FOREIGN TRADE UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION

---------***---------

GRADUATION THESIS
Major: International Business Administration

MANAGING TRANSFER PRICING ACTIVITIES

OF MULTINATIONAL CORPORATIONS IN
VIETNAM

Student name : Trinh Linh Chi

Student code : 1312250005

Class : English 6 FBA

Intake 52

Supervisor : Tang Thi Thanh Thuy, MSc

Hanoi, May 2017

 TABLE OF CONTENTS

ACKNOWLEDGEMENT.......................................................................................... v

LIST OF ABBREVIATIONS.................................................................................... vi

LIST OF TABLES.................................................................................................... vii

LIST OF FIGURES................................................................................................. viii

INTRODUCTION....................................................................................................... 1

1. The necessity of the research.......................................................................... 1

2. Purpose of the research.................................................................................. 2

3. Subject and scope of the research.................................................................. 2

4. Methodology................................................................................................... 2

5. Overview structure of the research................................................................. 3

CHAPTER 1. OVERVIEW OF TRANSFER PRICING IN MULTINATIONAL

CORPORATIONS.......................................................................................................... 4

1.1. Overview of multinational corporations......................................................... 4

1.1.1. Definition and roles of multinational corporations.................................... 4

1.1.2. Objective and organizational structure...................................................... 5

1.1.3. Internal transferring transactions of multinational corporations................6

1.2. Transfer pricing in multinational corporations............................................. 7

1.2.1. Transfer pricing identifications................................................................. 7

1.2.2. Common transfer pricing methods............................................................ 9

1.2.3. Motivation of transfer pricing................................................................. 11

1.3. Impacts of transfer pricing........................................................................... 13

1.3.1. Impacts of transfer pricing on multinational corporations.......................13

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 1.3.2. Impacts of transfer pricing on related countries...................................... 14

1.4. Methods of assessing transfer price............................................................. 16

1.4.1. Comparable uncontrolled price method.................................................. 17

1.4.2. Resale price method................................................................................ 18

1.4.3. Cost plus method..................................................................................... 20

1.4.4. Profit split method................................................................................... 21

1.4.5. Transactional net margin method............................................................ 22

1.5. Anti-transfer pricing activities in the world................................................. 23

1.5.1. The United States of America................................................................. 23

1.5.2. China....................................................................................................... 25

1.5.3. Southeast Asian countries........................................................................ 26

CHAPTER 2. TRANSFER PRICING ACTIVITIES IN VIETNAM.................29

2.1. Current operations of multinational corporations in Vietnam................... 29

2.1.1. Overview of Vietnams economy............................................................ 29

2.1.2. Development of multinational corporations in Vietnam..........................31

2.2. Some typical forms of transfer pricing in Vietnam...................................... 36

2.2.1. Transfer pricing through transferring raw materials and finished goods. 36

2.2.2. Transfer pricing through capital contribution.......................................... 36

2.2.3. Transfer pricing for the purpose of market manipulation........................37

2.2.4. Transfer pricing through technology transfer.......................................... 37

2.3. Current situation of transfer pricing in Vietnam........................................ 38

2.4. Some transfer pricing cases in Vietnam...................................................... 41

2.4.1. Hualon Corporation................................................................................. 41

2.4.2. Jun Chow Oolong Tea Limited Liability Company................................. 42

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 2.4.3. Saigon VeWong Limited Liability Company........................................... 44

2.4.4. Kad Industrial SA Vietnam Limited Liability Company.........................45

2.4.5. P&G Vietnam.......................................................................................... 45

2.4.6. Vietnam Brewery Joint Venture.............................................................. 46

2.4.7. Adidas Vietnam....................................................................................... 47

2.4.8. Metro Cash & Carry Vietnam................................................................. 49

2.4.9. Keangnam Vina....................................................................................... 53

2.5. Impacts of transfer pricing on Vietnam....................................................... 56

2.6. Current situation of anti-transfer pricing management in Vietnam...........57

2.6.1. Legal foundation..................................................................................... 57

2.6.2. Initial achievements of anti-transfer pricing management.......................59

2.6.3. Difficulties in fighting against transfer pricing........................................ 60

CHAPTER 3. RECOMMENDATIONS TO CONTROL TRANSFER PRICING

ACTIVITIES IN VIETNAM........................................................................................ 64

3.1. Adjusting corporate income tax rate............................................................ 65

3.2. Letting State Auditor participate in anti-transfer pricing............................ 65

3.3. Completing legal system............................................................................... 66

3.4. Tightening control of multinational corporations.......................................68

3.4.1. Issuing regulations in identification of transfer pricing behavior in

enterprises............................................................................................................ 68

3.4.2. Gathering accurate and full information.................................................. 68

3.4.3. Examining and storing information......................................................... 69

3.5. Building database system for purpose of determining transfer price..........70

3.6. Narrowing tax incentives.............................................................................. 71

3.7. Promoting the capacity of tax officials......................................................... 71

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 3.8. Stabilizing macro economy and the value of Vietnamese currency............72

3.9. Promoting anti-corruption activities............................................................ 73

3.10. Changing banking activities........................................................................ 74

3.11. Other solutions............................................................................................. 74

CONCLUSION......................................................................................................... 76

REFERENCES.......................................................................................................... 78

APPENDIX................................................................................................................... i

i
v
 ACKNOWLEDGEMENT
First of all, I would like to express my deepest sense of gratitude to my supervisor,
Tang Thi Thanh Thuy, MSc for her patient guidance, help and support throughout
this thesis. This accomplishment would not have been possible without her.

Besides, I also would like to express my very profound gratitude to my parents and
to my friends for providing me with unfailing support and continuous
encouragement throughout my years of study and through my intensive time
dedicating to this thesis.

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 LIST OF ABBREVIATIONS

APA Advance Pricing Agreement

APEC Asia Pacific Economic Cooperation

ASEAN Association of Southeast Asian Nations

CUP Comparable Uncontrolled Price

FDI Foreign Direct Investment

FIA Foreign Investment Agency

GDP Gross Domestic Product

IRC Internal Revenue Code

IRS Internal Revenue Service

OECD Economic Cooperation and Development

SAT State Administration of Taxation

TPP Trans Pacific Partnership Agreement

WTO World Trade Organization

 LIST OF TABLES
Page

Table 2.1: Inspection result of FDI enterprises in 2014.......................................... 39

Table 2.2: Comparison of payable tax of Oolong Tea Company when selling at
accurate price and transfer price............................................................................. 43

Table 2.3: Comparison of payable tax of the whole corporation when purchasing at
accurate price and transfer price............................................................................. 43

Table 2.4: Keangnam Vinas operating results 2007 2011................................... 54

Table 2.5: Comparison of tax payables of Keangnam Enterprises in two methods in

2011........................................................................................................................ 56
 LIST OF FIGURES
Page

Figure 1.1: Comparable uncontrolled price method................................................ 18

Figure 1.2: Resale price method............................................................................. 19

Figure 1.3: Cost plus method.................................................................................. 20

Figure 2.1: Vietnams GDP annual growth rate 2012 2016.................................. 29

Figure 2.2: Vietnams GDP per capita 2012 2016................................................ 30

Figure 2.3: FDI capital in Vietnam 2012 2016..................................................... 32

Figure 2.4: Number of FDI projects in Vietnam 2010 2016................................. 33

Figure 2.5: Proportion of newly registered capital by investment sector in 2016

...34 Figure 2.6: Associated transactions within Adidas......................................... 48

Figure 2.7: Revenue of Metro Vietnam 2002 2013.............................................. 50

Figure 2.8: Advertising expenses of Metro Vietnam 2011 2013..........................53

 INTRODUCTION
1. The necessity of the research

On April 3rd 2016, the release of the Panama papers amazed the whole world by
documents showing the myriad ways in which the rich and powerful use to hide wealth,
evade taxes and commit fraud. Panama papers is considered the biggest data leak in
history. It also continues to bring various questions about one eternal problem: economic
integration and globalization.

It is obvious that globalization, economic integration and trade liberalization have

become general tendency of our world economy. For over 30 years since Renovation
policy was implemented in 1986, Vietnam economy has achieved success to become
one of the countries having high and stable economic growth in Asia Pacific. Besides, by
participating in some trade organizations in the world such as Association of Southeast
Asian Nations (ASEAN) in 1995, Asia Pacific Economic Cooperation (APEC) in 1998,
World Trade Organization (WTO) in 2007 and recently, Trans Pacific Partnership
Agreement (TPP) in 2016, Vietnam has raised sharply both domestic and foreign
investment flows. Especially, capital investment from foreign corporations has become
an important source contributing to Vietnams economy. These corporations promote
economic growth, facilitate technology transfer as well as accelerate the process of
economic restructuring. They also solve the problems of employment and expand
opportunities of cooperation with numerous countries in the world.

Although the positive contributions of multinational corporations to Vietnams economic

growth cannot be denied, the sudden increase of investment also contains potential risks,
especially when Vietnam has not built a rigid and effective management policy. In recent
years, multinational corporations have continually reported losses in business operation,
causing direct effect on the state budget. This situation shows a warning about a serious
problem coming along with foreign investment: transfer pricing. Transfer pricing is
illegal tax fraud behavior, causing losses to the state budget and unequal competition
with domestic enterprises. Consequently, transfer pricing creates many potential hazards
to the development of Vietnams economy.

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Fighting against transfer pricing is a necessary problem which requires competency
authorities to pay attention and find solutions to make business environment fair and
effective. For that reason, I see the importance of the topic Managing transfer pricing
activities of multinational corporations in Vietnam in anti-transfer pricing activities.
From presenting objective analysis and research of the current actual situation as well as
learning experience from other countries in the world, the question of transfer pricing
may be clarified, contributing efficiently to anti-transfer pricing fight of Vietnam in near
future.

2. Purpose of the research

The main purpose of this research is to analyze and research about actual situation and
impacts of transfer pricing activities of multinational corporations in Vietnam as well as
anti-transfer pricing activities of competent authorities, from that suggest suitable
solutions in accordance with international practice and economic situation of the country.

3. Subject and scope of the research

The subject of this research is transfer pricing activities in multinational corporations in

Vietnam. In particular, the thesis mainly focuses on typical companies with medium and
large size which are located in key economic regions of Vietnam including Ha Noi, Thai
Nguyen, Ho Chi Minh City, Hai Phong, Binh Duong, etc.

Since international transfer pricing is a complicated issue, the scope of this research will
only concentrate on multinational corporations opening subsidiaries in Vietnam during
the period from 2006 to 2016 with practical cases. Besides, this thesis also presents
transfer pricing cases of some other older multinational companies in order to provide
the data and basis in analyzing and specifying methods used by these corporations.

4. Methodology

The research is based on qualitative analysis. The main methodologies used are theory
analysis, data collection, analyzing and comparing methods. In order to obtain the
accurate acknowledgement relating to transfer pricing issues, I refer to not only
Vietnamese and international regulations on transfer pricing but also economic articles in
Vietnam and all over the world. In addition, data sources are derived primarily from
operating reports of multinational companies and the numbers that are listed on the stock
market.

