The impact of transfer pricing on tax avoidance in viet nam

LIST OF ABBREVIATIONS TP Transfer Pricing OECD The Organization for Economic Cooperation and Development CUP Comparable Uncontrolled Price method RPM Resale Price method CPM Cost Plus me

Rationale

Globalization has reshaped the economic landscape, increasing interdependence and interconnectedness among nations and businesses This phenomenon promotes the elimination or reduction of trade barriers, such as tariffs and quotas, thereby facilitating the free flow of goods and services across international borders The liberalization of trade and investment policies enables many companies to expand their operations and tap into new markets However, alongside the benefits of globalization, there has been a growing concern over the emergence of tax avoidance practices facilitated by this global integration Multinational corporations, in particular, have leveraged the opportunities presented by global markets to establish subsidiaries, affiliate joint ventures, and other entities in jurisdictions with favorable tax regimes, commonly known as tax havens Multinational corporations can find ways to minimize their tax obligations thanks to the wide disparities in tax rates between countries; consequently, many countries risk losing revenue due to the transfer of profits to other countries (Arifin, 2014)

Based on the Organisation for Economic Co-operation and Development (OECD) report in 2022, more than sixty percent of transactions worldwide are carried out within multinational enterprises and by affiliated parties The prices of these transactions are always a subject of controversy because (i) intra-group transactions often occur between related entities within the same corporate structure, which may not operate under typical market conditions and transactions; (ii) the lack of transparency surrounding these transactions makes it difficult for external parties, including regulatory authorities and stakeholders, to assess their fairness and legitimacy; (iii) these transactions are considered as a way to shift profits from high- tax countries to low-tax countries, thereby reducing their overall tax burden OECD also estimates that countries lose 4–10% of corporate income tax revenue annually because of profit shifting

Since the Doi Moi was launched in 1986, Viet Nam has witnessed a rapid increase in inflows of foreign direct investment (FDI) which significantly contributes to Viet Nam’s economic development, creates jobs, and substantially improves the living standards of Vietnamese citizens However, the efficiency of FDI capital is still in question According to the report of the State Audit Office of Viet Nam, FDI companies reported losses quite commonly, accounting for 50% of the total number of FDI companies operating in Viet Nam while many other domestic companies in the same sector were profitable Despite suffering continuous losses, these FDI companies still invested significantly in expanding their production capabilities and business operations Such unusual activities could be indicative of tax evasion or tax avoidance through transfer pricing activities Many large multinational companies caught the transfer pricing-related attention of the Vietnamese tax authorities such as PepsiCo Viet Nam, Nestlé, and Toshiba Asia in the last few years One typical example that went viral in late 2019 was the Ho Chi Minh City Tax Department named Coca-Cola Beverages Viet Nam among businesses it suspects of transfer pricing fraud to evade tax As a consequence of investigations, Coca-Cola Viet Nam was obligated to remit almost US$35 million due to discrepancies or irregularities in its transfer pricing arrangements Therefore, it is extremely necessary to thoroughly examine and assess the influence of transfer pricing on the tax avoidance behavior of companies operating in Viet Nam Due to these above considerations, the author chooses the research topic: “The impact of Transfer Pricing on Tax Avoidance in

Research objectives

Overall objectives

The general objective of the study is to evaluate the influence of transfer pricing on tax avoidance behavior among publicly listed industrial enterprises on the Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) Based on the research's result, the research presents implications concerning the enhancement

Research assignment

Consolidating common issues regarding transfer pricing and tax avoidance in Viet Nam

Using a quantitative model to assess the impact of transfer pricing behavior on tax avoidance among enterprises operating in Viet Nam

Additionally, the study proposes policy recommendations aimed at increasing tax revenue while ensuring the retention of major investors and maintaining the competitiveness and attractiveness of the investment environment.

Research question

Question 1: How to assess the impact of tax avoidance behavior through transfer pricing?

Question 2: How does foreign ownership influence the transfer pricing behavior of enterprises in Viet Nam?

Question 3: What policy recommendations and suggestions are proposed to increase tax revenue, reduce tax evasion, and avoid tax avoidance behaviors of enterprises operating in Viet Nam?

Object and range of research

Research Subject: The study focuses on the transfer pricing and tax avoidance behaviors of enterprises in Viet Nam

Spatial Scope of Research: The research concentrates on analyzing and evaluating the impact of transfer pricing behavior on tax avoidance

Temporal Scope of Research: The study covers the period from 2020 to 2023.

Research method

Method

The research problem addressed in this study is approached based on the theories of transfer pricing behavior and tax avoidance behavior This synthesis draws upon international empirical research and practical insights from Viet Nam, aiming to provide recommendations for regulatory agencies The research employs quantitative analysis methods, specifically utilizing descriptive statistics and quantitative models through three steps:

Step 1: The research employs the regression model approach, specifically utilizing panel regression with three fundamental quantitative tools to select the most appropriate model for the research topic among Pooled OLS, FEM, REM

Step 2: Model deficiencies are examined, including (i) testing for multicollinearity using the Variance Inflation Factor (VIF), (ii) evaluating heteroscedasticity, and (iii) assessing autocorrelation through the LM-Breusch Pagan test or Modified Wald test

Step 3: In case of model deficiencies, corrective measures are implemented, including (i) for multicollinearity, removing variables that may cause this phenomenon, and (ii) for heteroscedasticity and autocorrelation, applying robust adjustments to correct standard errors

To handle the collected information and data, the study utilizes the following primary research methods:

(i) Reviewing, evaluating, and collecting existing literature and information: (+) Reviewing relevant documents and policies; (+) Verifying numerical information

(ii) Collecting secondary data and information.

Research data

The research utilizes data collected on indicators related to transfer pricing and tax avoidance, such as net income, scale, total assets, etc., for the period from 2020 to 2023 (data collected annually)

Sources of data supply and collection data of industrial companies listed on the stock exchange in Viet Nam from Fiinpro.

Research structure

Excluding the Table of Contents, List of Abbreviations, List of Tables, Introduction, and References, the research paper is divided into 5 specific chapters as follows:

LITERATURE REVIEW

Literature review about transfer pricing behaviors

Over the years, transfer pricing has been a longstanding concern for policymakers, revenue authorities, and scholars, with early works (Bhat, 2009; Cianca, 2001; McNair et al., 2010; Sikka & Willmott, 2010) and recent studies (Barrogard et al., 2018; Cooper et al., 2017; Kabala & n.d.ulo, 2018; Oguttu, 2016,

The growing rate of globalization with the benefits of foreign direct investment has necessitated cross-border and international trade among business corporations (Abdallah and Maghradi, 2009; Cui & Chang, 2010) However, when MNCs are deciding whether to invest at home or abroad in order to embrace such benefits, the level of tariffs, tax laws, and regulations are taken into consideration in order to achieve the goal of global tax minimization and profit maximization by embracing the benefits of low tax rate as well as tax-free policies of the host country ( Bartelsman & Beetsma, 2003; Borkowski, 2010; Olibe & Rezaee, 2011; Muhammadi & Ahmed, 2016)

To achieve global profit maximization and tax minimization objectives, MNCs have resorted to several tax avoidance mechanisms as a means for shifting taxable income from high tax jurisdiction to low tax jurisdiction to reduce their corporate tax liabilities These mechanisms include; transfer pricing, tine capitalization, tax haven utilization, financing structure of affiliates (debt financing), contract manufacturing, and the strategic location of asset and overhead cost (Grubert

& Mutti, 1991; Choi & Day, 1998; Bartelsman & Beetsma, 2003; Dharmapala, 2008; Gravelle, 2009; Pendse, 2012; Jansky et al.,2013; Rossing & Rohde, 2014) Notwithstanding, it has been identified in the extant literature that out of the numerous avoidance practices, transfer pricing is the main mechanism that multinational firms use for their profit-shifting practices which results in tax avoidance (Grubert & Mutti, 1991; Choi & Day, 1998; Dharmapala, 2008; Dyreng

& Lindsey, 2009; Slemrod & Wilson, 2009; Taylor & Richardson, 2012; Cristea & Nguyen, 2013; Jansky et al., 2013; Brock & Pogge, 2014; Muhammadi & Ahmed,

In line with the identification of TP as the main international tax avoidance mechanism, the literature has examined the role of TP and has stated that TP is used for resource allocation and tax avoidance Sikka & Willmott (2010), is used to achieve higher divisional profit if managerial compensation is based on such profit and also used to shift income Borkowski (2010), is a financial management mechanism that allows MNCs to move funds internationally Rossing (2013) and Chan et al (2015), is used to; obtain goal congruence, assist in evaluating subsidiaries performance, to maximize profit and to minimize taxes Clausing (2009) and Chang & Lin (2010), is a means by which the actions or parts of the organization are integrated and differentiated and to assess their individual performance Cools et al (2008) and Rossing & Rohde (2014)

The literature has also discussed in detail some factors that affect the choice of a particular transfer pricing method These factors influence managers to choose a particular TP method at a particular point in time as against the others Numerous factors are; the enterprise's overall operating profit, the host country’s subsidiary’s interest and the host country’s demand for maintaining appropriate cash flows (Tang,

2016), demographic and behavioral variables Borkowski (2010), tax regulation Rossing & Rohde (2014) and differences in transfer pricing regulation of the respective countries Borkowski (1997) However, the literature has grouped these factors into two main categories namely external and internal factors

Viet Nam Transfer Pricing Regulations 2020 (Decree 132/2020/ND-CP) and the Organization for Economic Cooperation and Development (OECD) have indicated that for the purpose of tax consequences, related party transactions should be based on the arm’s length principle The arm’s length principle states that transactions between related parties should be carried out as if those parties are unrelated In line with the arm’s length principle, the regulation requires MNCs to evaluate their intra-firm transaction using the arm’s length principle in line with the following transfer pricing methods; the comparable uncontrolled price methods (CUPM), the resale price method (RPM), cost plus method (CPM), transactional net margin (TNM) method and profit split method (PSM).

