Determining transfer pricing and what FDI businesses need to know.

Determining transfer pricing is one of the crucial issues that FDI enterprises need to pay special attention to in order to ensure compliance with tax regulations and limit the risk of tax arrears and penalties. The core legal framework. Decree 132/2020/ND-CP, Decree 20/2025/ND-CP With updated guidelines for 2026, businesses need to clearly understand the arm's length principle, pricing methods, standard value ranges, and reporting and documentation obligations. This article will help businesses systematize the entire process of determining transfer pricing, identify common risks, and choose appropriate solutions to proactively protect themselves against tax audits. 

What is transfer pricing and why is it important?

Related-party transactions are transactions that occur between related parties, typically parent-subsidiary relationships, companies with the same owner, or parties with mutual control, management, or capital contributions. Because these parties can influence each other's decisions, the prices in their transactions are not formed objectively as in transactions between two independent parties in the market.

Determining transfer pricing involves demonstrating that the price (or profit margin, profit allocation ratio) that a business applies to an affiliated party is equivalent to the price that independent parties would agree on under similar conditions, i.e., adhering to the Arm's Length Principle.

This is important because corporate income tax obligations depend directly on those figures. If a business sells to its parent company at a price lower than the market rate or pays unusually high internal service fees, its taxable profit in Vietnam is reduced, and this is where tax authorities focus their audits. When prices are not accurately determined, businesses face the risk of having their profits reassessed, taxes collected retrospectively, late payment interest calculated, and penalties imposed.

The core legal framework determines the pricing of related-party transactions.

The current legal framework is Decree 132/2020/ND-CP, applicable from the 2020 corporate income tax period. By 2025, this framework will undergo significant adjustments by Decree 20/2025/ND-CP, issued on February 10, 2025, effective from March 27, 2025, and immediately applicable to the 2024 corporate income tax period. Notable changes include:

• The criteria for identifying related parties through loan relationships have been revised: The assessment has shifted from considering each individual loan to considering the total outstanding loan balance, limiting the practice of splitting loans into smaller amounts to circumvent the threshold.
• Excluding certain credit institutions from the list of affiliated parties: Banks and credit institutions that lend but do not participate in the management, control, or capital contribution of the borrowing enterprise are not considered affiliated parties. This is a significant change that helps businesses relieve the pressure of borrowing from banks to finance production and business operations.
• Replace the entire Appendix I (declaration form for related party relationships and related party transactions) with the new form; businesses must use the correct form when settling accounts.
• Expand the State Bank of Vietnam's responsibilities in coordinating the provision of information to tax authorities.

A note for 2026: The government has announced a draft of a new Decree to replace Decree 132/2020 (expected to take effect from July 1, 2026). Because this is a volatile sector, businesses should closely monitor and review their internal pricing policies periodically.

Two core principles govern the entire valuation process.

All the methods and calculations below revolve around two fundamental principles:

• The arm's-length principle: Related-party transaction prices must be comparable and determined to be equivalent to independent transactions under the same conditions. Businesses are obligated to proactively exclude factors that reduce tax liability due to related-party relationships.
• The principle of substance over form: Tax authorities assess tax obligations based on the actual economic nature of the transaction and the real value created, not just the form of the contract. An internal service fee is only deductible if the service has real commercial value, directly serves the business operation, and is not duplicated.

05 methods for determining transfer pricing.

Decree 132 stipulates five methods, and businesses choose the most suitable method based on the nature of the transaction and the availability of comparative data:

• The Independent Transaction Price Comparison (CUP) method: Directly compares the price of an related-party transaction with the price of a comparable independent transaction. It is preferred when there is a high degree of comparable data, for example, the same product sold to a parent company and to an independent customer. 
• Resale price method: Subtract a reasonable gross profit margin from the resale price to an independent party. This method is typically applied to distributors and trading companies that only purchase from related parties and resell without altering the nature of the goods. 
• Cost-plus method: Take the cost of goods sold and add a reasonable gross profit margin, appropriate to the production and processing activities for the affiliated company.
• The Net Profit Margin Comparison (NPMR) method compares the net profit indicators (such as profit margin on revenue, on assets, and on expenses) of a business with independent companies performing similar functions. This is currently the most common method due to the easier access to comparative data.
• Profit Allocation Method: This method is applied to complex, closed-loop transactions or when multiple parties are involved in developing intangible assets, and it is not possible to separate and value each part individually. The aggregate profit is allocated according to each party's contribution ratio. 