In specific, the research begins with actual situation of associated transactions, transfer
pricing anti-transfer pricing activities of Vietnam and some other countries, then suggest
solutions for this problem in Vietnam. Methodology of the research is demonstrated
clearly as below:

Theories about multinational

corporations and transfer pricing

Experience from
Actual situation of transfer pricing
other countries

Assessment of current anti-transfer

pricing activities

Suggestion of solutions
applying to Vietnam

5. Overview structure of the research

The thesis consists of three main chapters which will be presented in the following
orders:

Chapter 1: Overview of transfer pricing in multinational corporations

Chapter 2: Current situation of transfer pricing in Vietnam

Chapter 3: Suggestions to control transfer pricing in Vietnam

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 CHAPTER 1. OVERVIEW OF TRANSFER PRICING IN
MULTINATIONAL CORPORATIONS
1.1. Overview of multinational corporations

1.1.1. Definition and roles of multinational corporations

James Wright (2015) defines a multinational corporation as a business organization

whose activities are located in more than two countries and is the organizational form
that defines foreign direct investment. Such company normally consists of headquarter
based in home country and few or more subsidiaries in foreign countries. These
operations outside the companys home country must be linked to and managed by the
parent company. Obviously, multinational corporations can diversify their global
activities in term of the number of host countries in which they do business. A large
multinational corporation may employ thousands of employees working in over one
hundred countries all over the world.

Stephen Cohen (2007) mentions to corporation as the most important private sector
institution for creating wealth and allocating resources on a country-by-country basis.
Multinational corporations serve this role in the global economy.

Multinational corporations play an important role in the worlds economy. Firstly,

multinational corporations act as a leader in the economy with constant promotion of
new technologies. Innovations are to be seen not only in technological field but also in
other fields such as medicine, education and social policies which are necessary to the
worlds development. Secondly, by opening subsidiaries in some developing countries,
multinational corporations create a quantity of job opportunities for people living in the
host countries. They are employed and educated, which makes their lives better. In
addition, minimizing the costs of production helps companies to provide relatively cheap
products that facilitate peoples lives. Thirdly, multinational corporations promote
efficiency and growth of the world economy. They establish the interconnection between
the domestic economies of some isolated countries and the worlds greatest economies.
They create a global market for all countries to join in. In other words, multinational
corporations promote globalization.
On the other hand, the operation of multinational companies also includes the negative
side when companies take advantage of cheap labor and relatively rich natural resources
of the host countries. Moreover, multinational companies are known to rarely take care
of the well-being of the country where they place businesses. The main goal for such
corporations is to get as much profit as possible. A lot of companies launch their factories
in different countries in order to minimize the costs of production; however, the final
goods are often exported to serve the people in the original country. Thus, which receive
larger benefits are still home country and its people, leaving host countries with smaller
profits and environmental concerns.

1.1.2. Objective and organizational structure

Multinational corporations consider shareholders value as the fundamental element of

the organization. Therefore, usually, the aim of these corporations is to utilize assets of
their shareholder. To achieve this goal, companies have to make efforts to bring the most
effective benefits to shareholder, which is presented in stock value and dividend at
moderate risk level, or certain benefits at the lowest risk level brought by the companies.

Multinational corporations can be divided into three broad groups according to their
production facilities as follows:

Horizontally integrated multinational corporations do global business by producing the

similar good in both parent company and subsidiaries. It means that the product will be
almost the same in home and host countries. The soft drink industry is an example of this
group. The subsidiary is a bottling company which produces pretty much the same
product as the parent company. Another example is the food industry with typical brands
such as McDonalds, Kentucky Fried Chicken (KFC), Pizza Hut, Burger King, etc.

Vertically integrated multinational corporations do global business by letting one

subsidiary in certain country produce products that serve as input to produce the final
good done by parent company or other subsidiary in other country. Oil companies are
good examples of this structure. Oil exploration and production are accomplished
abroad where the subsidiary exports crude petroleum to the parent corporation which
then refines the crude into gasoline. Another example is the Maquiladora program. The
US parent corporation exports components to an assembly Maquiladora subsidiary which
in turn re-exports the assembled good back to the parent corporation. A company
operating in shoe industry like Adidas also uses this type of operation.

Diversified multinational corporations contains of many subsidiaries in different

countries which cooperate and develop together by both horizontal and vertical
integration way. Microsoft is the corporation following this structure.

1.1.3. Internal transferring transactions of multinational corporations

Internal transferring transactions of multinational corporations are trading activities

between parent company and subsidiary or between many subsidiaries. Trading activities
can be normally understood as activities for the purpose of profitability, including the
sale of goods, the provision of services, investment, trading promotion and other profit-
making activities. The two main parts of trading activities are commodity trading and
service trading, in which one party has the obligation to pay for the goods and services
provided by the other party. Because multinational corporations operate in many
different countries, their business activities must be in accordance with customs as well
as business law of that host country. Thus, their internal transactions are extremely
complex with larger quantity and bigger value. As a result, tax authority of a single
country may have difficulty in managing and controlling these activities. Internal
transferring transactions have a big impact on developing strategy of multinational
corporations.

According to their common features and characteristics, internal transferring transactions

can be divided into several groups. One of the most popular internal transactions is
transaction relating to materials which require high specific characteristics or materials
which are made by subsidiaries in favorable host countries in order to reduce the cost of
these materials. Besides, multinational corporations do internal transactions through
finished goods, in which subsidiaries purchase final products that were made in one
country, then resell for profit without investing in machines and labor in manufacturing
process. The third group is internal transaction
relating to the movement of production machinery and equipment, especially when the
destination is developing countries. Internal transactions can also be implemented by
transacting intangible assets such as franchise, copyright, trademark, trade name as well
as product research and development expense. Additionally, supply of managing service,
financial service or cost for professions working in receiving country are also sources of
expenses which multinational companies rely on in the purpose of lowering their payable
tax in host countries. Another way to do internal transactions is funding and receiving
fund of resources like financial resources and human resources within one global
corporation. Last but not least, internal transactions can be performed by companies
which are related to internal borrowing and loan between subsidiaries or between parent
company and subsidiary.

These internal transferring transactions take place regularly with large value; hence, a
general and consistent principle must be agreed across countries so as to eliminate
negative impacts of these transactions. The principle is made to ensure the equality in
commerce, pose a fundamental rule for trading activities in international business. The
applied principle is the arm's length principle which state that the transactions between
affiliated parties must be made purely on commercial basis, both parties trying to
maximize their advantage and neither parties accommodating or favoring the other in
any way. This means that all of commercial and financial terms in a contract between
subsidiaries of the same multinational corporation must be directed and governed by
objective effects from market.

1.2. Transfer pricing in multinational corporations

1.2.1. Transfer pricing identifications

Robert Feinschreiber (2004) refers transfer pricing as the pricing of intercompany

transactions that take place between affiliated businesses. The transfer pricing process
determines the amount of income that each party earns from that transaction.
Transactions, in this context, are determined broadly, and include sales, licensing,
leasing, services, and interest.
Organization for Economic Cooperation and Development (OECD) (2010) defines a
transfer price as a price, adopted for book-keeping purposes, which is used to value
transactions between affiliated enterprises integrated under the same management at
artificially high or low levels in order to effect an unspecified income payment or capital
transfer between those enterprises. Thus, transfer pricing is understood as a way used by
companies in choosing a favorable price in transactions of trading tangible or intangible
assets and providing services. The price to be chosen will affect profit and taxes of
related parties within a multinational corporation.

This action may only be performed through transaction of associated parties which
specific presents in conclusion of price. Concluded price is the basis when examining
transfer pricing activity. Whether a transaction is concluded as a transfer pricing activity
or not will be assessed by comparing concluded price with market price. In case that
concluded price is not corresponding to market price, it is more likely to suspect transfer
pricing in this transaction.

How to recognize whether an associated enterprise involves in transfer pricing or not is

always a question especially concerned by tax authorities. In fact, this is a complex and
difficult problem that it is sometimes subjectively impacted by tax officials. Hence, in an
objective point of view, some identifications of transfer pricing in associated enterprises
are as follows:

Firstly, enterprises declare operational losses but constantly expand business activities,
increase scale of operations.

Secondly, transferring transactions appear between associated enterprises located in

countries with low tax.

Thirdly, a transfer pricing method used commonly by international companies is

recording depreciation expense. Whereby, subsidiaries first import used machineries and
equipment from parent company in home country, then estimate a short useful life of
these machines. By doing this, depreciation expense will be large, which also increases
production expense of the goods.
Fourthly, another method to raise the cost of production is using interest expense. Parent
company transfer materials and components that cannot be made or made with
unguaranteed quality in host countries to subsidiaries. This transaction is made in a
deferred payment including interest expense. When subsidiaries have revenue by selling
products, this money will be counted in interest expense, leading to report no or little
profit in financial statement. The real profit, through paying interest expense, was
transferred to parent company in home country.

Fifthly, when operating, companies report very high price of input materials, at the same
time increase all production expenses such as advertising expense, marketing expense in
purpose to eliminate profit.

1.2.2. Common transfer pricing methods

Multinational corporations often use some common transfer pricing methods as follows:

Firstly, transfer pricing through purchasing raw materials and selling finished goods:
subsidiaries located in host countries with high corporation income tax rate purchase
input materials, then sell finished goods to the market at high price or sell to other
subsidiaries at low price for purpose of minimizing income tax. Moreover, by exporting
and importing goods, multinational corporations also benefit from exporting or
importing tariff, aiming to maximize profit after tax of companies.

Secondly, transfer pricing through tangible fixed assets: when transferring fixed assets
among companies, subsidiaries located in countries with high income tax rate assess the
received assets at high value. This transfer price is extremely exceed the true value of
those assets. Through this activity, multinational corporations transfer a part of their
profit abroad, reducing taxable income. On the other hand, the activity helps companies
not only to save cost of liquidating used assets but also to transfer income to countries
with low tax rate, from that maximizing their profit.

Thirdly, transfer pricing through intangible assets: in transactions between related

parties, they will charge intangible assets at tremendously high price; otherwise, they
also report payments for copyright expense, expense for product branding, research and
development expense, etc. Multinational corporations build research and development
laboratories in countries with high tax rate. All product research and development
expenses will be borne by subsidiaries located in these countries. Nevertheless, results of
research are used and applied by all subsidiaries. In another case, multinational
corporations implement a branding program to promote products within a region, but
distribute all expenses to members located in high-tax-rate host countries. Above
activities are all aimed to minimize the amount of payable tax. Since they are purely the
intentional activities of multinational corporations, they may be concluded transfer
pricing.

Moreover, multinational corporations do transfer pricing through service supplying

transactions occurring among members such as financial service, legal consulting service
which is charged at extremely high price, or credit service with higher interest rate
compared to the market. Plus, there are funds relating to basic resources like human
resource. Expenses for professionals working at foreign countries are reported high.

In general, multinational corporations tend to do transfer pricing activities through 2

stages. In the first stage, companies increase the value of capital contribution and the
value of intangible assets by several times in comparison with the true value. This action
helps enterprises to raise annual depreciation expense, from that increasing input costs
which will help the companies to quickly return fixed investment and minimize
investment risks, reducing payable corporate income tax in the host country. The second
stage is implementation. In this stage, multinational corporations apply all methods to
higher input costs of the products, including: importing raw materials from parent
company or abroad affiliated companies in which the prices are determined by their own;
making abroad advertisement at high cost; advancing managing and administrative costs,
etc. In order to perform these above methods, enterprises may use several counterfeit
accounting techniques such as: pre-accounting but not yet spent; making provisions in
contravention of regulations; recording expenses without invoices; recording expenses
not for production and business; recording salaries and depreciation expenses not in
accordance with regulations; incorrect accounting of interest expenses; etc. In particular,
one of the most common way is erroneously
accounting for different expenses and transferring losses in contravention of
regulations.