Literature review about the impact of transfer pricing on tax avoidance

Transfer Pricing, the mechanism by which corporations value intercompany transactions across borders, has garnered significant attention from researchers, backing, and tax authorities With the rise of globalization and the proliferation of multinational enterprises, transfer pricing practices have become increasingly complex and contentious Dischinger and Riedel (2011) investigate how corporate taxes influence the location of intangible assets within multinational firms Using the database available, which contains detailed information on the firm structure and accounting of 1.6 million national and multinational corporations in 38 European countries from 1993 to 2006, the study finds that firms strategically locate intangible assets in low-tax jurisdictions through transfer pricing practices, thereby reducing their tax liabilities This research highlights the importance of transfer pricing in facilitating tax avoidance strategies related to intangible assets

Amidu et al (2019) provide valuable empirical evidence of tax-motivated transfer pricing, highlighting how firms utilize interfirm trade data to manipulate prices and shift profits to low-tax jurisdictions, thereby avoiding taxes Using annual reports to examine the abuses of transfer pricing techniques and earnings management practices from 2008 to 2015, the study exploits the panel data techniques to provide insight on the effects of transfer pricing aggressiveness and earnings management practices on tax avoidance among Ghanaian multinational firms This finding underscores the crucial role of transfer pricing in facilitating tax avoidance strategies among multinational corporations By exploiting the flexibility of transfer pricing mechanisms, firms can strategically allocate profits to jurisdictions with favorable tax regimes, ultimately reducing their overall tax liabilities Amidu et al's research contributes to the understanding of how transfer pricing practices directly influence tax avoidance behaviors, shedding light on the complexities of multinational tax planning strategies

Sudaryono and Murwaningsari (2023) used a variant of regression analysis and data of manufacturing firms listed on the IDX of Indonesia's stock market between 2018 and 2020 The model highlights how transfer pricing allows firms to allocate profits to low-tax jurisdictions, thereby reducing their overall tax burden By incorporating multiple countries and tax jurisdictions, this theoretical framework provides insights into the global dynamics of transfer pricing and tax avoidance

However, Irawan and Suhendra ‘s research in 2020 used a sample of 63 manufacturing companies listed on the IDX with a research period of 2014-2017 The results show that transfer pricing has a significant negative effect on tax avoidance

It means companies do not use transfer pricing activities as a medium of tax avoidance

Moreover, foreign ownership in the company often contributes to intricate transfer pricing strategies aimed at optimizing tax outcomes Clausing (2016) provides an in-depth analysis of profit-shifting behaviors among multinational corporations (MNCs) and their implications for corporate tax revenues By examining data from the Bureau of Economic Analysis surveys of U.S multinational corporations covering the period 1983 to 2012, the research underscores how foreign- owned subsidiaries strategically use transfer pricing to shift profits to low-tax jurisdictions, resulting in significant revenue losses for host countries

Egger et al (2012) examine how foreign ownership structures influence transfer pricing strategies within MNCs, shedding light on the complex dynamics of corporate tax planning and internal financing decisions By using the data set available comprising 45,608 affiliates of German MNEs over the period 1996 to 2007 and empirical analysis, the study reveals how transfer pricing strategies are intertwined with corporate financing choices, shedding light on the complexities of tax planning in multinational settings This research underscores the complexities inherent in tax planning within multinational settings and emphasizes the need for comprehensive regulatory frameworks to address transfer pricing challenges effectively

About domestic research, in 2013 Nguyen et al's study focused on transfer pricing practices in Viet Nam, offering insights into the challenges faced by tax authorities in combating profit shifting by foreign-owned enterprises Through qualitative analysis and case studies, the research identifies common transfer pricing problems in Viet Nam and proposes policy solutions to enhance tax compliance and transparency Additionally, Phan (2017) delves into the specific issues surrounding transfer pricing in Viet Nam, highlighting the need for targeted policy interventions to address tax evasion and profit-shifting concerns By examining the regulatory framework and enforcement mechanisms, the study offers policy recommendations aimed at strengthening Viet Nam's transfer pricing regulations and promoting fair taxation practices Other domestic research by Nguyen and Nguyen (2020) investigated transfer pricing practices and tax avoidance in Viet Nam using empirical evidence Findings suggest that transfer pricing manipulation is prevalent among multinational corporations operating in Viet Nam, leading to substantial revenue loss for the government The study underscores the importance of regulatory measures to combat transfer pricing abuse and tax avoidance in the Vietnamese context.

Research gap

Up to now, in Viet Nam, there has not been any specific report or domestic research that clearly demonstrates the impact of transfer pricing on tax avoidance practices among businesses in Viet Nam Previous studies have only provided a general overview of transfer pricing behavior and tax avoidance tendencies of multinational enterprises Therefore, based on preliminary content from previous research articles, this research contributes to two new aspects of the topic:

Firstly, the focus of this research is to conduct a comprehensive evaluation of the effects of transfer pricing behavior from two perspectives: (i) the impact of transfer pricing on tax avoidance behavior and (ii) after identifying the transfer pricing behavior of enterprises in Viet Nam, this study will assess the influence of foreign ownership on tax avoidance through transfer pricing

Secondly, this research holds particular significance in the initial phase of Viet

Nam's adoption of the Global Minimum Tax, which is poised to augment tax revenue, mitigate instances of tax avoidance, and curb transfer pricing practices among companies operating in Viet Nam

Chapter 1 provides a thorough review of existing literature in three key areas Firstly, the research synthesizes existing research on transfer pricing practices, examining intra-firm and inter-firm transactions, as well as strategies employed by multinational corporations Motivations driving transfer pricing practices to achieve global profit maximization and tax minimization objectives are thoroughly explored to provide a nuanced understanding of the complexities inherent in these behaviors Secondly, Secondly, the research examines how transfer pricing impacts tax avoidance strategies Through an analysis of empirical studies and case analyses, it investigates how transfer pricing practices contribute to reducing tax liabilities, manipulating taxable income, and exploiting regulatory gaps to minimize tax obligations

Lastly, the research identifies research gaps, emphasizing the need for further empirical studies, particularly in emerging markets like Viet Nam, and the evaluation of regulatory measures in mitigating transfer pricing abuse Addressing these gaps will enhance our understanding of transfer pricing's role in tax policy and corporate governance.

THEORETICAL FRAMEWORK

Tax avoidance

Corporate tax is a direct tax imposed on the income of businesses from their commercial activities after deducting reasonable expenses and allowable deductions It’s a direct tax that tax authorities apply to the profits or income derived from the business activities of entities, ensuring a fair and reasonable contribution from businesses to the national budget In Viet Nam, the corporate income tax originates from the profit tax, a portion of profits set aside for taxation The first corporate income tax law in Viet Nam was issued in 1997, replacing the Income Tax Law Vietnamese law does not explicitly define the corporate income tax but outlines its components, such as the taxpayer, taxable income, tax rates, etc Today, the regulation system for corporate income tax in Viet Nam is specified in a system of laws, decrees, circulars, and documents concerning corporate income tax

Corporate tax avoidance is broadly defined as activities, behaviors, or transactions conducted within the legal framework but altering the intent of the law it intends to comply with to reduce tax obligations More specifically, corporate tax avoidance is any action facilitated by loopholes in tax regulations to reduce the tax burden on taxable entities Tax avoidance is sometimes used interchangeably with tax evasion, but in reality, they are different concepts There have been no consensus measures on tax avoidance (Frank et al., 2009, Dyreng et al., 2010) Tax avoidance can be achieved through mechanisms known as tax evasion, a method that taxpayers can use to reduce their tax liability Tax avoidance activities can range from investments that provide tax incentives to activities that reduce taxable income such as transfer pricing, company-owned life insurance policies, installment sales contingent, lease transactions, cross-border dividend capture strategies, disputed liability acceleration strategies, and offshore intellectual property havens (Graham & Tucker, 2006; Wilson, 2009a) Hanlon and Heitzman (2010) argue that tax avoidance is a general term that refers to tax strategies that companies implement for the purpose of reducing taxes It can fall anywhere along a continuum, from certain tax positions (fully legal) to uncertain tax positions (legal, gray zone, or illegal), depending on the motive of tax avoidance activities

2.1.1.1 Traditional concept and agency theory

Traditional theory suggests that tax avoidance activities reduce tax liability and increase the shareholders’ value (Boussaidi & Hamed-Sidhom, 2020; Nugroho

& Agustia, 2017) On the other hand, tax planning is considered the managers’ follow-up action, making tax reductions by not violating the taxation provisions (Putra et al., 2018) To avoid detection from taxation authorities, managers create sophisticated transactions for tax avoidance purposes Managers use these transactions to hide their tax avoidance practices from the taxation authorities, but sometimes also for hiding from investors

Tax avoidance behavior is considered a sign of irresponsible behavior toward society (Hoi, Wu, & Zhang, 2013; Chircop, Fabrizi, Ipino, & Parbonetti, 2018) Slemrod (2004) explained that firms with high corporate social responsibility (CSR) scores are more cautious about tax avoidance practices These firms avoid tax- aggressive decisions because the detection of such behavior offsets the positive effects of CSR practices (Lanis & Richardson, 2015) and also causes reputational damages to the firms (Ortas & Gallego-Alvarez, 2020) In contrast, Landry, Deslandes, and Fortin (2013) and Mahon (2002) stated that corporate tax avoidance behavior leads to more tax administration penalties and reputational costs to the firm CSR disclosure is considered a risk management function by the firms and is preferred to strengthen investors’ beliefs and community concern toward the firm performance (Hanlon & Slemrod, 2009) More tax-avoiding firms disclose high CSR practices to hide such practices (Abdelfattah & Aboud, 2020; Gras-Gil, Palacios Manzano, & Hernandez Fernandez, 2016)