Standard Independent Transaction Value Range

The tax authorities do not accept a single figure. Businesses must build a set of independent comparable entities (usually a minimum of 5 companies), and then use percentile statistical methods to determine the acceptable market price range.

According to Decree 132, the standard independent transaction value range is from the 35th percentile to the 75th percentile. The application method is as follows:

• If the company's price, profit margin, or profit allocation ratio falls within this range: No adjustment is required.
• If it falls outside this range: The business must adjust the value to within the range that reflects the highest degree of similarity to its transaction, and the adjustment must not reduce the tax liability.

Compared to the previous Decree 20/2017 (which used a quartile range of 25-75), Decree 132/2020/ND-CP has narrowed this standard range, meaning the safety margin for businesses is narrower and the selection of comparison subjects needs to be even more precise. 

Standard procedures for determining transfer pricing.

A standard process for determining transfer pricing would include the following steps:

• Step 1 – Determine the relationship and scope of transactions: Compare the actual ownership, borrowed capital, and personnel control with the cases in Article 5 of Decree 132/2020/ND-CP to accurately determine whether the enterprise falls under the scope of regulation. 
• Step 2 – Functional, Asset, and Risk Analysis (FAR Analysis): Clarify what functions each party performs, what assets they use, and what risks they bear. This forms the basis for selecting the methodology and comparison subjects. 
• Step 3 – Selecting a method and building comparative data: Choose one of the five most suitable methods and find comparable independent objects based on four criteria: product or service characteristics, function performed, contract conditions, and economic/market context. 
• Step 4 – Calculate, compare with the benchmark range and adjust: Determine the benchmark independent transaction value range, compare it with the company's index, and adjust if it falls outside the range.
• Step 5 – Filing and archiving: Complete the declaration form and archive the documents to be ready for explanation during inspections. 

Declaration and documentation for determining transfer pricing.

This is one of the areas where FDI businesses are most prone to errors, especially those without specialized accounting and tax teams focusing on related-party transactions. Errors often lie not only in determining whether related-party transactions exist, but also in the way they are declared, the choice of forms, the preparation of documentation, and the justification of the applicable pricing.  

Regarding declaration obligations

When related-party transactions occur, businesses must declare information about these transactions along with their annual corporate income tax (CIT) return as required. Businesses need to use the correct declaration forms currently in use, in which Appendix I on related-party relationship and related-party transaction information has been replaced and updated according to Decree 20/2025/ND-CP.

The filing requirement does not depend on whether the business is required to file it. related-party transaction pricing documentation or not. In other words, the business can be Exemption from filing related-party transaction records. However, full details of related-party transactions must still be disclosed.

Regarding the obligation to prepare documentation for determining transfer pricing.

Except for cases exempted by regulations, businesses with related-party transactions must prepare documentation proving that the transaction prices comply with the arm's length principle. This documentation typically includes three levels:

• Local File: This file contains information about business operations in Vietnam, functional analysis, asset and risk analysis (FAR Analysis), pricing methodology, and comparative data used.
• Global corporate information profile (Master File): Provides an overall view of the organizational structure, business operations, and related-party transaction pricing policies of a multinational corporation.
• Country-by-Country Profit Reporting (CbCR): Applicable to certain multinational corporations that meet the specified criteria, it provides information on the allocation of revenue, profits, taxes, and business operations across countries.

Reference: Instructions for declaring related-party transactions on HTKK (Vietnam Tax Declaration System).

Important Note: Exemption from filing does not mean exemption from compliance responsibility. The tax authorities still have the right to request explanations regarding the nature of transactions, the reasonableness of expenses, revenues, and applicable prices if signs of risk arise. Therefore, even if exempt from filing, businesses should still maintain complete records of contracts, documents, and evidence proving that related-party transactions were conducted according to market principles. 

Common risks involved in determining transfer pricing.