Overall, multinational corporations use many transfer pricing methods for one major
purpose: reducing payable tax and maximizing profit of companies. To deal with more
tightening in management of host countries, transfer pricing methods are more and more
complicated and undetectable.

1.2.3. Motivation of transfer pricing

Motivation that promote multinational corporations to do transfer pricing can be

divided into categories: external and internal motivation.

1.2.3.1. External motivation

Firstly, the difference of corporation income tax rate: when there is a big difference in
corporation income tax rate between two countries, multinational corporations may do
transfer pricing in order to minimize tax payable as well as maximize profit after tax of
companies. Multinational corporations often increase input cost of materials and goods,
then set low sale price or export price in subsidiaries located in host countries with high
tax rate. By following this way, multinational corporations transferred one part of profit
from countries with high tax rate to countries with low tax rate, resulting in success of
maximizing profit.

Secondly, opportunity cost: since profit of multinational corporations can only be

transferred to home country at the end fiscal year after examination of tax authorities and
currency control of foreign exchange department, investment opportunities may be
missed. Therefore, multinational corporations do transfer pricing so as to recover capital
quickly and catch other investment opportunities.

Thirdly, exchange rate: base on forecast of exchange rate situation, multinational

corporations may make internal payments earlier or later to reduce the risk of exchange
rate. Liabilities may be paid earlier in case that currency of host country is forecasted to
be devalued in near future. In contrast, payments will be delayed if the forecast shows
that currency of that country tends to be more power.
Fourthly, inflation: inflation situation differs from country to country. High inflation rate
in one country means devaluation of its currency. As a result, multinational corporations
may do transfer pricing so as to conserve their investment capital and profit.

Fifthly, economic and political situation of countries: when government of host country
changes economic policies that affect rights of subsidiaries, multinational corporations
may do transfer pricing in order to save them from impacts. Moreover, in case of
unstable politic situation of host countries, companies also want to recover capital for the
aim of reducing risk and conserving business capital.

Besides, transfer pricing also helps to reduce profits; hence, reduce pressure for salary
increase from labor force as well as reduce observation of tax authorities in host
countries.

1.2.3.2. Internal motivation

Beside the external motivation mentioned above, there are internal motivation promoting
multinational corporations, making transfer pricing become more and more complex and
delicate. Those motivation are:

Desire of minimizing losses: when business activities of multinational corporations in

home country or subsidiaries in host countries get loss, transfer pricing helps companies
to share the losses among members. From that, taxes payable will be reduced, creating a
better financial situation when presenting to shareholders and related parties.

Capture market, domination of administration: domination of market is always necessary

when entering a new market. It contributes the initial foundation for latter operation.
Thus, in this first stage of opening business in foreign countries, multinational
corporations may increase product marketing activities, leading to loss reported.

In business association or cooperation, multinational corporations, depending on their

financial potential, report continual losses by doing illegal transfer pricing methods and
usurp management and control of other companies. Furthermore, multinational
corporations may kick partners out of business, usurp entire control and change the
ownership of companies. After dislodging competitors associated parties from market,
multinational corporations may capture the market and increase sale price to compensate
the previous costs.

Investment incentives from host countries: because of receiving benefits from the
process of calling for investment of host countries, multinational corporations consider
subsidiaries located in these countries as the main source to make profits for the entire
corporation and do transfer pricing, leaving significant consequences for countries
receiving investment.

Reduction of risk in transacting specific products: in order to reduce risk when

transacting products and services with high level of specification and security such as in
information technology, biotechnology, medicine and pharmacy, transfer pricing is the
method to be chosen by multinational corporations.

1.3. Impacts of transfer pricing

1.3.1. Impacts of transfer pricing on multinational corporations

In multinational corporations point of view, transfer pricing is recognized in two

different directions. Firstly, transfer pricing makes it easier for companies in achieving
their business purpose about tax and profit. In contrast, transfer pricing brings the risk of
bearing strict penalties from law of host countries and related countries.

Owning advantages of financial potential as well as incentives offered by host countries

in calling for investment, multinational corporations may do transfer pricing so as to
reduce the tax obligations to these countries.

Through transfer pricing, multinational corporations may easily transfer their profit
abroad and catch new business plans quickly, do not miss any opportunities. This is
usually applied in countries having monetary tightening policy.

Transfer pricing also makes it easier for multinational corporations to control the
domestic market, dislodge and usurp small and medium enterprises in domestic country
base on their enormous finance. When implementing the strategy of entering new
market, expenses will be shared among parent company and other subsidiaries. Hence,

13
generally, the whole corporation will not have to bear much financial pressure from
losses reported in some countries.

Through selling and purchasing transactions within company, multinational corporations

may avoid risks in research and development activities since these activities are usually
costly but low level of success. Plus, having sources of supplier and distributors,
companies also reduce risk of exchange rate, risk of consumer market and risk of
stability from raw materials supplier.

Beside obvious benefits brought by transfer pricing, multinational corporations have to

face strict penalties in case their behaviors come to light. When tax authorities of host
countries discover illegal transfer pricing activities, companies shall be punished by
paying a huge amount of money, at the same time may be revoked business license and
be forced to terminate all business activities in those countries. The worst damage is that
their reputation in international market shall be badly affected, attracting attention of all
tax authorities in located host countries.

1.3.2. Impacts of transfer pricing on related countries

Transfer pricing not only causes negative impacts to countries receiving investment but
also seriously affects country exporting investment. For purpose of maximizing profit,
multinational corporations try by all means to do transfer pricing, leaving enormous
consequences to economies of both countries.

1.3.2.1. Impacts of transfer pricing on countries receiving investment

Through transfer pricing, multinational corporations record input materials at high cost,
from that shortening their payback period. As a result, cash flows tend to flow out of the
countries receiving investment. Due to transfer pricing aiming to attract capital quicker
than initial investment plan, the capital structure of economy will be changed.
Consequently, results of production and business activities are reported wrongly, creating
incorrect information about the whole economy.

In some cases, countries receiving investment, due to their low income tax rate, become
the beneficiaries from transfer pricing activities of multinational corporations. Therefore,
they sometimes intentionally ignore these illegal activities; they are even

14
unwilling to cooperate with other countries to prevent transfer pricing. Clearly, illegal
transfer pricing activities benefit the economies of those countries in short term.
Nevertheless, in long term, when there are changes in international business
environment, countries which are considered as tax havens will suffer the
consequences due to the irresponsibility of previous management. At that time, those
countries will have to face financial difficulties since the strength of economy is
inaccurately reflected due to unsustainable revenues and then economic crisis will
happen.

For purpose of controlling the market when entering a new market, through transfer
pricing activities, multinational corporations shall implement excessive advertising and
promotion programs, resulting in cornering the market. Domestic enterprises lack of
financial resource to compete, leading to declare bankruptcy or change to other industry
thereafter. Thus, multinational corporations become monopoly and play the domestic
market by controlling sale pricing and breaking competition of the free market.
Governments of these countries may have difficulties planning macroeconomic
strategies and promoting domestic production.

Through transfer pricing, multinational corporations aims to take over domestic

enterprises. Owning enormously financial potential, multinational corporations cooperate
with domestic companies to create joint ventures, contributing high rate of capital to
undertake control. When holding power, multinational corporations will do transfer
pricing activities to report losses in financial statements. Dealing with losses in business
result, partners have to raise capital to maintain the operation of joint ventures. In case
that domestic partner is unable to invest more, it shall be forced to sell its capital
contribution. For that reason, the joint ventures transform to companies with 100%
foreign capital, gaining success of multinational corporations in taking over domestic
enterprises

Transfer pricing activities frustrate economic development strategies of countries

receiving investment. Unless transfer pricing is prevented, those countries shall become
dependent on both economic and even politic in long term. Transfer pricing causes an
imbalance in the international balance of payments of those countries.
 1.3.2.2. Impacts of transfer pricing on multinational corporations countries

When considering the entire process of transfer pricing activity, it can be seen that
multinational corporations are the most beneficiaries who minimize payable tax. Besides,
countries with low tax rate will also benefit. Transfer pricing reduces receivable tax of
countries exporting investment in case tax rate of these countries is higher than host
countries, causing an imbalance in countries tax plan.

Transfer pricing makes investment flows shift freely and sometimes not follow the
intention of governments of host countries, leading to difficulties in managing macro
economy.

In spite of the fact that transfer pricing brings negative impacts for both countries
receiving investment and multinational corporations countries, there are some countries,
acting in their own profit, create favorable conditions for multinational corporations do
transfer pricing in order to receive profit transferred from other countries. Those
countries set an extremely low corporate income tax rate, even no tax, to attract
multinational companies building subsidiaries; after that, they will receive valuable
assets such as technological know-how, patents, research inventions, advertising
expenses, etc.

1.4. Methods of assessing transfer price

Appraising the appropriate transfer price is the use of methods to determine whether the
price charged in internal transferring transactions within one multinational corporation is
comply with international practice and is accepted by the laws of host countries.

Determining the transfer price is necessary in governance of companies in order to adjust

the associated transaction price equal to market price. For that reason, the arm's length
principle is the important basis in specifying transfer price between subsidiaries and
parent company.

OECD has provided guideline listing methods used to determine the transfer price as
follows:
 1.4.1. Comparable uncontrolled price method

The comparable uncontrolled price method compares the price charged for property or
services transferred in a controlled transaction to the price charged for property or
services transferred in a comparable uncontrolled transaction in comparable
circumstances. If there is any difference between the two prices, this may indicate that
the conditions of the commercial and financial relations of the associated enterprises are
not arms length, and that the price in the uncontrolled transaction may need to be
substituted for the price in the controlled transaction.

An uncontrolled transaction is comparable to a controlled transaction for purpose of the

comparable uncontrolled price method if one of two conditions is met: i) none of the
differences (if any) between the transactions being compared or between the enterprises
undertaking those transactions could materially affect the price in the open market; or ii)
reasonably accurate adjustments can be made to eliminate the material effects of such
differences.

Depend on comparable relation, this method can be divided into two forms:

Internal comparable uncontrolled price method: compares price of goods and services
transacted between subsidiaries or between subsidiary and parent company to price
transacted between one of the related party and independent party in the same
comparable conditions.

External comparable uncontrolled price method: compares price of goods and services
transacted between related parties within one multinational organization to transaction
between two independent companies in equivalent conditions.

The comparable uncontrolled price method is considered the most direct way for
determining the arms length price since it involves with direct price comparison. As the
result of minor difference on goods or services being transferred can significantly affect
the price of the transaction, it may be difficult to find the comparable under this method.
Therefore, the CUP is most readily used in transactions involving commodity products
where degree of similarity of goods is high.
The comparable uncontrolled price method illustrated by United Nations has been
replicated in Figure 1.1.

Associated enterprise 1 Arms length price Associated enterprise 2

Internal comparable
Independent party

Internal
comparable
Independent party A Independent party B
External comparable

Controlled transaction
Uncontrolled transaction
Figure 1.1: Comparable uncontrolled price method

Source: United Nations, 2013

To apply this method, how the transaction in question is differed from the comparable
transaction with the independent parties must be determined. If there is any difference
that significantly affect the arms length price, the appropriate adjustment shall be made
to eliminate such difference.