Like other taxpayers, it is also the right of the company to minimize its tax obligations but within the boundaries of the law (Hasseldine & Morris, 2013; Whait, Christ, Ortas, & Burritt, 2018) Managers do not consider tax avoidance as an unacceptable and enormous activity Instead, it is a choice-based decision adopted for higher profits, status, and high remuneration expectations (Sikka, 2010) Tax avoidance decisions, on the other hand, have been subjected to a slew of criticisms Transfer Pricing schemes have been used by some big firms, like Apple, Starbucks, and Google, to evade taxes (Barford & Holt, 2013) Tax avoidance activities are considered inconsistent with societal expectations and create legitimacy risks for organizations (Christensen & Murphy, 2004)

2.1.2 Tax evasion and tax avoidance

Tax evasion and tax avoidance are two concepts that are often used interchangeably Nevertheless, they have a different meaning This difference has a huge consequence: where tax avoidance will lead to paying fewer taxes, tax evasion could result in paying fines and possible imprisonment In the event of tax evasion, it is no longer feasible to speak of legal behavior It is considered as an illegal activity in which a person or entity intentionally avoids paying taxes This often involves illegal practices such as making false statements, presenting personal expenses as business expenses, etc (Roggeman, 2019)

The European Union (2018) stated that “every single day around a fifth of all public money in Europe is lost to tax fraud and evasion" (p.78) The fight against tax fraud and tax evasion has become more and more challenging In this context, it is increasingly important to exchange information between the various tax authorities The collecting of taxes and the fight against tax evasion are the responsibility of the national authorities However, nowadays a lot of tax evasion happens across borders Interventions at an international level are needed to address such problems

In the continuum of tax planning strategies provided by Hanlon and Heitzman

(2010), we find that tax avoidance or “the choice of the least taxed” can be situated next to tax evasion The big difference with tax evasion is that tax avoidance is considered as a legal act For example, businesses can avoid paying taxes by taking all legitimate deductions

Within tax avoidance, however, companies often act against the limits of the law This is why it is often called the “grey zone” An example is the case when a company interprets the law extremely strictly to get a tax reduction, in a situation in which it was not the intention of the legislator The intentions of the companies (the subjective element) are, therefore, sometimes questioned This is commonly described as hard tax planning As a company, you must be able to demonstrate that, in addition to tax advantages, there are also economic motives (Beer et al., 2018)

Table 2.1: The difference between tax evasion and tax avoidance summarized

Attributes Illegal and objectionable Immoral

Motive Concealing tax Dodging of tax

Consequences Penalty or imprisonment Deferment of tax liability

Objective Reduce tax liability by exercising unfair means

Reduce tax liability by applying the script of law

Table 2.2: Identify predictors of tax avoidance behavior

Tax avoidance is based on techniques, which are applied to lower the firm’s corporate tax obligations Such practices cause the transfer of value from the state to the firm’s shareholders (Desai & Dharmapala, 2009) The adoption of tax avoidance behavior in an organization is influenced by (i) agency issues arising from the separation of management and shareholders, (ii) social needs, and (iii) the legitimacy of tax avoidance decisions (Duhoon & Singh, 2023)

Corporate taxes are an enormous cost for companies For this reason, they generally assess the implications of taxes for every decision The following most important strategies will be discussed: double non-taxation, treaty shopping, the minimization of the taxable base in a heavily taxed jurisdiction, and corporate inversions (Contractor, 2016)

Treaty shopping is a concept in international tax law that refers to the practice of structuring business transactions or investments in a way that takes advantage of favourable tax provisions found in bilateral tax treaties between countries This practice typically involves a taxpayer, often a multinational group, seeking to benefit from a tax treaty by routing its investments or transactions through an intermediary jurisdiction (a conduit country) with which it has little or no substantive economic activity In the International Tax jargon, this intermediate structure is also called a

The term itself has never been properly defined or explained by OECD In the documentation of the OECD, the emphasis is on eliminating this phenomenon The first operational definition of treaty shopping was provided when the OECD released its action plan against it in 2015 The definition follows: “Treaty shopping occurs when companies seek to take advantage of tax treaties between two contracting states using a shell company based in a third jurisdiction.” (OECD, 2015, p.23) In this method of tax avoidance, the company is looking for opportunities in bilateral double tax treaties The company tries to exploit this opportunity to its advantage in order to reduce or avoid taxes

The goal is to reduce or eliminate the withholding taxes, capital gains taxes, or other taxes that would otherwise apply to the income or transactions in the absence of a tax treaty Ideally, treaty shopping structuring follows the subsequent steps:

- Identify a tax treaty: The taxpayer identifies a tax treaty between two countries that offers more favorable tax treatment, such as lower withholding tax rates on dividends, interest, or royalties

- Establish an intermediary entity: The taxpayer creates an intermediary entity (often a subsidiary or holding company) in a third country that is a party to the favorable tax treaty This intermediary entity (stepping stone) serves as a conduit for the investment or transaction

Transfer Pricing

Already in the middle of the 20th century, Hirshleifer (1956) described that transfer pricing can be understood as the pricing of goods and services that are exchanged between different divisions that are part of the same organization A more recent but similar description of transfer pricing can be seen from Kumar et al

(2021), who describe it as the pricing of transactions that occur between and within enterprises that are part of the same organization

Transfer Pricing is an important consideration for all companies with cross- border or intra-group transactions After all, it can bring a lot of strategic advantages

In order to be able to discuss these benefits, we first need to gain a better understanding of the concept (Heimert et al., 2018) The European Commission stated in 2009 that transfer prices are “the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises” (p.19) In other words, a transfer price or transfer cost is the price at which related parties transact with each other Related parties have to be connected through a commercial relationship This is the situation when one company has direct or indirect participation in the management, control, or capital of another company Another case of this situation is when both companies are part of the same group The content of the transaction can also be very divergent It can range from goods to services, intellectual property, or even financial arrangements

Multinationals can manipulate transfer pricing in order to reduce the taxable base Moreover, they can shift profits from a high to a low-tax jurisdiction This is achieved by asking high prices to associated companies that are localized in a low- tax country By following these steps, they make larger profits in a low-tax jurisdiction, while they make fewer profits in high-tax regions Companies can gain a lot of tax benefits through this method by altering their taxable income and thus reducing their overall taxes They use transfer pricing as a method of allocating their EBIT among their subsidiaries within the organization (Rugman et al., 2017)

Transfer Pricing is not illegal or abusive as long as we are not talking about transfer mispricing In this case, the multinational is simulating his numbers to deceive the tax authorities For this reason, the arm's length principle was introduced

In brief, this means that the price should be the same as if two independent companies were involved This means that additional time, money, and manpower are required to match the accounting system with the rules (Tax Justice Network, n.d.)

Figure 2.5 explains how transfer pricing can manipulate the results In this case study, there are three companies: mother company A which is situated in Indonesia, daughter company B which is situated in Liberia, and daughter company

C which is situated in Serbia Due to the fact that A participates directly in the capital of both B and C, they are all associated entities An internal sale is controlled by the multinationals and is, therefore, called a controlled transaction This is not the case when selling goods to an independent third party, where the prices are set by supply and demand The price at which the car is sold by B towards C affects their individual financial performance If B asks a high price, B will make more profit, and vice versa From a commercial perspective, the price does not matter due to the fact that we look at the consolidated results However, from a tax perspective, it does matter As mentioned above, both companies are located in different countries with other corporate tax rates The multinational wants to maximize its profit after taxes as much as possible In this way, he wants to achieve the highest profits in Serbia, where the company needs to pay the lowest taxes Therefore, he wants the car to be sold at the highest price possible

Figure 2.5: Example of transfer pricing

Source: Processing based on a self-invented example

After the transfer pricing literature had been reviewed, it was interpreted that transfer pricing can influence a multitude of actors in society Besides, transfer pricing seemed to be a complex topic that to some extent was guided by legitimacy rather than efficiency aspects These insights from previous literature led to stakeholder theory and institutional theory being used as guiding theories Both theories will be described shortly in the following paragraphs

Organizations can be seen as powerful social entities that are surrounded by a multitude of different actors that can be affected by the actions or inactions of the organization Stakeholder theory considers organizations and the actors that surround them (Deegan & Unerman, 2011) According to stakeholder theory, every actor that can affect or can be affected by the achievement of organizational objectives can be seen as a stakeholder Some examples of actors that are included in this broad definition are competitors, employees, shareholders, and government agencies (Freeman & Reed, 1983)

There exist two different branches of stakeholder theory that discuss how an organization should approach its relations with stakeholders First, there is a moral branch that argues that each stakeholder has an inherent right to be treated respectfully regardless of their possible influence on the organization (Deegan & Unerman, 2011) Hasnas (1998) describes that this view of stakeholder theory claims that all stakeholders should be considered to an equal extent Further, an organization should strive to manage an organization in a way that is as beneficial as possible to as many stakeholders as possible The second branch is called the managerial branch This branch considers the influence and power of each stakeholder and focuses on how to balance the interests of various stakeholders based on these factors (Deegan

& Unerman, 2011) Regarding the managerial branch, organizations should consider each stakeholder group strategically and not in isolation Instead, the effects on multiple stakeholder groups should be considered before strategic decisions are made (Freeman, 2010) This perspective of stakeholder theory is aimed at improving financial performance by balancing the legitimate interests of stakeholders (Hasnas,

