Transfer pricing through the selling price of goods and services is a common trick used by many FDI enterprises to transfer profits internally, causing budget losses and high tax risks. In the context of tax authorities increasing inspection and application Decree 132/2020/ND-CPUnderstanding the mechanisms, signs and solutions to control transfer pricing is a vital factor to help businesses comply and protect their sustainable financial reputation.
What is transfer pricing?
Transfer pricing through the selling price of goods and services is an act in which the party affiliated relationship (e.g., a parent company and a subsidiary, or two companies within the same group) setting prices for goods or services that do not reflect market conditions (non-arm's length principle), in order to shift profits between entities. As a result, taxable profits may be shifted from high-tax to low-tax jurisdictions, resulting in a reduction in the overall tax payable by the group.
Why do businesses do that?
So what makes businesses choose to pass prices through the selling price of goods and services instead of following independent market prices? Below are the main economic and strategic motives that explain why this behavior is still prevalent in the international business environment.
- Optimizing after-tax profits: When internal selling prices are lowered (or raised depending on the target), accounting profits on the selling or purchasing side can be reduced in high-tax areas and increased in low-tax areas, thereby reducing the total tax payable by the group. This is the main economic motive of transfer pricing.
- Redistribution of income within the group: Internal selling prices are an easy-to-control tool for allocating revenues, costs and profits among members in the value chain, especially useful when the parties perform different functions (production, distribution, market research and development, etc.).
- Risk management, cash flow and market strategy: In addition to tax purposes, businesses can use price adjustments to manage internal cash flow, support a company that is expanding its market, or offset temporary losses for a strategic unit. However, when the action goes beyond the scope of normal trade, it can easily become illegal transfer pricing.
To realize the goal of optimizing profits and reducing tax obligations, businesses often implement transfer pricing through the selling price of goods and services through various internal pricing mechanisms, which are sophisticatedly designed to be difficult to detect during tax inspections.
Transfer pricing mechanism through selling prices of goods and services
Transfer pricing through the selling price of goods and services is often done by the seller and the buyer having an affiliated relationship setting internal selling prices that do not reflect market conditions (not according to arm's length). Specifically, the enterprise can lower the selling price when selling to an affiliated company in a low-tax country to reduce profits in a high-tax country; or push the selling price up when selling to an affiliated company in a low-tax country to shift profits there. These operations are often accompanied by tricks such as:
- Artificial discounts or unclear after-sales terms: Invoice at a high price, then pay back most of it with “internal discounts,” rebates, or off-the-books refunds.
- Inflated service contracts: Shifting profits by charging abnormally high internal consulting, management, and technical fees. These fees are accounted for as legitimate expenses but are actually a means of shifting profits.
- Setting unfavorable payment terms: Unusual payment terms, payment methods, or delivery conditions to create cash flow and earnings advantages for the affiliate.
- Split the transaction: Split the transaction into multiple small contracts in different entities to easily adjust for price incompatibility with the market.
- Unsubstantiated “transfer price” pricing: Using internal assumptions (e.g., fictitious profit margins) without comparable evidence to arm’s length transactions.
- Allocation of costs and profits not in line with functions and risks: Shifting costs to low-tax entities or assigning profits to entities that perform fewer functions but benefit more.
Although transfer pricing mechanisms through the sale price of goods and services are built by enterprises quite sophisticatedly, in reality, transactions that do not comply with market principles still leave many distinctive signs. Tax authorities often rely on differences in prices, profits, and internal transaction records to detect transfer pricing risks, especially when enterprises operate with related parties in countries with low tax rates.
Signs of transfer pricing through selling prices of goods and services
Transfer pricing mechanisms through the sale price of goods and services still leave “traces” that can be seen when compared with the conditions of independent transactions. Tax authorities often rely on industry data, profit margins, and transaction records to detect irregularities. Below are common signs that help to identify transfer pricing risks early, which businesses need to pay special attention to in the process of preparing and reviewing transfer pricing documents.
Board: Signs of transfer pricing through the selling price of goods and services.
| Signs of recognition | Describe |
| Internal prices differ greatly from market prices | Selling prices between related parties are unusually low or high compared to similar independent transactions, without clear market basis. |
| Gross profit is significantly lower than industry average | Businesses have low gross profit margins, especially when operating in a value chain with high added value. |
| Internal contracts are vague or frequently changing | Contract terms lack valuation basis and are frequently adjusted to optimize internal profits. |
| Sudden increase in service fees, royalties or internal commissions | Internal expenses increased rapidly over the years without supporting documentation of actual service value. |
| Related party transactions in low-tax countries or tax havens | There are signs of profit shifting to low-tax countries, especially where the related party has no real economic activity. |
The above signs are important indicators that help tax authorities identify risks and conduct in-depth inspections of businesses with related-party transactions. Early identification and regular internal review will help businesses limit the risk of having their taxable income adjusted during transfer pricing inspections.