1.4.2. Resale price method

The resale price method begins with the price at which a product that has been purchased
from an associated enterprise is resold to an independent enterprise. This resale price is
then reduced by an appropriate gross margin, determined by reference to gross margins
in comparable uncontrolled transactions, representing the amount out of which the
reseller would seek to cover its selling and other operating expenses and, in light of the
functions performed, make an appropriate profit. What is left after subtracting the gross
margin can be regarded, after adjustment for other costs associated with the purchase of
the product, as an arms length price for the original transfer of property between the
associated enterprises.
Thus, in a resale price method, the resale price margin (i.e. the gross margin) that the
reseller earns from the controlled transaction is compared with the gross margin from
comparable uncontrolled transactions.

The resale price method illustrated by United Nations has been replicated in Figure
1.2.

Associated enterprise 1 Associated enterprise 2 Independent party

Arms length price Resale
price

Figure 1.2: Resale price method

Source: United Nations, 2013

Arms length price is calculated based on this formula:

Arms length price = Resale price (Resale price * Gross profit margin)

For example:

Resale price $100

- Gross profit margin (25%) 25
Arms length price $ 75

Resale price method is probably most useful for marketing operations such as those
typically carried out by a distributor or reseller where no unique intangible assets were
added to goods or services before resale. In some circumstances, the resale price margin
of the reseller in the controlled transaction may be determined by reference to the resale
price margin that the same reseller earns on items purchased and sold in comparable
uncontrolled transactions (an internal comparable). In other circumstances (especially
where reliable internal comparable is not available), the resale price margin may be
determined by reference to the resale price margin earned by independent enterprises in
comparable uncontrolled transactions (external comparable).
 1.4.3. Cost plus method

The cost plus method begins with the costs incurred by the supplier of property or
services in a controlled transaction for property transferred or services provided to an
associated enterprise. An appropriate mark-up, determined by reference to the mark-up
earned by suppliers in comparable uncontrolled transactions, is then added to these costs,
to make an appropriate profit in light of the functions performed and the market
conditions. Such arms length mark-up may be determined by reference to the mark-up
that the same supplier earns in comparable uncontrolled transactions (an internal
comparable), or by reference to the mark up that would have been earned in comparable
transactions by an independent enterprise (external comparable). In general, the mark-
up in a cost plus method will be computed after direct and indirect costs of production or
supply, but before the operating expenses of the enterprise.

Thus, in a cost plus method, the mark-up on costs that the manufacturer or service
provider earns from the controlled transaction is compared with the mark-up on costs
from comparable uncontrolled transactions.

The cost plus method illustrated by United Nations has been replicated in Figure
1.3.

Associated enterprise 1 Associated enterprise 2

Arms length price

Figure 1.3: Cost plus method

Source: United Nations, 2013

For example:
Costs for associated enterprise 1 $500
+ Gross profit mark-up (50%) 250
Arms length price $750

This method is similar to resale price method in the way that it is less sensitive to
product comparability but is more sensitive to functional comparability. This means that
anything significantly affect the gross profit mark-up as a result of differences in
functions performed, risks assumed and assets used must be taken into account, and necessary
adjustments shall be made to eliminate such difference.

Cost plus method probably is most useful where: i) goods are sold by a manufacturer that
does not contribute valuable unique intangible assets or assume unusual risks in the
controlled transaction, such as may be the case under a contract or toll manufacturing
arrangement; or ii) the controlled transaction is the provision of services for which the
provider does not contribute any valuable unique intangible assets or assume unusual
risks.

1.4.4. Profit split method

In cases comparability doesnt exist due to the transaction of related parties is too
interrelated that it is not possible to evaluate the transactions independently, profit split
method is considered the most suitable method. The method is used to eliminate
elements affecting profit in controlled transactions. This method determines the transfer
price within corporation by analyzing profit distribution of associated enterprises
involved in this transfer activity.

Transactional profit split method first identifies the combined profits to be split for the
associated enterprises from the controlled transactions in which the associated
enterprises are engaged. In some cases, the combined profits will be the total profits from
the controlled transactions in question. In other cases, the combined profits will be a
residual profit intended to represent the profit that cannot readily be assigned to one of
the parties from the application of another transfer pricing method, such as the profit
arising from valuable, unique intangibles. Note that the combined profits may be a loss
in some circumstances.

Transactional profit split method then splits the combined profits between the associated
enterprises on an economically valid basis that approximates the division of profits that
would have been anticipated between independent enterprises. Where possible, this
economically valid basis may be supported by independent market data.

Base on associated relationship of related parties, there are two approaches used to split
the profit as follows:
Contribution analysis: The main idea of this approach is to allocate the combined profit
among related parties as if it is expected to be split among independent parties. In cases
where the external market data is available, such combined profit shall be allocated by
reference to the market data to reflect the division of profit in the comparable
transactions of independent parties. However, in cases where such external market data
is not available, the profit shall be split based on the value of their relative contributions
by taking the account of functions performed, risks assumed and assets used.

Residual profit split analysis: There are two stages of profit division under this approach.
In the first stage, after the combined profit has been identified, the sufficient profit will
be split among the related parties based on their functions performed. In this stage, the
profit being allocated will account for the routine functions performed by each related
party. In the second stage, the residual profit will be split among the related parties based
on the facts and circumstances of the transactions; therefore, the treatment of this part of
profit division will be varied case by case.

To apply the profit split method, it is essential to take reliability of the method into
account. Since the implementation of this method generally depends on fact,
circumstance of cases and the availability of information, profit must be allocated in way
it will be most likely expected in the comparable transactions of independent parties. To
be able to approximate such division of profit, the functional analysis, the determination
of combined profit and splitting factors and the approach used for determining the
division of profit of the related parties shall be consistent with those used by independent
parties. Moreover, accounting practice can be varied among businesses; hence, the
adjustment of the accounting data is needed to maintain the accounting consistency.
Without this consistency, the arms length price cannot be made.

1.4.5. Transactional net margin method

The transactional net margin method examines a net profit indicator that a taxpayer
realizes from a controlled transaction (or from transactions that are appropriate to
aggregate) with the net profit earned in comparable uncontrolled transactions. The
arms length net profit indicator of the taxpayer from the controlled transactions may be
determined by reference to the net profit indicator that the same taxpayer earns in
comparable uncontrolled transactions (internal comparable), or by reference to the net
profit indicator earned in comparable transactions by an independent enterprise (external
comparable).

In cases where the net profit is weighed to costs or sales, the transactional net margin
method operates in a manner similar to the cost plus and resale price methods
respectively, except that it compares the net profit arising from controlled and
uncontrolled transactions (after relevant operating expenses have been deducted) instead
of comparing a gross profit on resale or gross mark up on costs.

The comparability analysis is also required in applying the transactional net margin
method. Where price and gross profit margin can be significantly affected by product and
function differences, respectively, net profit margin under transactional net margin
method are less likely to be affected by such differences. However, net profit margin can
be significantly affected by factors such as difference in cost of capital, degree of
business experience and management efficiency that are unrelated to transfer pricing. To
mitigate the impact of the inaccuracy of comparative information due to the effect of
such factors, transactional net margin method has established the arms length range for
the transfer price instance of one single transfer price. Furthermore, the accounting
adjustment is needed to maintain the accounting consistency and thus comparability
between parties. Without the accounting consistency, the reliability of comparable will
not be established. Similar to other methods, the reasonable adjustment shall be made to
eliminate any differences between the tested parties and comparable that are significantly
affect the comparability of the transactions.

1.5. Anti-transfer pricing activities in the world

1.5.1. The United States of America

Regulations about transfer price has been included in American tax law, beginning with
the introduction of an anti-transfer pricing provision, in the form of Section 482, into the
Internal Revenue Code (IRC) in 1968. In July 1994, Internal Revenue Service
(IRS) issued official regulations about three methods used to assess the arms length
price of the goods, which valid until present. These three principal methods are the
comparable uncontrolled price method, the resale price method, and the cost plus
method. America is usually concerned about controlling transfer pricing in multinational
corporations, which is shown by the following points:

Firstly, America focuses on legal framework which set policies on calculating price
transferred within the corporation, which is call White Paper. White Paper contains
guidance of methods used to calculate the arms length price based on profit method.
This method examines net profit margin in relationship of other criteria: price, cost,
revenue and profit which is performed by taxpayers in comparable controlled
transactions.

Secondly, beside development of the legal framework, IRS also clearly identifies
associated companies engaging in international business as applied subjects. They
includes: i) American enterprises directly or indirectly holding and controlling other
foreign enterprises; ii) American enterprises directly or indirectly under holding and
controlling of other foreign enterprises; iii) enterprises with other foreign enterprises
under the same control of one other enterprise. The effect of determining objects is to
limit enterprises in the process of reviewing the investigation; at the same time, it shall
be considered as solution to combat transfer pricing activities.

Thirdly, America uses combination of methods. In addition to three above methods, two
transactional methods are also used including profit split method and net margin method.

Fourthly, government requires mandatory presentation of related documents. In recent

years, the United States of America has constantly issued rules governing operation of
associated parties. According to the regulation, companies must present the necessary
documentation to determine the results of transferred transactions between associated
corporations.

Fifthly, government attaches great importance to sanctions when evidence of violations

appears. When tax authority proves the violations for purpose of transfer
pricing, tax authority is allowed to adjust income of taxpayer and impose a fine from
20% to 40% of the declared lower tax (regulated in Section 482, IRS).

1.5.2. China

China started looking into transfer pricing issues in the late 1990s. While the early focus
of transfer pricing investigations was mostly on tangible goods transactions, it has since
been expanded into a range of other transactions, and in particular, those involving
intangibles and services.

On 29th June 2016, Chinas State Administration of Taxation (SAT) issued a new
regulation to improve the reporting of related-party transactions and contemporaneous
documentation. This regulation will replace the existing SAT guidance on Special Tax
Adjustments in Circular Guoshuifa No.2 issued in 2009, which provides guidance on the
Chinese Transfer Pricing rules and the key Chinese tax law anti-avoidance rules. The
issuance shows a focus of the country to this serious problem. The legislation provide
SAT the basis in adjusting the taxable income of taxpayer when their transactions with
associated parties are not in accordance with arm's length principle. Corporate income
tax law also requires taxpayers engaging in transactions with associated parties to submit
documents related to the transactions, along with their annual income tax return.

Taxpayers are also requested to submit related documents including price, cost
determining standard, calculation method and explanation to audit. Corporate income tax
law stipulate: enterprises engaging in transactions of tangible assets with associated
parties which is valid to 200 million Yuan annually or 40 million Yuan must submit
documents to explain with competency authority.

The transfer pricing regulation of China is also built on the basis of guidelines from
OECD; however, there are some different points between regulations of China and the
United States of America, including:

In China, the obligation to pay taxes is not consolidated, it means that if an organization
opens subsidiaries in many provinces in China, it will be inspected repeatedly.
In case that the tax authority in one province accepts a certain matter, it do not mean that
the matter is accepted in other provinces. This is a different point in comparison to
America. A tax problem once agreed in one state will be considered accepted by other
states.

If the company is concluded to involve in transfer pricing activities, the adjustment of

transfer pricing applied by Chinese tax authorities will be imposed for all related taxes
such as corporate income tax, value added tax, import and export tax, etc. On the other
hand, the United States of America only imposes corporate income tax.

In America, the index of price set by tax authority is based on public information while
in China, it is built from comparing secret data.

China also stipulates specific penalties of transfer pricing activities, whereby violations
shall be fined and serious violations of tax evasion or tax fraud shall be prosecuted for
criminal responsibility. Chinese corporate income tax law also states the interest of
missing taxes. Interest rate will be calculated by lending rate of People's Bank of China
plus 5%. This 5% fee could be reduced or completely eliminated if company provides
documents and other relevant information in accordance with this law.