1998) The two branches of stakeholder theory are, however, not mutually exclusive, and both the moral and managerial aspects can be considered simultaneously by management in organizations (Deegan & Unerman, 2011) Although both branches are related to balancing the interests of various stakeholders, the moral branch strives to achieve balance as it is morally correct, while the managerial branch emphasizes balance because this can be financially attractive

Institutional theory investigates the adoption of organizational forms and practices as a response to pressures and expectations from society and various institutions Similar to stakeholder theory, the institutional theory is related to organizational legitimacy and can be seen as a complement to stakeholder theory (Deegan & Unerman, 2011) Organizations that incorporate practices and procedures that are institutionalized in society may be seen as legitimate The incorporation of institutionalized practices and procedures can also increase the likelihood of the survival of organizations regardless of whether the incorporated practices and procedures are advantageous for the organizations concerning their efficacy Since institutionalized matters such as techniques and policies can be beneficial for support and legitimacy but unfavorable for coordination and control of organizational activities, actual work activities may be decoupled from formal structures (Meyer & Rowan, 1977) Thus, structures and practices that are considered to be legitimate may conflict with structures and practices that are favorable to an organization from an efficiency perspective Conformity to organizational forms and practices by organizations that are regarded as legitimate may make organizations homogeneous (Oliver, 1997), as organizations may incorporate the same or similar practices In line with the reasoning from Meyer and Rowan (1977), it is also described by DiMaggio and Powell (1983) that similarity among organizations not necessarily is driven by efficiency reasons Instead, three isomorphic processes can be linked to homogenization among organizations (DiMaggio & Powell, 1983) The concept of isomorphism is related to that an organization may be criticized if the organization adopts structures and processes that are divergent from those adopted by other similar organizations (Deegan & Unerman, 2011) The coercive sort of isomorphism originates from pressures and expectations from other organizations as well as society Mimetic isomorphism can instead be described as the process where organizations imitate organizations that are considered legitimate or successful to cope with uncertainty The third type called normative isomorphism is connected to professions and the phenomenon that professionals also tend to become homogeneous This homogeneity is based on education as well as professional networks and can lead to a situation where professionals who possess similar characteristics incorporate similar structures and practices in organizations (DiMaggio & Powell, 1983) Accordingly, certain practices and procedures such as transfer pricing may be incorporated in a specific manner for legitimacy reasons rather than for efficiency reasons

The OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide several methods to determine an accurate arm’s length price Moreover, it also explains how these methods can be used in practice According to these guidelines, five methods are consistent with the arm’s length principle The choice of methodology depends on different facts and considerations: the strengths and weaknesses of each method, the type of the controlled transaction, the availability of reliable information that is needed, and the degree of comparability between the controlled and uncontrolled transactions It is, therefore, important to understand the whole process of the transaction (KPMG, 2016)

The five methods are divided into two general categories On the one hand, we have the traditional transaction methods, which include the comparable uncontrolled price method, the cost-plus method, and the resale price method On the other hand, we have the transactional profit methods, which include the transactional net margin method and the profit split method Traditional transaction methods measure the terms and conditions of the actual transactions, while transactional profit methods do not look at the actual transactions The transactional profit methods are less accurate than the traditional transaction methods, even though they are more often applied in practice This is due to the fact that traditional methods require more detailed information which is not always available (Feinschreiber, 2004)

METHODOLOGY

Research process

Firstly, the search and synthesis of domestic and international studies with the same research objectives and subjects are conducted to choose an appropriate model concerning the impact of transfer pricing behavior on tax avoidance in Viet Nam

Secondly, an exploration and selection of factors influencing tax avoidance behavior among enterprises in Viet Nam as well as adding a number of control variables that affect transfer pricing behavior

Thirdly, after selecting suitable variables, collect and process data for each variable before analyzing the detected impacts using a data regression model

Fourthly, the tax avoidance situation of enterprises in Viet Nam is clarified, thereby providing suitable directions and recommendations.

Overview of research model on the impact of Transfer Pricing on Tax avoidance

Amidu et al (2019) researched a model to evaluate the relationship between transfer pricing and tax avoidance

CTA it = β 0 + β 1 TP it + β₂SIZE it +β 3 LEV it + β 4 ROA it + β 5 GP it + β 6 TANG it + β 7 LIQ it + β 8 AGE it + ε it

CTA it : is the level of tax avoidance of firm i in period t

TP it : the transfer pricing index of the firm is based on the sum of five different transfer pricing items divided by five of firm i in period t

SIZE it : is the size of firm i in period t LEV it : is the leverage of firm i in period t ROA it : is the performance of firm i in period t

GP it : is the growth potential of firm i in period t TANG it : is the asset tangibility of firm i in period t LIQ it : is the liquidity of firm i in period t

AGE it : is the age of firm i in period t

The study findings indicate that financial institutions engage in greater tax avoidance through the manipulation of transfer prices compared to non-financial entities This outcome aligns with existing empirical research demonstrating that multinational corporations (MNCs) use transfer price manipulation as a means to evade taxes Additionally, the study highlights the impact of transfer pricing manipulation on tax revenues The study's relevance is underscored by a report from the Tax Justice Network Africa (2017), which revealed that the Ghanaian government suffered a loss of GHC 2 billion due to transfer pricing abuses within the extractive sector This underscores the presence of significant loopholes in Ghana's transfer pricing regulations that are exploited by multinational corporations, resulting in substantial tax revenue losses for the state Therefore, the study recommends that the Ghana Revenue Authority's transfer pricing unit enhance the capabilities of its personnel through comprehensive training and implement effective strategies to ensure that MNCs provide transfer pricing documentation for all intra-firm transactions involving related parties

Ferry Irawan et al.(2020) discovered a measure based on the research of

Amidu et al (2019), to study the impact of Transfer Pricing and Earning Management on tax avoidance in Indonesia

ETRDiff it = β 0 + β 1 TP it + β₂AMPROXY it +β 3 RMPROXY it + β 4 SIZE it + β 5 LEV it + β 6 ROA it + β 7 TANG it + β 8 GRWTH it + β 9 LIQ it + β 10 AGE it + ε it

ETRDiff it : tax avoidance for company i at year t

TP it : transfer pricing by company i at year t AMPROXY it : accrual earning management company i at year t PMPROXY it : real earning management company i at year t SIZE it : company size i at year t

LEV it : leverage company i at year t ROA it : profitability company i at year t TANG it : total fixed asset to total asset ratio company i at year t

The research findings indicate a significant inverse relationship between transfer pricing and tax avoidance This suggests that as transfer pricing practices become more aggressive, resulting in a higher tax burden for the company, the company engages in fewer tax avoidance activities These findings diverge from prior research, which may be attributed to variations in research locations Disparities in research locations can lead to differences in economic conditions and variations in tax regulations Another possible explanation for transfer pricing having a negative impact on tax avoidance is that Indonesian companies employ transfer pricing not primarily for tax avoidance purposes Companies employing aggressive transfer pricing practices may not engage in tax avoidance, while conversely, transfer pricing carried out by companies listed on the Indonesian Stock Exchange (IDX) may be aimed at enhancing the company's financial performance as reported in financial statements, thereby maintaining high firm value and appearing profitable to investors

This can involve transferring expenses or losses from IDX-listed companies to affiliated or related parties not listed on the IDX Consequently, more aggressive transfer pricing practices result in higher reported profits for the company.

Research model

The research uses a simple linear regression model based on previous research models to analyze and evaluate the impact of transfer pricing on the tax avoidance behavior of businesses in Viet Nam from 2020 to 2023 Choosing the period from

2020 to 2023 for analyzing the impact of transfer pricing on tax avoidance in Viet Nam is suitable due to the issuance of Decree 132/2020/ND-CP ("Decree 132") by the Vietnamese Government This decree introduced new regulations on transfer pricing in Viet Nam, indicating a significant shift in the legal framework governing such practices Therefore, focusing on this period allows for an examination of how these regulatory changes may have influenced transfer pricing behavior and its impact on tax avoidance among businesses operating in Viet Nam

The financial reports of industrial companies being listed on the Hanoi Stock Exchange (HNX) and the Ho Chi Minh Stock Exchange (HOSE) are used as a data sample for this study, which is based on data found on the Fiinpro 217 businesses met the purposive sampling criteria, and the 868 observations they yielded were recorded (217 x 4)

1 Industrial companies listed on the HNX and

2 Industrial companies listed on the HNX and

3 Companies that did not have foreign shareholding during the 2020-2023 period

To clarify the impact of transfer pricing on the tax avoidance behavior of enterprises operating in Viet Nam, the research employs two models:

H1 CTA it = β 0 + β 1 TP it + β 2 SIZE it +β 3 LEV it + β 4 PROFIT it + β 5 TANG it + β 6 GROWTH it + β 7 LIQ it + ε it

H2 CTA it = β 0 + β 1 TP it + β 2 FO it +β 3 (FO it *TP it )+ β 4 SIZE it +β 5 LEV it

+ β 6 PROFIT it + β 7 TANG it + β 8 GROWTH it + β 9 LIQ it + ε it

Tax avoidance (CTAi,t): typically involves legally minimizing tax liabilities through various strategies, such as exploiting loopholes in tax laws, using tax shelters, or engaging in aggressive tax planning The research of Wilkie (1988) is the starting point in the literature about determinants of the effective tax rate, as a measure of tax avoidance Before Wilkie (1988) the effective tax rate is studied only in intra-industry and intertemporal variety settings (e.g Siegfried, 1974; Wilkie, 1988) Wilkie (1988) gives evidence for the relation between firm income and effective tax rates Factors of firms with special tax rules (for example tax reductions through investments) and income have both influence on the relation provided that the factors and income are not perfectly correlated (Wilkie, 1988) Some recent research papers such as Taylor

