied that FDI hae patl ought aout soe pospeit fo Vieta’s eoo, stimulated investment and growth rate Attracting FDI capital is a judicious policy of Vietnamese government because it has been having some clearly positive impact on Vieta’s eoo suh as suppleetig fo doesti apital, acquiring modern sciencetechnology as well as management experience from developed countries, participating in global producing network, raising more employment for workers, bringing about a large aout of iflo fo host outies’ udget, et Hoee, esides suh positie effets, FDI capital also raises some negative phenomenon or unfair problems in business activities, largely affecting macroeconomics One of these challenges is transferring price in MNC As the study have analyzed, transfer price is a sophisticated and delicate finance activity that MNC often apply with the aim of evading tax obligations Transferring price has adverse impacts on economic growth: shifting investment structure, the government suffering tax loss, making unequal competitiveness between foreign and domestic partners, investment environment becoming unhealthy, losing the economic control and management rights More seriously, transferring price can lead to deviation from national economic growth orientation Nevertheless, transferring price is a sensitive and unavoidable phenomenon when receiving foreign investment Many countries all over the world, especially developing ones, have experienced and found out the way to overcome In order to make the supervision of transferring price become more effective, it is essential to have a strict coordination between the government agencies, departments, especially tax agency and the enterprise as well as the consumers It is of paramount importance to make a legal framework for anti transferring price, improving competitive environment for both domestic and foreign enterprises, strengthening supervision and verification of business activities as well as financial statements, tax obligation of FDI enterprises As so, business environment can become more healthy, highly competitive, making motivation for sustainable economic growth in long-term 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