1.5.3. Southeast Asian countries

1.5.3.1. Thailand

In Thailand, anti-transfer pricing regulation has been implemented for more than 10
years. Moreover, the national tax authority have established a complete database, which
shall easily states whether a company do transaction according to market price or not. In
order to deal with transfer pricing, since 2004, Thailand has set up a database of
information, reporting companies with high risk, to specially pay attention to. These
companies are which either report continuous losses for over two years, do not pay
income taxes in a period of time, have significant transactions with related parties or
have lower profitability index than other competitors.

To prevent transfer pricing, Thai tax authority requires the exact pricing evidence. All
data need to be reasonably demonstrated. Furthermore, it is necessary to provide
documents explaining companys revenues, operating results and international
transactions with associated parties. The pricing policy, profitability of products, market
information, profit contribution of each party, used assets in production will all be taken
into account and potentially used for thorough survey.

In particular, tax authority in Thailand also carefully focuses on internal costs within the
corporation such as corporate management expense, copyright expense. They examine
not only the validity of invoice but also the nature of the transaction at whether it took
place or not. On the other hand, Thailand's Department of Taxation often pays attention
to companies with tax incentives and compares the profitability of these companies with
other companies in market.

Countries economies become more and more dependent, making transfer pricing easier
to commit. Therefore, fighting against this serious problem requires carefully preparation
and tight cooperation between countries.

1.5.3.2. Singapore

Despite of owning a number of subsidiaries opened by large multinational corporations,

Singapore does not have specific law to regulate transfer pricing. The provisions relating
to this issue are stated in general law on taxation. Transfer pricing guidelines of the
Singapore is based on and consistent with the guidance of OECD. However, Singapore
does not give preference for any methods guided by OECD. Method for determining
transfer price will be selected and applied depending on specific case so as to create the
most reliable results.

Moreover, Singapore has no specific penalty provision for transfer pricing behavior. A
common fine for tax violations ranges from 100% to 400% of payable tax. Singaporean
tax law does not set any requirement of presenting documentation about transfer pricing
activities. The minimum documents required when company is examined on transfer
pricing issues include: description of parties involved in transactions, including trading
value and agreed terms; an detailed analysis which describes the main factors relating to
the purchasing process such as function and development of assets, the use of assets and
predicted risks; a table showing assessment of taxpayer about its taxation risk.
The guidelines issued by Singaporean government about transfer pricing primarily aim
to raise awareness and understanding of enterprises on transfer pricing issues. All
unilateral, bilateral and multilateral pricing agreements are accepted in Singapore.
Nevertheless, bilateral and multilateral agreements are required double taxation
agreement between Singapore and the related country.

1.5.3.3. Indonesia

The most common methods used to prevent transfer pricing activities in Indonesia are
traditional methods guided by OECD, including comparable uncontrolled price method,
resale price method and cost plus method. On the other hand, Indonesian corporate
income tax law applies fine from 2% to 48% per month on the missing payable tax
through transfer pricing. At the same time, government adjusts corporate income tax rate
in accordance with the main competitor countries, improves the predictability of tax
policy, and releases tax policy in upcoming years. These actions aim to facilitate
enterprises in previous assessment. Moreover, government also narrows tax incentives,
improves information and data system of taxpayers in order to closely monitor the
changes in revenue and profit of enterprises.
 CHAPTER 2. TRANSFER PRICING ACTIVITIES IN
VIETNAM
2.1. Current operations of multinational corporations in Vietnam

2.1.1. Overview of Vietnams economy

In recent years, Vietnams development record is remarkable. Economic growth is one of

the macroeconomic indicators used to assess the basic development of a country in a
period of time. Vietnams economy, in spite of being affected by the impact of global
financial crisis and public debt crisis, still maintains growth. The countrys GDP growth
in 5 recent years is shown in Figure 2.1.

8
7 6.68
5.98
6 5.42 6.21
5.03
5
4
3
2
1
0

20122013201420152016

Figure 2.1: Vietnams GDP annual growth rate 2012 2016

Unit: %

Source: General Statistics Office Vietnam

It can be seen from the figure that after a continual growth in 4 years from 2012 to 2015,
Vietnams economy suffered a slight decline in 2016 at 6.21% compared to 6.68% over
the same period in 2015. This slowdown is considered a result of unfavorable trend of
global economic downturn and a series of natural disasters and environmental incidents.
The severest drought recorded in recent 100 years and saltwater intrusion of sea water
into river have caused great damage to Mekong Delta -
Vietnam's main granary. In addition, ecological disaster in Ha Tinh province caused by
Formosa factory (Taiwan) have poured toxic chemicals into the sea, poisoning fishing
areas and affecting tourism industry. The services and industry sectors were the key
drivers as agriculture, hunting and forestry, and fishing sector has been facing obstacles
this year. In detail, of 6.21% growth rate, agriculture sector increased by 1.36%, the
lowest number of Vietnam since 2011. Industry and construction sector rose 7.57% while
service sector rose 6.98%. "In general the economy has been growing strongly, except
for the agriculture and mining sectors," said Nguyen Bich Lam, head of the General
Statistics Office, pointing out there have been upheavals in financial and monetary
markets around the world.

In addition to GDP, GDP per capita is also an important indicator to determine the
strength of an economy which is a measurement of the total economic output divided by
the number of people of one country. GDP per capita is normally used when comparing
the performance of a country to another since it is calculated on the same base.
Increasing of GDP per capita shows growth in the economy and tends to reflect an
improvement in productivity.

2,500
2,215
2,052 2,109
2,000 1,933
1,749

1,500

1,000

500

0
2012 2013 2014 2015 2016

Figure 2.2: Vietnams GDP per capita 2012 2016

Unit: USD

Source: General Statistics Office Vietnam

It is also reported that in the flow of steadily increase, GDP per capita in 2016 reached
2,215 USD, increasing 106 USD in comparison with 2015. Figure 2.2 presents GDP per
capita of Vietnam from 2012 to 2016.

In terms of economic structure, this year, agriculture hunting and forestry, and fishing
sector accounted for 16.32%, industry and construction sector covers 32.72%, service
sector covers 40.92% and the other 10.04% is contributed by other sectors. In addition,
inflation was also under control, at 4.74%, lower than the 5 percent ceiling rate.

In 2016, retail sales reached around 118 billion USD in total, up 10 percent compared to
last year. Vietnams retail turnover is expected to rise to 179 billion USD by 2020,
according to the Association of Vietnam Retailers.

Exports reached around 176 billion USD this year, up 8.6 percent compared to 2015. The
country posted a trade surplus of 2.68 billion USD, the biggest in six years. It is also
believed that, even without TPP, Vietnam has other free trade agreements to lean on and
will continue to increase its trade activities.

On the other hand, Vietnam saw a record number of business openings in 2016, a trend
attributed to more relaxed regulations under new enterprise and investment laws. A
report from the Ministry of Planning and Investment indicated the past year saw 110,000
new businesses open, up 16.2 percent from 2015. Registered capital increased 48 percent
to more than 39 billion USD. This trend gives hopes for robust growth and strong
investment of Vietnam in the near future.

2.1.2. Development of multinational corporations in Vietnam

Vietnam has become an attractive destination for foreign direct investment (FDI) in
recent years. According to Vietnam Foreign Investment Agency (FIA), 2016 recorded
2,556 new FDI projects licensed, with registered capital of over 15.1 billion USD. Thus,
there was an increase of 27% in the number of projects and 2.5% of registered capital
compared to 2015. Besides, 1,225 projects licensed in the previous years registered
capital adjustments, with an additional amount of over 5.765 billion USD. Additionally,
in 2016, 2,547 domestic enterprises and economic entities sold
shares to foreign investors, resulting a total capital invested approximately 3.4 billion
USD.

30.0
24.4
25.0 23.4 21.9 22.8
19.9
20.0 16.3
15.3
15.0
14.5 15.8
10.0 12.5
11.0 11.0 10.5 11.5
5.0

0.0
2010 2011 2012 2013 2014 2015 2016
Registered Capital Disbursed Capital

Figure 2.3: FDI capital in Vietnam 2012 2016

Unit: Billion USD

Source: General Statistics Office Vietnam

Overall, the total registered capital of the new projects, additional funding and
investment in form of capital contribution and share purchasing in 2016 reached over
24.3 billion USD, increasing 7.1% in comparison with 2015.

Notably, the amount of capital disbursed by investors was 15.8 billion USD, increasing
9% compared to 2015. This is also the highest amount of disbursement in Vietnam so far.

In the early stages of attracting foreign investment in Vietnam, FDI flows mainly focused
on mining industry and import substitution. However, this tendency has changed since
2000. The number of FDI projects in processing industry and export orientation have
increased steadily, contributing to export turnover and restructuring of exported
commodity. Through the period, orientation of attracting FDI in industry and
construction sector, in spite of changing in field and specific products, basically follows
encouraging production of new materials, high-tech products, information technology,
mechanical equipment, electronic components and products, etc. They are also projects
having capability of creating high value added and projects at which Vietnam has
comparative advantages in attracting FDI.

3,000
2,556
2,500
2,013
2,000 1,843
1,530
1,500 1,287
1,155 1,091
1,000

500

0
2010 2011 2012 2013 2014 2015 2016
Figure 2.4: Number of FDI projects in Vietnam 2010 2016

Unit: Projects

Source: General Statistics Office Vietnam

About the investment field, Vietnam Foreign Investment Agency recorded 19 fields and
sectors invested, in which processing and manufacturing industry is the most attractive
field of FDI. In 2016, this sector attracted 9.812 billion USD of registered capital from
newly licensed projects, accounting for 64.7% of total newly registered capital.

The second attractive sector is real estate business, reaching 3.480 billion USD and
accounting for 22.95% in total. Wholesale and retail sector, repair of motor vehicles
contributed 1.522 billion USD, accounting for 10.04%. The other industries attracted 348
million from FDI.
 0.348

1.522

3.480

9.812

Processing and manufacturing Real estate

Wholesale and retail, repair of motor vehicles Other sectors

Figure 2.5: Proportion of newly registered capital by investment sector in 2016

Unit: Billion USD

Source: General Statistics Office Vietnam

In 2016, there were 68 countries and territories having investment projects in Vietnam.
South Korea retained its position as Vietnams leading source of FDI in this year. During
the period, South Korean investors pumped 5.58 billion USD into Vietnam, accounting
for 34% of total FDI volume arriving to the country. South Korean private investment in
Vietnam comes in waves, showing via determination to implementing large-scale
projects as well as capital volumes continuously flowing into the country.

Notably, on December 27th, competency authorities of Vinh Phuc province accepted 1.5
billion USD horse racecourse project from G.O. Max I&D, a Korean investor. In
addition to the racecourse itself, the project is going to include a 72-hole golf course, a
sports and entertainment area, a horse riding and polo club, residences, and villas, all on
a total area of 750 hectares.

Another example is LG Group subsidiary LG Innoteks project to build a 550 million

USD factory to manufacture camera modules in the northern city of Hai Phong. Being
LG Groups third project in Hai Phong, this addition will help increase LGs
investment capital in the city to 3.55 billion VND, consisting of the 1.5 billion USD hi-
tech screen production factory and a $1.5 billion complex which specializes in producing
price-competitive electronic goods, including televisions, mobile phones, washing
machines, and air conditioners. Although the 3.55 billion USD is relatively small
compared to the 15 billion USD investment from Samsung, it is a testament to LGs
plans to turn Vietnam into a key link in its global manufacturing chain.