& Richardson (2012), and Yorke et al (2016) define tax avoidance as the difference between the statutory tax rate (STR) and effective tax rate (ETR) When the ETR is lower than the STR, the company saves money, indicating tax avoidance Conversely, if the ETR is higher, the company owes additional taxes Therefore, the greater the difference between the ETR and STR, the higher the tax savings This approach posits that tax avoidance occurs when a company's ETR is lower than the STR, signifying that the company has managed to reduce its tax liability below the expected level dictated by the statutory rate The greater the discrepancy between the ETR and the STR, the higher the tax savings, indicating more aggressive tax avoidance strategies Conversely, if the ETR exceeds the STR, it suggests that the company has not effectively minimized its tax obligations and may owe additional taxes This method of measuring tax avoidance provides a clear and quantifiable metric for evaluating the extent to which firms engage in tax minimization practices

Transfer Pricing (TPi,t): According to Amidu et al (2019) the transfer pricing index comprises the following components: (1) having a subsidiary or a related subsidiary situated in a tax haven jurisdiction; (2) engaging in transactions with the subsidiary or a related subsidiary located in a tax haven jurisdiction for the relevant financial year; (3) having a parent, a subsidiary, or a related subsidiary situated in a country with a tax rate different from that of a tax haven jurisdiction; (4) engaging in transactions with related parties located in a country with a tax rate differing from that of the jurisdiction under review for the relevant financial year; and (5) making royalty payments associated with intangible assets between related parties for the financial year under review Each component is assigned a score of 1 if present and

0 otherwise A cumulative score of five indicates a higher degree of transfer pricing manipulation, while a score of 0 signifies that the firm does not engage in transfer pricing manipulation

Foreign ownership (FOi,t): foreign ownership would act as a moderator variable that potentially influences the relationship between transfer pricing and tax avoidance Foreign ownership refers to the extent to which a company or entity from one country has ownership or control over another company located in a different country As a moderator variable, foreign ownership would be considered as a factor that affects the strength or direction of the relationship between transfer pricing and tax avoidance If the foreign-owned company operates in a country with stringent tax regulations and effective enforcement mechanisms, the impact of transfer pricing on tax avoidance might be reduced because the authorities may closely scrutinize and challenge such practices Conversely, if the foreign-owned company operates in a country with lax regulations or minimal enforcement, transfer pricing strategies might be more effective in reducing tax liabilities, thus strengthening the relationship between transfer pricing and tax avoidance Chen et al (2017) highlight that the extent of foreign ownership influences the agency costs associated with transfer pricing practices and subsequently affects tax avoidance strategies adopted by multinational corporations (MNCs) In jurisdictions with stringent tax regulations and effective enforcement mechanisms, the impact of transfer pricing on tax avoidance may be mitigated due to closer scrutiny by authorities (Chen et al., 2017) Conversely, in environments characterized by lax regulations or minimal enforcement, transfer pricing strategies could prove more effective in reducing tax liabilities for foreign- owned entities (Chen et al., 2017)

Below is a list of control variables used in the study to assess the impact of transfer pricing on tax avoidance behavior, derived from both theoretical foundations and previous research:

Table 3.2: The definitions of control variables used in the model

Variable name Definition Formula Source

SIZE The size of firm Logarithm of Total Assets Fiinpro

LEV The leverage of firm

Research methods

According to William (2011), three common research methods include quantitative research method, qualitative research method, and mixed method Specifically, the quantitative research method addresses research questions through data, including steps such as collecting numerical data, using mathematical models, and analyzing data The qualitative research method addresses research questions through language, describing phenomena that cannot be represented numerically This method requires researchers to collect information directly or indirectly through interviews, daily observations, etc The mixed method combines qualitative and quantitative methods, with data in both numerical and content forms The topic uses the quantitative research method to evaluate the impact of accounts receivable management on the efficiency of listed construction companies

In regression methods with panel data, three regression models are most commonly used: Pooled Ordinary Least Squares (Pooled OLS), Random Effects Model (REM), and Fixed Effects Model (FEM) All three models will be used to estimate the effects between independent variables and fixed variables in the topic, and then through tests to select the most appropriate model for the topic According to Gujarati (2004), when implementing the Pooled OLS model with panel data, the differences in space and time of observations may be overlooked This leads to the Pooled OLS model often suffering from defects such as changing residual variance, multicollinearity, or correlation between variables Therefore, firstly, the F test and the Breusch-Pagan test will be conducted to consider the choice between the Fixed Effects Model (FEM) and the Random Effects Model (REM) or the Pooled OLS model

According to Baltagi (2008), the LM Breusch-Pagan test is used to choose between the Random Effects Model (REM) and the Pooled OLS model The LM Breusch-Pagan test has the following hypotheses:

H0: The model does not have random effects or constant error variance H1: The model has random effects or varying error variance

At a significance level of 5% or a P-value < 0.05, if we reject the null hypothesis (H0), we choose the alternative hypothesis (H1): the model has random effects, so we use the Random Effects Model (REM) instead of the Pooled OLS model Conversely, if the P-value > 0.05, there is insufficient evidence to reject the null hypothesis (H0), so we use the Pooled OLS model instead of the Random Effects Model (REM)

According to Baltagi (2010), the F test is used to choose between the Fixed Effects Model (FEM) and the Pooled OLS model The F test has the following hypotheses:

H0: The model does not have fixed effects

H1: The model has fixed effects

At a significance level of 5% or a P-value < 0.05, if we reject the null hypothesis (H0), we choose the alternative hypothesis (H1): the model has fixed effects, so we use the Fixed Effects Model (FEM) instead of the Pooled OLS model Conversely, if the P-value > 0.05, there is insufficient evidence to reject the null hypothesis (H0), so we use the Pooled OLS model instead of the Fixed Effects Model (FEM)

After performing the LM Breusch-Pagan test and the F test, if the best model has not been found (i.e., the Pooled OLS model is not better than both the FEM and REM models), the Hausman test will be used to choose between the Fixed Effects Model (FEM) and the Random Effects Model (REM), according to Gujarati (2004) and Baltagi (2008) The Hausman test has the following hypotheses:

H0: There is no correlation between the unique errors and the independent variables

H1: There is the correlation between the unique errors and the independent variables

At a significance level of 5% or a P-value < 0.05, if we reject the null hypothesis (H0), we choose the alternative hypothesis (H1): there is the correlation between the unique errors and the independent variables, so we use the Fixed Effects Model (FEM) Conversely, if the P-value > 0.05, there is insufficient evidence to reject the null hypothesis (H0), so we use the Random Effects Model (REM)

After selecting the most appropriate model for the research topic, the model will be tested for autocorrelation, as well as the LM-Breusch Pagan test to check for the presence of heteroscedasticity If flaws are detected in the selected model, the Generalized Least Squares (GLS) model will be used to address these flaws.

Research hypothesis

Based on the literature review and empirical data collected, formulating the research hypothesis as follows:

H1 The impact of transfer pricing on tax avoidance

Sikka & Willmott (2010), Taylor & Richardson (2012), Jansky (2013), Amidu et al

Moderator for the impact of transfer pricing on tax avoidance

Chapter 3 provides an in-depth overview of the research methodology employed in this study, starting with a detailed exposition of the research process encompassing data collection, analysis, and interpretation A comprehensive research model is presented to guide the investigation into the relationship between transfer pricing and tax avoidance Utilizing quantitative analysis techniques, the research methods are tailored to examine the impact of transfer pricing on tax avoidance, with foreign ownership serving as a potential moderator

Two research hypotheses are formulated: H1 proposes the significant influence of transfer pricing on tax avoidance, while H2 explores the moderating effect of foreign ownership on this relationship Through this rigorous methodology, Chapter 3 sets the stage for empirical analysis, aimed at exploring the interplay between transfer pricing, and tax avoidance.

RESEARCH RESULT

Descriptive statistics for the research sample

The descriptive statistical results of the research sample are presented in below table:

Variable Obs Mean Std.dev Min Max

To measure the impact of transfer pricing on tax avoidance behavior of industrial enterprises listed on HOSE and HNX, a total of 868 observations were used, corresponding to data from 217 enterprises in the period from 2020 to 2023 Based on the study by Box et al (2008), Box particularly emphasized that a model needs at least 50 observations to be effective, while Hynman (2014) suggested a minimum of 200 observations for a model; Hanke and Wichern (2009) found that only 24 observations are needed for an effective model Overall, the number of observations in the study is sufficient for the model to capture the impact of transfer pricing and tax avoidance in Viet Nam

With an average of 0.7% of businesses within the industrial sector in Viet Nam engage in tax avoidance It was observed that some companies recorded minimum and maximum levels of -78.6% and 87.48% respectively This is an indication that avoidance attitudes vary widely across sampled companies Transfer Pricing is on average 53.49%, with companies recording a maximum transfer pricing of 80% to manipulate transfer pricing for tax avoidance purposes Looking at profitability, on average, companies earn a return on assets of 7.6% However, there's a wide range here, with some firms experiencing negative returns at -15.92% while others achieve rates as high as 60.31% This indicates a big gap in financial performance among the industrial companies studied

In terms of financing, the average leverage ratio is around 8.8%, suggesting that about 9% of the companies rely more on debt than equity This indicates varying levels of financial risk and management strategies among them Asset tangibility measuring the use of factory assets and equipment is an average of 21.3% This suggests that industrial companies allocate around 21% of their total assets to factories and real estate equipment It is also observed that a company reached a peak of 91% of total assets in factory and equipment assets in a year Furthermore, the average growth rate is 30%, indicating that industrial companies in Viet Nam operate very efficiently during the period under review.