Based on our experience in advising and supporting numerous businesses, MAN – Master Accountant Network It has been observed that tax authorities pay particular attention, especially to FDI enterprises that have transactions with their parent company, companies within the same group, or related parties abroad. Many businesses are not at fault for having related-party transactions, but they face risks due to not fulfilling their declaration obligations, not preparing complete documentation, or not being able to prove that the applied prices comply with the arm's length principle.

Some common errors that lead to businesses being required to adjust related-party transaction prices, reduce deductible expenses, pay back taxes, and incur penalties include:

Failure to declare, incomplete declaration, or misuse of the form.

This is a common administrative error but can lead to many risks during the tax settlement process. Some businesses have related-party transactions but fail to correctly identify the scope of transactions to be declared, omit information about related parties, transaction values, or use the wrong declaration appendix according to the new regulations.

Inaccurate declarations may lead tax authorities to assess that the business has not fully fulfilled its compliance obligations, thereby requiring further explanation of the nature of the transaction and the pricing method.

Failure to prepare or failure to prepare transfer pricing documentation within the prescribed timeframe.

For businesses required to maintain records, failure to prepare Local File, Master File, or other relevant supporting documents within the deadline poses a significant risk. Related-party transaction records are not merely a record-keeping procedure; they also serve as proof that pricing, profit margins, or profit allocation among parties are consistent with market conditions.

In cases where records are missing or incomplete, businesses may face difficulties in providing explanations and risk having their tax obligations reassessed by the tax authorities using alternative data.

Inappropriate comparative data, incorrect pricing method selected.

This is a highly technical issue and often directly impacts the results of related-party transaction analysis. Businesses may face risks when selecting comparable companies that are dissimilar in function, industry, size, market, or business conditions.

Furthermore, applying a valuation method that is inappropriate for the nature of the transaction can also cause the company's profit margin to fall outside the standard independent transaction value range, leading to a requirement to adjust taxable profit.

For example: Businesses engaged in simple processing and manufacturing may apply methods that do not accurately reflect their actual function, resulting in analysis that fails to support their position when dealing with tax authorities.

Inconsistency in information requests from tax authorities.

During an audit, the tax authorities may request that businesses provide contracts, pricing policies, functional analysis documents, comparative data, or explanations of profit fluctuations.

If a business is not prepared with the necessary documentation or if there is inconsistency in information between departments (accounting, finance, legal, corporate management), the explanation process can be lengthy and increase the likelihood of doubts arising about the legitimacy of the transaction.

In summary, the biggest risk for FDI enterprises does not lie in the existence of related-party transactions, but in their ability to prove that those transactions were conducted under market conditions. Thorough documentation, appropriate methodology selection, and the development of reliable comparative data are crucial factors in reducing the risk of tax adjustments during audits. 

This is why many FDI business owners choose to use it. related party transaction advisory services Seek support from specialized and experienced units like MAN – Master Accountant Network to minimize risk. MAN has access to a dedicated comparison database, is constantly updated to reflect legal changes, and is responsible for ensuring all figures are legally sound.

Conclude

Determining transfer pricing is not simply a technique, but a mechanism that helps businesses demonstrate transparency and fairness in their transactions with related parties. With the continuous changes in tax policies, especially Decree 132/2020/ND-CP, Decree 20/2025/ND-CP, and updated guidelines in 2026, FDI enterprises need to proactively review transactions, choose appropriate pricing methods, and ensure full compliance with declaration and documentation requirements.

Contact MAN – Master Accountant Network to receive support and adviceấIt's free!

Contact information MAN – Master Accountant Network

• Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
• Mobile/Zalo: 0903 963 163 – 0903 428 622
• E-mail: man@man.net.vn
• Google Business Profile: View MAN – Master Accountant Network's Google Business Profile 
• LinkedIn Founder: View expert Le Hoang Tuyen's LinkedIn profile. 

Responsible for production and professional content review by: Mr. Le Hoang Tuyen – Founder & CEO of MAN – Master Accountant Network. He is a CPA Vietnam auditor with over 30 years of in-depth experience in accounting, auditing, taxation, and corporate legal consulting.

Answering frequently asked questions about determining transfer pricing.