With the cumulative investment capital of 50 billion USD in Vietnam so far, it is difficult
to imagine other countries to take over South Korea as the largest foreign investors in the
country.

Meanwhile, investors from Singapore and Japan invested $1.84 billion and $1.7
billion, making up 11.2% and 10.3% of the nations total FDI, respectively.

Thus, it can be seen that traditional partners are still the leading investors in Vietnam.
Moreover, in addition to the new investment projects, investors also expand production
and business of other local region such as Bac Ninh, Thai Nguyen, Dong Nai instead if
just focusing on big cities like Ha Noi or Ho Chi Minh City.

In 2016, 51 cities and provinces in Vietnam received FDI projects from foreign
investors. Ho Chi Minh City led cities and provinces nationwide in attracting FDI, in
which there were 836 newly registered projects, 222 projects adjusting capital and 1,935
projects of purchasing shares for capital contribution. In the year, Ho Chi Minh City
absorbed 3.42 billion USD, covering 14% of the total. The northern port city of Hai
Phong came next with 2.98 billion USD, contributing 12.26%. Ha Noi, Binh Duong and
Dong Nai followed with 2.79 billion USD, 2.36 billion USD and 2.23 billion USD,
respectively.

Most remarkable among new FDI projects licensed in 2016 include the 1.5 billion USD
horse racecourse project invested by G.O. Max I&D, the LG Display Hai Phong worth
1.5 billion USD invested by the RoKs LG Display Co., Ltd, the 550 million USD LG
Innotek Hai Phong, invested by LG Innotek also of the RoK, and the Dam Nha Mac sea
port-industrial park complex in Quang Ninh worth 315.46 billion USD invested by CDC
Co., Ltd of the Cayman Islands.
 2.2. Some typical forms of transfer pricing in Vietnam

Multinational corporations do transfer pricing activities for the final purpose of

maximizing their profit and minimizing the amount of tax to be paid to governments of
host countries. Aiming at this purpose, multinational corporations do transfer pricing in
many ways, including some typical forms as follows:

2.2.1. Transfer pricing through transferring raw materials and finished goods

Transfer pricing through transferring raw materials and finished goods is used relatively
common by multinational corporations in Vietnam in recent years. This way especially
happens in enterprises with 100% foreign investment and takes place in several major
industries such as garment, footwear, food processing, etc.

Starting at the difference in corporation income tax rate between Vietnam and other
countries, in order to minimize tax obligations of the whole corporation, parent company
in home country controls transfer price of input materials and goods between subsidiaries
and associated parties in foreign countries, in which profit gained in Vietnam will be
transferred to associated parties locating in countries with low tax rate. This method is
performed by raising purchasing price of input materials to higher than market price and
reducing selling price of finished goods to lower than market price.

In addition, another way is that subsidiaries in Vietnam sell finished goods to parent
company at low price which shall equal to production cost or even lower. After that,
parent company will sell products in foreign market and gain profit.

2.2.2. Transfer pricing through capital contribution

Taking advantage of open policies to attract investment of Vietnam towards promoting

comparative advantage in natural resources, land and labor, multinational corporations
do transfer pricing for their own benefit. Besides, being aware of Vietnam's limitation in
financial resource and the ability to assess value of fixed assets, foreign investors invest
in Vietnam through capital contribution by machinery, production equipment which is
appraised much higher than actual. Raising capital contribution will bring some
economic benefits such as:
Foreign investors may transfer a part of economic benefits back to their home countries
through recording depreciation deduction of fixed assets. Moreover, the distribution of
profits based on capital contribution proportion shall cause damage to Vietnamese
partners.

By raising capital value higher, their capital proportion will be higher than the
Vietnamese partners. Therefore, multinational corporations can take control, run
business and do transfer pricing, causing continual loss in operating result. Vietnamese
enterprises do not have financial resource to continue operating business, then they will
be forced to sell their shares contribution to the foreign investors. The joint venture will
be transferred to company with 100% foreign investment.

2.2.3. Transfer pricing for the purpose of market manipulation

When considering to open operation in a country, multinational corporations often prefer

doing joint venture with a domestic company to investing directly to become company
with 100% foreign capital. The reason is that they want to take advantages of the
available distribution system and market share of domestic companies. After a period of
time doing joint venture, these multinational corporations shall use some ways, which
include transfer pricing, to force their partners to termination and transfer form of
company from joint venture to company with 100% foreign investment.

2.2.4. Transfer pricing through technology transfer

This kind of transfer pricing is performed when parent company transfers manufacturing
and business technology to subsidiaries in Vietnam and collects copyright fee.
Technology transfer is one type of transferring intangible assets. The valuation for this
kind of property is very difficult since it requires all related information and high
assessment capability. Abusing this feature, multinational corporations often charge
extremely high copyright fee for subsidiaries in Vietnam, increasing expense of
operation. Consequently, subsidiaries in Vietnam suffer loss in operation while copyright
fee was paid to foreign company.
 2.3. Current situation of transfer pricing in Vietnam

It is clear that FDI plays an important role in the development of Vietnams economy.
Currently, Vietnam has more than 15,000 FDI projects with total registered capital of
218.8 billion USD. FDI projects not only contributes to increasing state budget,
improving the balance of payment but also becomes an important supplementary source
of economic development which helps to raise the living standards of the citizens.
However, beside the positive contributions to the economy, FDI has also exposed
negative sides including transfer pricing and tax evasion which cause several losses in
budget revenue and create unhealthy competitive environment with domestic enterprises.

In Vietnam, the issue of transfer pricing is not a recent problem. It has appeared for years
since the massive FDI flew into the country. In reality, transfer pricing in Vietnam is
increasing and causing many difficulties for competency authorities to detect and handle
the problem. Data on the performance of tax obligations of FDI enterprises in recent
years shows that the contribution of these enterprises is not proportional with the amount
of investment in Vietnam.

In 2014, results of inspections in 2,110 enterprises collected arrears and penalized of

more than 988 billion VND, reducing deduction of 136.95 billion VND. Especially, tax
inspectors forced enterprises to reduce losses deduction of more than 4,192 billion VND.
According to competency authority, the amount collected was mainly concentrated in the
FDI sector (accounting for 40% of the total receivables), the average receivable per
enterprise was 1.73 billion VND. However, these numbers only reflected one small part
of the whole situation of tax evasion in FDI enterprises. Inspection result in 870 FDI
enterprises reported a number of 720 enterprises which had violated tax regulations.

Notably, the violation rate was up to 100% as Bac Giang Tax Department reported (16
enterprises were inspected and all 16 enterprises were found to violate tax regulation).
This 100% rate was similar in Hoa Binh (16/16) and Gia Lai (15/15). In some other
provinces and cities, though not as much as 100%, the rate was still very high. In Ha
Noi, competency authority inspected 332 enterprises, then detected 326
violating situations, reducing losses of more than 1,500 billion VND, collecting arrears
and penalizing of nearly 498 billion VND. Authority in Ho Chi Minh City inspected 193
FDI enterprises, reporting 164 violating companies, reducing losses by more than 870
billion VND and collected nearly 173 billion VND.

Table 2.1: Inspection result of FDI enterprises in 2014

Unit: Billion VND

Number of Number of Amount of

Losses
Tax authority inspected violated arrears and
deduction
enterprises enterprises penalty

Ha Noi 332 326 498 1,575

Ho Chi Minh City 193 164 173 870

Quang Tri 27 27 2.3 1.2

Thai Nguyen 20 20 3.1 24.3

Tay Ninh 18 18 5.3 63

Hoa Binh 16 16 3.6 46

Ben Tre 17 15 1.5 21

Hai Phong 50 12 28.8 169

Ninh Binh 10 8 1.2 119

Nam Dinh 6 5 1.6 8.2

Source: General Department of Taxation 2014

In the early 2016, General Department of Taxation published a report which emphasizes
on fighting against transfer pricing of FDI enterprises involving in
associated transactions, having losses in financial results but continual expanding
business in Vietnam.

According to statistics from General Department of Taxation, Vietnam recognized about

50% of FDI companies declaring losses, in which many enterprises had declared losses
for 3 continuous years. In Ho Chi Minh City, nearly 60% of 3,500 FDI enterprises often
declare losses for years. The same situation also appeared in Lam Dong province with
104/111 FDI enterprises reporting losses continuously. Binh Duong, one of the provinces
attracting more FDI projects, also reported losses from 50% of FDI enterprises.

At a conference in 2016, it was reported that tax authority has inspected business
activities of 4,751 enterprises declaring losses, including companies have associated
transactions and companies have transfer pricing signal. Among them, the detection of
transfer pricing in Metro Cash & Carry after 12 years operating in Vietnam helped tax
authority to collect more than 507 billion VND of arrears. This case is considered the
typical case in fighting against transfer pricing. Tax authority has fined 1,062.74 billion
VND, reduced withholding is 302.91 billion VND. The total amount that was recovered
on state budget was 16.89 billion VND.

The report of tax authority showed that FDI enterprises declaring losses are often
enterprises operating in field of garment processing, footwear, production, tea exporting
business, processing industry, etc.

Especially, in Ho Chi Minh City, 90% FDI enterprises operating in textile sector declared
losses in financial results while almost all other companies operating in the same field in
the country are profitable. In spite of losses, these FDI enterprises still invested to
expand production and business. Thus, these FDI enterprises have transfer pricing signal;
however, the output information of these companies cannot be verified so tax authorities
cannot handle violations.
 2.4. Some transfer pricing cases in Vietnam

2.4.1. Hualon Corporation

Hualon Corporation is a foreign business which specializes in fiber production and fabric
weaving, operating in southern Dong Nai Provinces Nhon Trach 2 Industrial Park with
100% investment capital from Malaysia and Taiwan-British Virgin Islands. Licensed in
December 1993, Hualon Corporation is listed as the first-generation foreign invested
enterprises in Vietnam. Since then, the company has been constantly expanding and
developing. In 1995, it established the Knitting Plant with 112 Circular Knitting
machines. In 1996, the Draw Textured Yarn Plant with 124 Draw Texturizing machines
was established. In 1997, the company continued expanding its operation, establishing
the Two For One Plant with 83 machines and the Weaving Plant with 3,190 Water Jet
Looms. In 2000, it opened the Dyeing Plant with 22 Dyeing machines. At present, the
company has a total of about 3,000 employees.

In contrast to the continuous expansion of production, Hualon Corporation has been

repeatedly reporting loss for over the last 20 years in Vietnam. By the end of 2010, the
corporations accumulative loss had reached over 1 trillion VND (47.7 million USD).
The result was that it did not have to pay income tax in that period of time.

According to the General Department of Taxation, the corporation blamed the losses on
too much investment in expensive production lines and materials, which low selling
prices could not compensate for. Specifically, the company declared that it had imported
a fabric weaving production line for nearly 16 million USD. However, it then sold the
line to another company for 400,000 USD, 40 times lower than the original price.
According to the initial explanation, since there was no need to use up this asset,
company liquidated it, and it is obvious that liquidation value was extremely low. This
activity appears to go against the business principle of other ordinary companies. It is
rare to easily purchase at high price then quickly resell, accepting low price.

In fact, this production line was very outdated, must be considered to disposal in foreign
countries. However, Hualon Corporation purchased in order to increase production
capacity, as the company stated. In reality, although the line had not been
used since it was imported to Viet Nam, the corporation had still reported it as fixed asset
in production and business activities. It means that the line had been depreciated,
creating a huge number of expense in business report.