Correlation matrix

The statistics of the correlation test results between each pair of variables are presented in the table above It can be observed that the correlation levels between the variable pairs range from (-0.169; 0.6353) According to Gujarati (2004), correlation levels should ideally fall within the range of (-0.8; 0.8) to avoid multicollinearity issues in the model

The correlation results show that transfer pricing (TP), is as expected positively correlated with tax avoidance The coefficient of 0.5993 suggests a strong positive relationship, implying that firms manipulating transfer pricing may indeed engage more in tax avoidance activities This suggests that as transfer pricing activities increase, so does the propensity for tax avoidance strategies among corporations in Viet Nam This result is not different from that of previous studies (Bartelsman & Beetsma, 2003; Sikka & Willmott, 2010; Taylor & Richardson, 2012; Jansky, 2013; and Amidu et al., 2019) Regarding control variables, size (SIZE) demonstrates a moderate positive correlation with tax avoidance, indicating that larger firms may have more opportunities and resources for tax planning and avoidance Leverage (LEV), profitability (PROFIT), and growth potential (GROWTH) also exhibit positive correlations with tax avoidance, suggesting that firms with higher leverage, profitability, and growth prospects are more inclined toward tax avoidance planning strategies However, tangibility of assets (TANG) and liquidity (LIQ) show weaker positive correlations with tax avoidance, indicating that the influence of these variables on tax avoidance may be less pronounced For the moderator variable, foreign ownership (FO) shows a strong positive correlation with both tax avoidance and transfer pricing The coefficient of 0.5630 with tax avoidance and 0.7453 with transfer pricing suggests that firms with higher levels of foreign ownership may engage more in tax avoidance and transfer pricing manipulation This aligns with the prior research results of Widyastuti (2011), Darussalam et al (2013), and Sudaryono et al (2020)

CTA TP SIZE LEV PROFIT TANG GROWTH LIQ FO

Evaluate the impact of Transfer Pricing on Tax avoidance in Viet Nam

In order to select the best model to explain the impact of transfer pricing on tax avoidance behavior among industrial enterprises listed on HNX and HOSE, several tests including the LM Breusch-Pagan test, F-test, and Hausman test have been conducted, and the results are presented in the table (4.3) below

The result of the LM Breusch-Pagan test for the model explaining the impact of transfer pricing on tax avoidance indicates a recorded P-value of 0.0001 < 0.05 Therefore, the null hypothesis - H0 is rejected, and the alternative hypothesis - H1 is chosen: the model exhibits random effects Hence, the Random Effects Model is more suitable than the Pooled Ordinary Least Squares model

Meanwhile, the F-test is employed to choose between the Fixed Effects Model and the Pooled OLS model, yielding a P-value of 0.0000 < 0.05 Consequently, the null hypothesis - H0 is rejected, and the alternative hypothesis - H1 is selected: the model exhibits fixed effects Therefore, the Fixed Effects Model is more appropriate than the Pooled OLS model

To further determine the most suitable model between the Fixed Effects Model and the Random Effects Model, the Hausman test is utilized with a p-value of 0.0205

< 0.05 Hence, the null hypothesis - H0 is rejected, and the alternative hypothesis -

H1 is selected indicating a correlation between the error terms and the independent variables Thus, the Fixed Effects Model is considered more appropriate than the Random Effects Model and is the most suitable among the three models

After selecting the most appropriate model for model (1) among the three models (Pooled OLS, REM, FEM), the chosen FEM model will undergo tests for deficiencies, including the multicollinearity, heteroskedasticity and autocorrelation phenomena The results of these three tests are presented in Table (4.4) and (4.5)

Tables 4.4: Variance Inflation Factor Table 4.5: Testing model defects

The VIF results indicate values ranging from 1.06 to 1.61 These values suggest that multicollinearity among the independent variables is minimal, as VIF values below

10 are generally considered acceptable and indicative of low multicollinearity concerns

In the Modified Wald test test to examine for heteroskedasticity, the recorded P- value is 0.0000 < 0.05, indicating the rejection of the null hypothesis - H0 and the selection of the alternative hypothesis - H1 Therefore, the FEM exhibits heteroskedasticity Regarding the autocorrelation test, the recorded P-value is 0.7524 > 0.05, indicating acceptance of the null hypothesis - H0 Thus, FEM does not exhibit autocorrelation To address this deficiency, the GLS regression model will be employed to adjust the FEM

Following the selection of a suitable model, the subsequent phase involves delving into the results to rigorously analyze the impact of transfer pricing on tax avoidance within the context of Viet Nam This section not only reveals the relationships between these variables but also provides valuable insights into corporate tax planning strategies employed by industrial companies operating in Viet Nam

Table 4.6: Transfer Pricing on tax avoidance

Pooled OLS FEM REM GLS

Source: Result from STATA 17.0 Firstly, the model results show a positive correlation between transfer pricing and tax avoidance with a significance level of 1% A coefficient of 0.02 indicates that industrial firms in Viet Nam avoid taxes by manipulating transfer pricing Similar results were found by Bartelsman & Beetsma (2003), Sikka & Willmott (2010), Taylor & Richardson (2012), Jansky (2013), and Amidu et al (2019) highlighting the implications of manipulating transfer prices for the purpose of tax avoidance strategies employed by multinational corporations Companies always seek to maximize their benefits by minimizing tax obligations as much as possible (Walton, 2019) They engage in several legal tax avoidance strategies to maximize global profits and minimize global taxes which rob a large of developing's tax revenues Klassen (2017) pointed out that transfer pricing is directly linked to tax avoidance and profit-shifting Through transfer pricing practices, the profit allocation and tax liability of the company are distorted because companies can move income or profit from a higher tax jurisdiction to entities within a multinational group located in a lower tax jurisdiction (Sudaryono et al., 2023)

Table 4.7: Inspection results of transfer pricing prevention activities during the period 2021-2023

Adjustment to increase taxable income

According to statistics from the Ministry of Finance, tax avoidance through transfer pricing manipulation is still a persistent challenge for tax authorities In 2022, inspections and audits of 822 enterprises, resulted in the collection of arrears, refunds, and fines totaling 1,989 billion VND Additionally, there was a reduction in losses amounting to over 17,074 billion VND, along with deductions reduced by 18 billion VND Moreover, inspection and re-determination of market prices led to the collection of over 567 billion VND, reduced losses by 14,810 billion VND, and adjusted to increase taxable income by 1,984 billion VND

Similarly, in 2023, inspections were carried out on 892 businesses, resulting in the collection, refunds, and fines totaling over 1,974 billion VND Moreover, there was a reduction in losses by 18,166 billion VND and deductions by 128 billion VND, while taxable income increased by 7,290 billion VND Noteworthy is that the inspection and re-determination of market prices in 2023 led to the collection of 640 billion VND and reduced losses by 12,086 billion VND, with an adjustment to increase taxable income by 4,647 billion VND

These figures highlight the significant impact of transfer pricing and tax avoidance on tax revenue and the entire economy Although Vietnamese regulatory authorities make ongoing efforts to address these issues through inspections, audits, and market price reassessments, the data indicates that it is necessary to strengthen enforcement measures to effectively combat transfer pricing abuse and tax avoidance This will not only safeguard tax revenue but also promote fairness and integrity within the tax system, ultimately contributing to sustainable economic growth and development

Secondly, based on the results of the regression analysis, the company size variable has a significant positive effect on tax avoidance through transfer pricing practices Company size has a regression coefficient value of 0.0131 with a significance level of 1% The positive direction on the regression coefficient indicates the larger companies are, the higher the likelihood of tax avoidance The result is in line with the research of Pramudya et al (2021), Saragih et al (2021) and Indrastuti et al (2023)

In the study of Indrastuti et al (2023) concluded that large company generates higher profits, and they tend to use subsidiary companies to move profits decreasing the fiscal profits to minimize tax liabilities

According to Saragihet al (2021), it is easier for large companies to access extensive resources, including not only financial but also human capabilities They often employ specialized tax departments or hire external tax consultants with expertise in transfer pricing strategies This enables them to implement transfer pricing manipulations more effectively to minimize tax liabilities (Mintz & Weichenrieder,

2010) Moreover, large corporations operate across multiple jurisdictions, each with its tax laws and regulations This complexity provides opportunities for companies to exploit differences in tax rates and regulatory environments through transfer pricing Multinational corporations can strategically allocate profits and expenses among their various entities to optimize their overall tax position (Clausing, 2003)

Evaluate the foreign ownership as a moderator for the impact of Transfer

For the selection of the model evaluating the impact of transfer pricing on tax avoidance behavior with foreign ownership as a moderating variable, the LM Breusch-Pagan test, F-test, and Hausman test were sequentially conducted and the results are presented in the table below

The result of the LM Breusch-Pagan test for the model assessing the impact of transfer pricing on tax avoidance with foreign ownership as a moderator variable records a P-value of 0.0000 < 0.05 Therefore, the null hypothesis - H0 is rejected, and the alternative hypothesis - H1 is chosen: the model exhibits random effects Thus, the Random Effects Model is more suitable than the Pooled Ordinary Least Squares model

The F-test is used to choose between the Fixed Effects Model and the Pooled OLS model, showing a P-value of 0.0000 < 0.05 Consequently, the null hypothesis - H0 is rejected, and the alternative hypothesis - H1 is selected: the model exhibits fixed effects Therefore, the Fixed Effects Model is more appropriate than the Pooled OLS model

Meanwhile, the Hausman test shows a P-value of 0.0001 < 0.05, indicating rejecting the null hypothesis - H0 and acceptance of the alternative hypothesis - H1: there is a correlation between the cross-sectional error terms and the independent variables Thus, the Fixed Effects Model is considered more appropriate than the Random Effects Model and is the most suitable among the three models

After selecting the most appropriate model for model (2) among the three models (Pooled OLS, REM, FEM), the chosen FEM model will undergo tests for deficiencies, including the multicollinearity, heteroskedasticity and autocorrelation phenomena The results of these three tests are presented in Table (4.9) and (4.10)