Tax authorities handle transfer pricing through selling prices of goods and services
To detect transfer pricing behaviors through the selling price of goods and services, tax authorities often use the method of determining price. affiliate transactions based on the arm's length principle. Accordingly, prices in related party transactions must be equivalent to prices between independent parties under similar conditions.
Common transfer pricing methods
- Comparable Uncontrolled Price (CUP) method: Tax authorities compare the selling prices between related parties with the selling prices in similar independent transactions. This is the most accurate method, but requires reliable market data.
- Resale Price Method (RPM): Applicable to distribution or trading businesses. Tax authorities will consider the difference between the purchase price from the related party and the selling price to independent customers, thereby determining a reasonable profit margin.
- Cost Plus Method (CPM): Usually applied to manufacturing and processing enterprises. The selling price to the associated party is determined based on the production cost plus a reasonable profit margin compared to the market.
- Transactional Net Margin Method (TNMM): Analyzes the net profit margin of an enterprise in related transactions and compares it with similar independent enterprises. This is the most commonly used method in practice in Vietnam.
- Profit Split Method (PSM): Applied when the associated parties contribute significant value (e.g. technology, brand, intangible assets). Profits will be divided according to the actual contribution ratio.
Although transfer pricing methods have been applied more and more strictly, in reality, transfer pricing in Vietnam is still complicated, especially in FDI enterprises with multi-level internal transaction models and abnormally low declared profits.
Current status of transfer pricing through selling prices of goods and services in Vietnam
In recent years, transfer pricing through the selling price of goods and services has become a worrying issue in Vietnam. Transfer pricing behavior not only appears in FDI enterprises but also spreads in large domestic economic groups, causing budget losses and distorting market competition. It is estimated that up to 60-70% enterprises operating in sensitive areas of related transactions such as trade, production and services are at risk or have signs of violating regulations on transfer pricing through the selling price of goods and services.
Some recent cases of transfer pricing violations through selling prices of goods and services:
- According to the Dong Nai Provincial Tax Department, in the first 3 months of 2019, through inspections, the agency discovered 8 foreign direct investment (FDI) enterprises with transfer pricing behavior. Dong Nai Tax Department fined and collected over 84 billion VND in taxes from these 8 enterprises.
- In 2021, a large telephone trading company was charged about VND4,500 billion in taxes due to transfer pricing through internal transactions.
- In 2022, the Ho Chi Minh City Tax Department decided to collect and fine hundreds of billions of VND from a domestic retail group for transferring over VND8,600 billion in prices abroad.
Transfer pricing through the selling price of goods and services is quite diverse and increasingly sophisticated. Some common forms include: adjusting selling prices through intermediaries, inflating business management costs, depreciating assets or unreasonable internal service fees; even adjusting transfer prices to reduce taxable profits.
Faced with this situation, the Vietnamese tax authorities have proactively coordinated with large corporations and enterprises to inspect and monitor transfer pricing activities. At the same time, the State has also continuously improved the legal framework on tax management for related-party transactions, typically Decree 132/2020/ND-CP and Circular 78/2014/TT-BTC, to tighten regulations and increase transparency in determining transfer pricing.
These regulations have contributed to creating a clearer legal corridor, forcing businesses to make their internal operations transparent, comply with the principles of independent market prices and reasonably price related-party transactions. However, in reality, detecting and handling transfer pricing through selling prices still faces many challenges, due to the complexity of transaction structures and tax rate differences between countries.
Therefore, experts believe that Vietnam needs to continue to improve the effectiveness of tax management, standardize the mechanism for monitoring related transactions, and increase transparency and international coordination to thoroughly prevent transfer pricing through the sale price of goods and services in the coming time.
Contact us now MAN – Master Accountant Network To receive support and advice on building policies for managing related transactions, ensuring compliance with related transactions and the principles of independent transactions.
MAN – Master Accountant Network with a team of experts and rich experience. Especially in the field of anti-transfer pricing, will help businesses:
- Identify and control transfer pricing risks
- Prepare and report complete related party transaction records and reports as prescribed.
- Develop appropriate transfer pricing policies and methods
- Representative to exchange and explain with tax authorities during inspection and examination
- Optimize compliance costs and manage transfer pricing risks.
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Conclude
It can be seen that transfer pricing through the selling price of goods and services is not only a violation of the principle of independent transactions, but also directly affects the budget revenue, competitive environment and business reputation. Reality in Vietnam shows that although the legal framework is increasingly complete with documents such as Decree 132/2020/ND-CP or Circular 78/2014/TT-BTC, detection and handling still face many challenges due to the complex structure of related-party transactions and the difference in tax rates between countries.
To minimize transfer pricing risks through selling prices, businesses need to strictly comply with legal regulations, build a complete internal control system and price related transactions based on the principle of independent transactions.
At the same time, transparency of information and complete documentation are also important factors to ensure compliance in case State agencies conduct inspections and audits.
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