Later, it was found out that the corporation conducted transfer pricing, not only in the
production line import affair, but in the input material imports as well, totaling 1.156
trillion VND. With the trick, Hualon reported the virtual loss of up to 956.2 billion VND.
At the time when Hualon was inspected, there were still some more old and backward
machines and equipment, imported at high prices. If the corporation had repeated the
same trick, the virtual loss would have been even higher.

Taxation officers have found out that Hualon actually made profit, while it has to pay
the corporate income tax arrears of 78.1 billion VND.

2.4.2. Jun Chow Oolong Tea Limited Liability Company

Operating in Vietnam in 2006, Jun Chow Oolong tea, a company from Taiwan, invested
6.344 billion VND. However, four years later, total losses declared by the company
amounted to 23.903 billion VND, that means loss is 3.7 times invested capital.

The main reason of this huge loss was that Oolong Tea Company in Vietnam had sold its
finished goods to parent company in Taiwan at an extremely low price, even lower than
production costs to produce those goods. In detail, in Vietnam, 1 kilogram of Oolong tea
is charged 2 to 3 million VND in average in market. Nevertheless, in this Taiwan
company, the initial selling price to parent company is under 1 USD per kilogram,
equivalent to 17,000 to 18,000 VND per kilogram, calculated on exchange rate at that
time. Latterly, exporting price slightly increased to just 2 to 4 USD per kilogram,
equivalent to 40,000 to 80,000 VND. The difference between market price and selling
price to parent company is up to 10 times.
 Table 2.2: Comparison of payable tax of Oolong Tea Company when selling at
accurate price and transfer price

Oolong tea company Accurate price Transfer price

Selling price (VND) 2,000,000 80,000

Weigh (kilogram) 1,000 1,000

Revenue (VND) 2,000,000,000 80,000,000

Production cost (VND) 100,000,000 100,000,000

Corporate income (VND) 1,900,000,000 (20,000,000)

Corporate income tax rate (in Vietnam) 25% 25%

Tax payable (VND) 475,000,000 0

Source: Synthesized by author

Table 2.3: Comparison of payable tax of the whole corporation when purchasing
at accurate price and transfer price

Parent company Accurate price Transfer price

Purchasing price (VND) 2,000,000 80,000

Weigh (kilogram) 1,000 1,000

Revenue (VND) 2,000,000,000 80,000,000

Corporate income tax rate (in Taiwan) 17% 17%

Tax deductible (VND) 340,000,000 13,600,000

Total tax payable (VND) 135,000,000 (13,600,000)

Source: Synthesized by author

In table 2.2 and 2.3, it is shown that through transfer pricing, for every 1,000 kilogram of
tea sold to parent company, Oolong Tea Company makes loss to state budget a sum of
340,000,000 VND. The amount of tax payable of the whole corporation is significantly
reduced. Consequently, by transfer pricing, corporation may avoid a payment of
corporate tax in Vietnam and at the same time transfer profit to parent company which is
located in a territory with lower tax rate.

2.4.3. Saigon VeWong Limited Liability Company

In 1990, VeWong Taipei Company and Saigon Food Company cooperated to establish
Saigon VeWong joint venture which specializes in producing monosodium glutamate.
VeWongs capital contribution, which are machinery and equipment, was assessed
4,972,073 USD. However, after reassessed by international inspection company, it is
indicated that the real value of those machinery and equipment is just 4,612,640 USD.
Thus, VeWong declared a difference of 359,433 USD, equivalent to 7.22%.

Assessment higher value of those machinery and equipment helped foreign investor to
transfer a portion of its profits to parent company in home country right after
contributing capital. The action caused damage to three subjects including Vietnamese
partner, government and consumers.

For Vietnamese enterprise, its capital contribution ratio decreases. Because of that,
foreign company shall control the executive authority of the joint venture. In some cases,
foreign partner deliberately leads operation business to a loss, forcing Vietnam partner to
sell shares. After that, joint venture will become company with 100% foreign
investment. In fact, in 2008, Saigon VeWong company became a subsidiary invested
100% by VeWong Taipei company.

For Vietnam government, due to the fact that profit of enterprise reduces because of large
depreciation expense, government loses an amount of revenue from tax receivable.

For Vietnamese consumers, since company records large depreciation expense, selling
price of product increases. Hence, consumers must pay more money. Besides,
this transfer pricing activity also causes imbalance situation in national balance of
payments as the country has to import a number of machinery and equipment at higher
price than their real valuation.

2.4.4. Kad Industrial SA Vietnam Limited Liability Company

Being invested 100% by Korean enterprises, Kad Industrial SA Vietnam came into
operation from January 2007 which operates in garment industry. The company locates
its head office at Hoa Khanh Industrial Zone, Da Nang. The enterprise has repeatedly
declared losses for many years. The project has generated accumulated losses up to 14.4
billion VND.

According to the results of tax inspection from local tax authority in 2012, all of
companys fixed assets (machinery and equipment) were used assets which were
imported from a factory in America. These assets were included in the value of capital
contribution of Korean parent company. Losses were partly result from high depreciation
expenses of machinery and equipment which were 1.5 times higher than planned.
However, tax authority did not have sufficient grounds to handle because the actual price
of machinery cannot be determined.

2.4.5. P&G Vietnam

P&G Vietnam is a joint venture established by Procter & Gamble Far Earst Company
and Phuong Dong Company in November 1994. Total initial capital of the joint venture
was 14.3 million USD. In 1996, capital increased to 367 million USD, of which
Vietnamese partner contributed 30% and the other 70% was contributed by foreign
partner. After two years of operation (1995 and 1996), the joint venture declared a huge
loss of 311 billion VND, equal to three quarters capital contribution of the whole
company. In this loss, the company reported 123.7 billion VND of loss in 1995 and
187.5 billion VND in 1996.

Since P&G was a new company in Vietnam market in the period 1995 1996, it aimed
to build brand and popularize products to Vietnamese consumers. For purpose of market
manipulation, in those two years, P&G spent a huge amount on advertising, up to 65.8
billion VND. That is am extremely high number for advertising in Vietnam at
that time. During this time, almost all television channels, radio and newspapers
contained advertisement of P&G products such as Safeguard, Lux, Pantene, Header &
Shoulder, Rejoice, etc. The total advertising expenses accounted for 35% net revenue of
company financial report. Thus, it far exceeded the allowed level indicated in tax law:
advertising cost is no more than 5% of total expenses. In fact, the number presented by
P&G was seven times higher than it was in the initially planned level.

In addition to advertising, other costs of company also far exceeded the initial plan.
Salary fund in the first of operation built in initially planned level was 1 million USD;
however, in fact, company spent 3.4 million USD on paying salary. The main reason is
that P&G had 16 foreign experts work in company while it just planned to use 5 to 6
employees. Moreover, other costs incurred were also much higher than the initial plan
including expenses for specialists (7 billion VND), legal consultancy (7.6 billion VND)
and liquidation expenses (20 billion VND).

Another reason leading to heavy loss in the first year of operation is that the actual
revenue gained was only equal to 54% as planned. Both high operation expenses and low
revenue resulted in 123.7 billion VND loss in the first year of operation. This situation
continued to repeat in the second year, reporting loss of 187.5 billion VND. Hence, after
two years, the joint venture suffered an accumulated loss of 311.2 billion VND,
accounting for three quarters of all contributed capital. In July 1997, general manager of
P&G invested more 6 million VND than allowed in the license, company had to borrow
cash to pay salaries to employees.

Facing this situation, the foreign partner suggested increasing capital by 60 million VND
to continue the business. According to contribution proportion, Vietnamese partner has to
contribute 18 million USD. Due to its lack of financial potential, Vietnamese partner
then had to sell its all shares to foreign partner. Therefore, P&G Vietnam transformed its
type from joint venture to company with 100% foreign capital.

2.4.6. Vietnam Brewery Joint Venture

Vietnam Brewery joint venture is a typical case of transfer pricing through technology
transfer. Vietnam Brewery joint venture was licensed in 1991 by two
partners: Food II Company in Ho Chi Minh City and Heneiken International Behler
Company (Netherlands). In 1994, this business joint venture license was transferred,
becoming joint venture with Asia Pacific Breweries., Ltd (Singapore). The total
investment of this joint venture was 49.5 million USD with legal capital of 17 million
USD. Vietnamese partner holds 40% of capital contribution and the other 60% is held by
Singaporean enterprise. The production line of joint venture is brewing for domestic
consumption and export.

When starting production and business activities, company suffered continual losses in
financial result for years. The main reason of loss was payment of high and increased
license fees over years. Given the frequent losses of joint venture, Vietnamese partner
was heavily influenced while the foreign enterprise remained unharmed since they still
received money from trademark and copyright fees.

2.4.7. Adidas Vietnam

Being a globally popular brand, Adidas has joined in sport equipment market in Vietnam
for a long time. Since 1993, Adidas has been presented in Vietnam but not until 2009,
Adidas officially founded Adidas Vietnam liability limited company, with 100% capital
owned by Adidas International B.V (Amsterdam, Netherlands).

In Vietnam market, Adidas had been rapidly developed. After only two years from
official operation, Adidas opened 50 stores in big cities in Vietnam. In 2014, Adidas
recruited about 80,000 employees in Vietnam. Despite of its development, there are some
unclear questions remain behind the business of Adidas Vietnam.

Operating under the business license as wholesale distribution, there are a number of
expenses relating to retailer raising in Adidas Vietnam. Inspection result showed that the
company had numerous expenses to be paid unreasonably to its associated partners,
including Adidas AG (Germany-based parent company), Adidas Singapore and Adidas
International Trading BV. It is found that transactions between Adidas Vietnam and those
related parties might be associated transactions showing signs of possibly unlawful
transfer pricing.
The unreasonable expenses at Adidas include international marketing cost, management
cost, purchase cost, licensing cost. Of these expenses, the most typical one is
international marketing cost. Parent company (Adidas AG) hired celebrity shooting
commercial advertisement of its product. When hanging these posters at every store,
Adidas Vietnam must pay 4% of net revenue to parent company. In addition, although
Adidas Vietnam is not a manufacturer, it still has to pay copyright fee of 6% net sales to
parent company.

Transfer profit
Adidas
Vietnam
Distribute products Adidas AGs affiliated subsidiaries
Management expense Marketing expense Copyright fee
Commission

Distribute
products Consumers

Transfer profit
Adidas
AG

Figure 2.6: Associated transactions within Adidas

Source: Synthesized by author

Moreover, even though licensed for direct import, Adidas Vietnam hired another partner,
Adidas International Trading BV, to make procurement transactions for the company and
then paid Adidas International Trading BV 8.25% of the value of each transaction, which
was recorded as procurement expenses and accounted into the cost price. Under this
agreement, Vietnam Adidas assigns Adidas International Trading BV on behalf of Adidas
Vietnam to perform services such as finding manufacturers of products, finding suppliers,
placing orders, examining input materials and components, monitoring production, etc.
The production cost of the Adidas was also hiked by expenses for multi-level
management paid to Adidas in Singapore and Germany.

Besides, although Adidas Vietnam was licensed as wholesaler which imports and
distributes sport shoes and sport clothing, the company also reports expenses of
supporting appliances to retailers such as supply cabinet, furniture, exterior, etc. These
appliances will be used by retailers but they are not required payments. All costs shall be
counted as selling cost of Adidas Vietnam.