Tables 4.9: Variance Inflation Factor Table 4.10: Testing model defects

The VIF results ranging from 1.07 to 3.54 indicate a moderate level of multicollinearity among the independent variables in the regression model In the Modified Wald test to examine for heteroskedasticity, the recorded p-value is 0.0000 < 0.05, indicating the rejection of the null hypothesis - H0 and the selection of the alternative hypothesis - H1 Therefore, the Fixed Effects Model exhibits heteroskedasticity Regarding the autocorrelation test, the recorded p-value is 0.2930 > 0.05, indicating acceptance of the null hypothesis - H0 Thus, the Fixed Effects Model does not exhibit autocorrelation

To address these deficiencies, the Generalized Least Squares regression model will be employed to adjust for the autocorrelation in the Fixed Effects Model

Following the selection of the appropriate model for analyzing the impact of transfer pricing on tax avoidance in Viet Nam, this part aims to further investigate the role of foreign ownership as a moderator in this relationship By examining foreign ownership as a moderator, this study aims to illuminate how multinational corporations operating in Vietnam use transfer pricing strategies to handle their tax obligations, especially given the changing regulatory environment in the country Through a detailed examination of these relationships, this research contributes significantly to understanding transfer pricing and tax avoidance behaviors in emerging economies like Viet Nam

Table 4.11: Foreign ownership as a moderator for transfer pricing on tax avoidance

Pooled – OLS FEM REM GLS

Source: Result from STATA 17.0 Based on the results of hypothesis testing, it is known that foreign ownership significantly enhances the correlation with tax avoidance through transfer price manipulations among businesses operating in Viet Nam This suggests that corporations with foreign ownership structures engage more in transfer pricing activities to reduce their tax liabilities compared to domestic firms

This observation aligns with prior research by Darussalam et al (2013), Widyastuti (2011), and Sudaryono et al (2023), found that MNCs often have greater flexibility and resources to engage in complex transfer pricing arrangements, allowing them to optimize their tax positions in host countries Furthermore, the results are consistent with the theoretical framework proposed by Lee and Guenther (2014), which posits that foreign-owned firms may have a higher propensity for tax avoidance due to their access to global tax planning expertise and resources

Moreover, the moderated regression analysis underscores the significance of considering foreign ownership as a critical moderator in transfer pricing and tax avoidance behavior The research finds a statistically significant weak positive correlation coefficient of 0.00284 between transfer pricing and tax avoidance Moreover, when foreign ownership is introduced as a moderator, the correlation coefficient increases to 0.0451 at a significance level of 1%, indicating a stronger positive relationship These findings suggest that the presence of foreign ownership amplifies the relationship between transfer pricing and tax avoidance, implying that companies with foreign ownership might engage in transfer pricing practices more aggressively to minimize their tax liabilities

As Viet Nam continues to attract substantial foreign investment and undergoes economic globalization, understanding the differential impact of foreign ownership on tax behavior becomes imperative for policymakers and regulatory authorities This finding is noteworthy that transfer pricing fraud has been identified as a significant concern, leading to the loss of state budget revenue This is particularly pronounced when FDI enterprises account for substantial proportions of key economic indicators, including more than 20% of GDP, 25% of total social investment capital, 40% of industrial production value, and 50% of total export turnover Such insights underscore the urgency for robust regulatory measures and enforcement efforts to curb transfer pricing abuses and safeguard the integrity of the tax system in Viet Nam

In this chapter, the impact of transfer pricing on tax avoidance behavior among industrial enterprises listed on the HNX and HOSE from 2020 to 2023 through a quantitative model Based on the results, several insights are drawn: transfer pricing exhibits a positive correlation with tax avoidance behavior Particularly, the study reveals that foreign ownership magnifies the relationship between transfer pricing and tax avoidance, suggesting that foreign-owned companies may engage more aggressively in transfer pricing activities to minimize their tax liabilities Additionally, variables such as growth and firm size also show a positive impact on tax avoidance behavior through transfer pricing This further elucidates the reason why many large firms in Viet Nam continuously report losses for several consecutive years while expanding their business operations, leading to significant revenue losses for the state budget Such firms, by strategically utilizing transfer pricing mechanisms, may deliberately shift profits to affiliates located in lower-tax jurisdictions, thereby reducing their taxable income in Viet Nam Despite apparent losses in financial reports, these firms may actually be generating substantial profits, which are effectively shielded from taxation through transfer pricing strategies Consequently, the Vietnamese state budget experiences considerable revenue shortfalls due to the underreporting of taxable income by these multinational entities, highlighting the pressing need for enhanced regulatory oversight and enforcement measures to address transfer pricing abuses.

RECOMMENDATION

Implications

Based on the aforementioned results, Transfer Pricing has become a significant issue for state management and tax administration It's crucial to address this behavior promptly To achieve this, Viet Nam need to implement the following comprehensive solutions:

Firstly, the modeling results and empirical data indicate that transfer pricing behavior among businesses operating in Viet Nam is becoming increasingly complex

As companies grow larger, their transfer pricing activities become more popular, resulting in revenue losses for the government budget Therefore, Viet Nam need refine existing laws concerning the broader economy, tax regulations, and specifically, laws governing transfer pricing to effectively manage such practices Viet Nam should carefully consider and adopt the transfer pricing control guidelines advocated by the OECD to align with international standards Additionally, a robust enforcement system should be established to ensure compliance Although transfer pricing is not illegal, countries all recognize penalties for non-compliance with transfer pricing declarations in related-party transactions according to legal procedures Considering this, Viet Nam should consider enacting Transfer Pricing Law to provide a legally binding framework, simultaneously fostering clarity and preventing tax avoidance practices

Secondly, there is a need for a strategy to enhance the capacity of tax officials in general, both those specializing in transfer pricing and those who are not In addition to specialized expertise in transfer pricing, tax officials also need to be equipped with soft skills such as communication, negotiation, issue resolution, and dispute resolution skills; updating and enhancing knowledge of macroeconomics, industry economics, and language proficiency Currently, only GDT and four Tax Departments have Transfer Pricing Inspection Divisions, limiting their effectiveness Therefore, there's a pressing need to bolster human resources for specialized transfer pricing inspection teams Moreover, tax officials specializing in transfer pricing lack comprehensive training and rely heavily on experience or short-term courses A strategic plan for capacity enhancement through training assessments and targeted programs is essential to fortify tax administration and transfer pricing control at the local level

Thirdly, Viet Nam needs to improve the legal framework for the Advance Pricing

Agreement (APA) to provide clearer guidance on the application of APA tools Specific regulations delineating timeframes for each step of the APA process would prevent undue delays caused by tax officials, ensuring efficiency for enterprises Moreover, provisions safeguarding the confidentiality of enterprise information during APA negotiations are vital Effective communication strategies are needed to assist enterprises in APA implementation APA is a mutually beneficial solution for both tax authorities and taxpayers Since APA negotiations are voluntary and require collaboration among enterprises, fostering cooperation is pivotal for successful outcomes

Fourthly, although the reality over the past 30 years has shown that Viet Nam primarily attracts foreign direct investment through preferential tax policies and corporate income tax exemptions or reductions, research results reveal that these tax incentives create opportunities for multinational corporations to engage in transfer pricing activities, resulting in revenue losses for the state budget According to Truong

Ba Tuan (2018), Viet Nam's tax incentive policies primarily focus on enterprise profits, mainly centered on preferential tax rates and temporary tax exemptions or reductions This type of incentive is considered the least effective and most costly by many researchers Therefore, tax policies should only be considered a component of investment attraction policies and not the most crucial condition To attract domestic and foreign investment, comprehensive measures are needed to create a favorable, transparent, and stable investment and business environment; and ensure easy and equitable access with reasonable costs for production and business factors such as capital, labor, raw materials, transportation conditions, and infrastructure

Fifthly, Viet Nam began implementing a Global Minimum Tax in 2024 The application of Global Minimum Tax regulations brings new opportunities for Viet Nam, such as increasing government budget revenue from additional tax collections, minimizing tax avoidance, transfer pricing, and profit shifting However, for a competitive country to attract FDI like Viet Nam, Pillar 2 will affect Viet Nam's FDI attraction When Pillar 2 is applied, multinational corporations subject to Pillar 2 adjustments with effective tax rates in Viet Nam lower than 15% may have to pay additional taxes in their home countries This diminishes the effectiveness of tax incentives that their subsidiaries have enjoyed or will enjoy in Viet Nam Therefore, tax incentive measures based on income and capital criteria, widely used as investment attraction tools, will be less effective Therefore, in the current context, tax policies for attracting FDI in Viet Nam, in particular, and investment attraction in general, should not focus on tax incentive policies but should aim for a good tax system with low compliance costs for taxpayers with fair, transparent, efficient tax system and in line with international norms and standards

Sixth, improving the tax information and data system on taxpayers Two important tasks need to be done to improve the tax information and data system on taxpayers: (i) Broadening Data Collection Channels To strengthen the tax information and data system, it's imperative to expand the sources of data collection This can be achieved by leveraging the operational activities of various functional departments within the tax authorities By tapping into diverse channels for data acquisition, tax authorities can access a broader spectrum of information, enabling more comprehensive taxpayer profiles.(ii) Facilitating Electronic Government Development Another pivotal step is to expedite the establishment of an electronic government framework This entails fostering seamless connectivity and automatic information exchange between tax authorities and other governmental entities By establishing robust electronic interfaces, data sharing among different state management agencies becomes more efficient and effective, enhancing overall governance and compliance efforts

In summary, to enhance the effectiveness of transfer pricing activities in Viet Nam in the future, attention should primarily be given to perfecting the legal framework for transfer pricing activities and implementing various synchronized solutions in tax management specifically and state management generally.

Limitations

Although the research has addressed the research questions posed, it still has several limitations:

Firstly, it focuses solely on data from listed industrial firms, omitting the broader spectrum of businesses in Viet Nam, particularly those of foreign direct investment origin Excluding this aspect may overlook important insights into the transfer pricing activities and tax avoidance strategies among FDI enterprises, thereby limiting the generalizability of the findings

Secondly, the research employs quantitative methodologies exclusively, neglecting qualitative considerations that could profoundly impact transfer pricing behaviors and tax avoidance tendencies Qualitative factors such as business models, legal frameworks, and tax policies could significantly influence the observed relationships but were not systematically examined due to constraints in time and resources Incorporating qualitative data through in-depth surveys or interviews could offer a more comprehensive understanding of the phenomena under investigation

Thirdly, the study relies on annual data collection, which may overlook temporal fluctuations in transfer pricing dynamics and tax avoidance behaviors Utilizing quarterly or even monthly data could capture more nuanced variations and provide a more accurate depiction of the relationships examined

Fourthly, transfer pricing practices are dynamic and subject to continuous evolution in response to changes in market conditions, regulatory environments, and business strategies As such, research findings based on static analyses may fail to capture the dynamic nature of transfer pricing behaviors over time Longitudinal studies that track changes in transfer pricing practices and tax avoidance behaviors over time could provide valuable insights into their evolving dynamics and drivers.

Recommendations

Based on the identified limitations, several recommendations can be proposed to enhance the quality and scope of future research:

Firstly, future studies should aim to broaden the scope of their samples to encompass a more comprehensive representation of businesses in Viet Nam, including both listed industrial firms and non-listed entities, with particular attention to FDI enterprises This broader sample would provide a more holistic understanding of transfer pricing practices and tax avoidance behaviors across different business types and ownership structures

Secondly, in order to capture the multifaceted nature of transfer pricing and tax avoidance, future research should consider incorporating qualitative methodologies alongside quantitative analyses In-depth interviews, surveys, and case studies can offer valuable insights into the contextual factors influencing these behaviors, such as business models, regulatory frameworks, and industry dynamics

Thirdly, investing in comprehensive data collection efforts, including both quantitative financial data and qualitative contextual information, is essential for enriching the analytical framework and improving the validity of research findings Collaboration with industry stakeholders and government agencies can facilitate access to relevant data sources and ensure the completeness and accuracy of the dataset

Fourthly, due to the complex nature of transfer pricing and tax avoidance, interdisciplinary collaboration between researchers from various fields, including economics, accounting, law, and business administration, can enrich the research process and foster innovative approaches to studying these phenomena This collaborative approach can facilitate the integration of diverse perspectives and methodologies, leading to more robust and comprehensive research outcomes

The research delves into the significant and relatively unexplored relationship between transfer pricing and tax avoidance behavior within the Vietnamese context, offering both theoretical insights and practical implications By examining this relationship, the study aims to bolster the effectiveness of tax revenue sources, thereby mitigating potential state budget deficits

Chapter 1 conducts a comprehensive review of prior research on transfer pricing and tax avoidance behaviors, drawing insights from multinational enterprises operating in Indonesia and Ghana to inform the selection of an appropriate research model Building upon this foundation, Chapter 2 delves into pertinent theories surrounding tax avoidance and transfer pricing, elucidating the intricate strategies employed by multinational corporations to minimize their tax liabilities

Chapter 3 outlines the research methodology, elucidating the evaluation models utilized to assess the impact of transfer pricing on tax avoidance, thereby providing a holistic view of transfer pricing behavior's influence in Vietnam Moving forward, Chapter 4 selects and applies suitable models and methods to analyze regression results, thereby elucidating the significance of transfer pricing's impact on tax avoidance behavior The study's findings suggest a correlation between transfer pricing and increased tax avoidance among larger and more profitable industrial enterprises in Vietnam, exacerbated by foreign ownership

Chapter 5 underscores the urgent need for Vietnamese tax authorities to swiftly adapt, augment personnel capabilities, and bolster oversight mechanisms to address emerging challenges posed by transfer pricing abuse Moreover, the study advocates for a reassessment of the attractiveness of tax reduction as a tool for attracting foreign investment, particularly in light of popular transfer pricing activities As Vietnam implements a global minimum tax regime, alternative measures must be explored to foster foreign direct investment inflows sustainably

In summary, this research offers valuable insights for policymakers, tax authorities, and stakeholders, facilitating informed decision-making to foster a fair and transparent tax environment conducive to sustainable economic growth

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APPENDIX A: The impact of Transfer Pricing on Tax avoidance

Breusch and Pagan Lagrangian multiplier test for random effects cta [ID, t] = Xb + u [ID] + e [ID, t]

Test: Var (u) = 0 chibar2 (01) = 14.90 Prob > chibar2 = 0.0001

(b–B) Difference sqrt (diag (V_b-V_B) Std.err

LIQ -.000902 -.0002951 -.0006069 001194 b = Consistent under H0 and Ha; obtained from xtreg

B = Inconsistent under Ha, efficient under H0; obtained from xtreg Test: H0: Difference in cofficient not systematic chi2 (7) = (b-B)’[(V_b-V_B)ˆ(-1)](b-B)

Prob>chi2 = 0.0250 (V_b-V_B is not positive definite)

Modified Wald test for groupwise heteroskedasticity in fixed effect regression model

H0: sigma(i)^2 = sigma^2 for all i chi2 (217) = 2.7e+08

Wooldridge test for autocorrelation in panel data

Pooled Ordinary Least Squares model

Sources SS df MS Number of obs = 868

CTA Coefficient Std Err t P > | t | [95% Conf Interval]

Fixed-effects (within) regression Number of obs = 868

Group variable: ID Number of groups = 217

R-sq: Obs per group: within between overall

CTA Coefficient Std.Err t P > | t | [95% Conf Interval]

_cons -.1419629 0634994 -2.24 0.026 -.2666538 -.0172721 sigma_u 0760944 sigma_e 11591429 rho 30116575 (fraction of variance due to u_i)

Random-effects GLS regression Number of obs = 868

Group variable: ID Number of groups = 217

R-sq: Obs per group: within between overall

Wald chi2 (4) = 559.05 corr (u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

CTA Coefficient Std.Err z P > | z | [95% Conf Interval]

_cons -.2154969 0541854 -3.98 0.000 -.3216984 -.1092954 sigma_u 04060465 sigma_e 11591429 rho 1092975 (fraction of variance due to u_i)

Generalized Least Squares regression model

Cross-sectional time-series FGLS regression

Estimated covariances = 217 Number of obs = 868

Estimated autocorrelations = 0 Number of groups = 217

TAX Coef Std.Err z P > | z | [95% Conf Interval]

APPENDIX B: The foreign ownership as a moderator for the impact of Transfer Pricing on Tax avoidance

Breusch and Pagan Lagrangian multiplier test for random effects

Size [ID, t] = Xb + u [ID] + e [ID, t]

Var sd = sqrt (Var) tax 0255282 1597755 e 0121097 1100442 u 0018823 0433853

Test: Var (u) = 0 chibar2 (01) = 22.20 Prob > chibar2 = 0.0000

(b–B) Difference sqrt (diag (V_b-V_B) Std err fo 0758388 0493567 0264821 0354948 tp 0079909 0080869 -.000096 0036301 c.fo#c.tp 0598065 0439094 0158971 009689

Tang -.1046607 0189375 -.1235983 0666416 growth 005755 0065509 -.0007959 0008176 liq -.0006785 -.0001527 -.0005259 001105 b = consistent under H0 and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under H0; obtained from xtreg Test of H0: Difference in cofficient not systematic chi2 (2) = (b-B)’[(V_b-V_B)ˆ(-1)](b-B)

Prob>chi2 = 0.0001 (V_b-V_B is not positive definite)

Modified Wald test for groupwise heteroskedasticity in fixed effect regression model

H0: sigma(i)^2 = sigma^2 for all i chi2 (217) = 7.6e+08

Wooldridge test for autocorrelation in panel data

Pooled Ordinary Least Squares model

Sources SS df MS Number of obs = 868

CTA Coef Std Err t P > | t | [95% Conf Interval]

Fixed-effects (within) regression Number of obs = 868

Group variable: ID Number of groups = 217

R-sq: Obs per group: within between overall

CTA Coef Std.Err t P > | t | [95% Conf Interval]

TANG -.1046607 0716355 -.1.46 0.144 -.245329 0360075 GROWTH 005755 0019574 2.94 0.003 0019114 0095987 LIQ -.0006785 0015041 -0.45 0.652 -.0036321 002275 _cons -.0955661 0614388 -1.56 0.120 -.2162113 0250791 sigma_u 0811149 sigma_e 11004417 rho 35205231 (fraction of variance due to u_i)

Random-effects GLS regression Number of obs = 868

Group variable: ID Number of groups = 217

R-sq: Obs per group: within between overall

Wald chi2 (9) = 652.15 corr (u_i, X) = 0 (assumed) Prob > chi2 = 0.0000

CTA Coef Std.Err z P > | z | [95% Conf Interval]

TANG 0189375 0262781 0.72 0.471 -.0325666 0704417 GROWTH 0065509 0017784 3.68 0.000 0030653 0100366 LIQ -.0001527 0010205 -0.15 0.881 -.0021528 0018474 _cons -.1591114 0535624 -2.97 0/003 -.2640918 -.0541309 sigma_u 4338532 sigma_e 11004417 rho 13452581 (fraction of variance due to u_i)

Generalized Least Squares regression model

Cross-sectional time-series FGLS regression

Estimated covariances = 217 Number of obs = 868

Estimated autocorrelations = 0 Number of groups = 217

CTA Coef Std.Err z P > | z | [95% Conf Interval]