2.4.8. Metro Cash & Carry Vietnam

Metro began its operation in Vietnam in March 2002 with an initial investment of 78
million USD, legal capital was 36 million USD. Experiencing 6 times of changing
business license, the amount of additional investment increased to more than 301 million
USD in May 2013. The operation of Metro Vietnam includes managing Cash & Carry
centers, buying food and non-food products directly from suppliers, then classifying,
storing and controlling quality, processing and wholesaling to customers who are
enterprises.

In July 2003, Metro Cash & Carry opened its second wholesaling center in Ha Noi. On
average, the company steadily opened one to two centers each year. In three years 2010,
2011 and 2012, Metro opened four supermarkets each year, the growth far exceeded
numerous domestic companies. Keeping its progress, after 12 years, system of the whole
company includes 1 head office, 15 branches (including 19 centers) and 2 warehouses
locating in 16 provinces and cities in Vietnam. Also, Metro Cash & Carry is creating jobs
for nearly 4,000 workers in Vietnam. The fact that Metro had continuously expanded its
business is extremely unusual. Beside the expansion is the constant growth of revenue.
 16000 14,731
14000 13,275 13,905
12000
10000
10,267
8,149 8,709
80006,590

6000 4,883
3,630
4000
2,565
1,741
2000
608
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 2.7: Revenue of Metro Vietnam 2002 2013

Unit: Billion VND

Source: Metros financial report 2002 2013

According to Metros financial statement, in 2002, revenue of company reached 38

million Euro, equivalent to more than 600 billion VND calculated on the exchange rate
at the time. Over 12 years of operation, Metro Cash & Carry experienced a steady
increase in its revenue. In 2013, revenue was 516 million Euro, equal to about 14,731
billion VND. Thus, revenue in 2013 was 24 times than it was in the beginning of
company. Vietnam is also the market having second largest revenue in Asia, following
China.

In contrast to the growth of expansion and revenue, profits which were reported by
company show no positive number. A report published in 2013 from General Department
of Taxation indicated that Metro Cash & Carry ranked at top of the list of FDI enterprises
reporting losses. For more than 12 years of operation in Vietnam, the company only
reported profit of 116 billion VND in 2010. The remaining years, the amount of loss
reported by Metro ranged from 89 to 160 billion VND. Total losses of Metro from 2002
to 2013 was reported 1,657 billion VND. Therefore, Metro has not yet pay any corporate
income tax for that period of time.
The constant losses reported by company caused transfer pricing suspicion of
competency authorities. After more than 2 months of comprehensive inspection, in April
2015, Department of Taxation officially announced that Metro had many violations
relating to tax law in Vietnam, of which the most notable activities were transfer pricing
and tax evasion.

Tax authorities had conducted inspection four times in the company with nine-year
period inspection (2003 2011). The results of inspection by the end of 2011 adjusted
loss deduction of 500.4 billion VND; determined profits from 2 years 2010 and 2011 as
the amount of 234.8 billion VND.

After inspection, Department of Taxation specified transfer pricing methods used by

Metro Vietnam including three main groups:

Firstly, Metro did transfer pricing through paying franchise fee to parent
company in Germany.

According to its report, the amount of expense that Metro Vietnam had paid to associated
enterprises in Germany was huge. The report showed that salary and compensation
expense, expense of information technology support and franchise expense covered 1.5%
to 2.1% net revenue of Metro Vietnam. Copyright fee that the company had to pay parent
company was the largest amount. In detail, franchise fees in 2011, 2012 and 2013 were
153 billion VND, 132.65 billion VND and 110.39 VND respectively. Since Metro
Vietnam and its parent company signed franchise agreement when opening business in
Vietnam, it is mandatory for Metro Vietnam to pay parent company the franchise fee
annually. In the period that Vietnamese government had not had specific regulation about
franchising in FDI companies, Metro took advantage of this omission in order to
maximize its profit through transfer pricing. According to data from General Department
of Taxation, the total amount of franchise fees paid to Metro Germany in the period 2001
2013 amounted to 731 billion VND.

In its first three years of operation, Metro was not registered with the Ministry of
Industry and Trade; therefore, after inspection, tax authorities decided to exclude 245
billion VND from eligible franchise fee. Besides, there was a difference of franchise fee
recorded in financial reports of Metro Vietnam and Metro Germany; thus, this amount,
7.5 billion VND, was also be excluded.

Secondly, Metro did transfer pricing through receiving services provided by

parent company.

In addition to franchise contract, Metro Germany also signed contract of providing

professionals working in Vietnam. According to this contract, Metro Vietnam had to pay
compensation and allowance for foreign experts through Metro Cash & Carry GmbH in
Germany. That was also a huge amount, 699 billion VND.

Moreover, the application of standards set by parent company to all 19 centers in

Vietnam also required a lot of human and capital resources. Nearly expired goods should
be revoked, costing about 1.15% revenue (equivalent to over 100 billion VND per year).
Security expense covered about 0.3% revenue (30 billion VND per year). Hence,
operating costs increased.

Thirdly, Metro did transfer pricing through loan amounts.

In 2013, Metro Vietnam recorded a debt of 4,650 billion VND. The majority these loans
were guaranteed by Metro Corporation with guarantee fee of 0.25% to 0.35% per annum.

Moreover, advertising activities also helped the company avoid of tax payment. Figure
2.8 indicates that Metros spending budget on advertising was extremely high. In three
years, these expenses were all over 100 billion VND. 2012 recorded the highest number
of 151.26 billion VND (24.7 billion VND higher than 2011 and 45.33 VND higher than
2013). According to the company, the reason was that in 2012, Metro had to spend much
on advertising and promotional activities in the end of 2011 and the whole year 2012. It
was the time that Metro opened five new supermarkets.
 160151.26

140 126.56
120
100 105.93
80
60

40
20
0

2011 2012 2013

Figure 2.8: Advertising expenses of Metro Vietnam 2011 2013

Unit: Billion VND

Source: Metros financial report 2011 2013

Overall, due to huge payments paid to parent company as well as large budgets on
advertising and employees compensation, Metro Vietnam had showed continual losses
in its operation results. After inspection, all of violated arrears shall be immediately paid
to state budget.

2.4.9. Keangnam Vina

Keangnam Vina Co., Ltd is a company with 100% foreign capital which belongs to
Keangnam Corporation, Korea. Keangnam Vina is the investors of Keangnam Hanoi
Landmark Tower with initial investment of more than 1 billion VND. Being recognized
as Vietnam's tallest tower, Keangnam Hanoi Landmark Tower is well known and
receives great attention from investors as well as citizens.

Keangnam Tower had been under construction since May 2007. Handing over it in early
2011, the company began to have revenue. Selling price of apartments was sometimes up
to 3,000 USD per square meter, equivalent to 5 to 8 billion VND each apartment. Luxury
apartment is considered the abundant revenue source of Keangnam Vina. In 2012, not
long after the tower went into operation, the office area of Keangnam
Tower had high occupancy rates with many major customers such as KPMG,
PricewaterhouseCoopers, Ericsson, Standard Chartered Bank, etc. Rental price in
Keangnam ranged from 20 to 25 USD per square meter.

Table 2.4: Keangnam Vinas operating results 2007 2011

Unit: Billion VND

Year Revenue Profit before tax

2007 0 (37)

2008 0 (14)

2009 0 (9.3)

2010 0 (26.2)

2011 5,224 140.9

Source: Keangnam Vinas financial report 2007 2011

In addition to revenue from commercial center, revenue from sale of apartments and
office space brought Keangnam Vina a huge amount of money. However, since investing
in the project, Keangnam Vina has continuously reported losses which amount to tens of
billion VND per year. Even in 2011, when Keangnam Tower came into operation, the
company's revenue was more than 5,200 billion VND, loss was still declared of 140
billion VND. Company had not paid any corporate income tax, except value added tax
and land use tax.

Having great reputation but declaring constant losses, Keangnam Vina created questions
of the General Department of Taxation in the end of 2012. After inspection, transfer
pricing manipulation used by the company was exposed. With a total value of 1,220
billion VND being adjusted, all losses declared in 2007 2011 was obviously deleted.
This company was forced to pay arrears of corporate income tax amounted to
95.2 billion VND.
Transfer pricing activities in Keangnam Vina were mainly performed through contracting
associated transactions.

In May 2007, in order to prepare finance for the project, Keangnam Vina signed a
contract of borrowing loans from Kookmin Bank which is also a member of parent
company Keangnam Investment in Korea. So far, the company had borrowed a total of
400 million USD loan from this bank. The total interest and financing cost of this
borrowing had risen to over 2,000 billion VND.

Experts from Hanoi Department of Taxation calculated that Keangnam Vina had paid on
average about 12% interest rate per year to Kookmin Bank. Meanwhile, interest rate for
borrowing loans in USD in Vietnamese banks was only in range of 5 to 7% per year.
Obviously, Keangnam Vina conducted an associated transaction. At that time, Vietnam
did not have regulation controlling the interest rate ceiling for foreign currency loans.
However, immediately before being inspected, Keangnam Vina modified the number
equal to market rate (5 7%). Thus, the company was not penalized in this transfer
pricing activity.

Additionally, in October 2007, after 3 months of being licensed, Keangnam Vina signed
a contract with Keangnam Enterprise, a member of parent company, for performing
Engineering Procurement and Construction (EPC). The total value of contract was up to
871 million USD. Keangnam Enterprise was responsible for a lot of important work in
Keangnam Vina such as surveying, designing project, supplying equipment,
constructing. Not only undertaking work related to construction, Keangnam Enterprise
also provided financial advisory and arranging loan services for Keangnam Vina. In
2008, Keangnam Vina had to pay 30 million USD, equivalent to 485 billion VND of
financial advisory fee to Keangnam Enterprise. Arranging loan fee was up to 20 million
USD, expenses of advertising consultancy, land use right advisory were also up to
several million USD.

Being a foreign contractor, Keangnam Enterprises had two choices to pay tax: pay
corporate income tax based on profit, or pay contractor tax based on sales after deducting
sales of subcontractors. Keangnam Enterprises chose the second method. By that, the
amount of tax payable was equivalent to only 10% compared to the first
method. This was a deficiency in Vietnams law at that time and Keangnam Enterprises
took advantage of it.

Table 2.5: Comparison of tax payables of Keangnam Enterprises in two methods

in 2011

Tax calculation method Tax payable (Billion VND)

25%/Profit 2,000

2%/Revenue 198

Difference 1,802

Source: Transfer pricing inspection report from General Department of Taxation in 2012

On reports, while the investor Keangnam Vina showed continuous losses and did not
have to pay income tax to Vietnam government, Keangnam Enterpise earned benefits.
Keangnam Enterpise only have to pay foreign contractor tax in Vietnam, much lower
than payment of corporate income tax at the rate of 25 28%. By these arrangements of
expenses, a huge profit was transferred from Keangnam Vina to Korea.

After inspection, tax authorities excluded all unreasonable input costs. The total value of
EPC contract reduced from 871 million USD to 699 million USD. In particular, the
amount of gain and loss was clarified. Inspection authority identified that revenue from
sales of apartments was 3,500 billion VND. Keangnam Vina was forced to pay income
tax arrears of 95.2 billion VND.

2.5. Impacts of transfer pricing on Vietnam

Transfer pricing may have a negative impact on the macro economy such as causing
losses of state budgets, creating inequality companies which have performed or have not
performed fully tax obligations. Also, transfer pricing may raise import value and trade
deficit which lead to an imbalance between balance of trade and balance of payments,
thus, increasing pressure on Vietnam domestic currency.

In particular, transfer pricing activities are performed through transactions between

affiliated parties. These companies easily negotiate an extremely high or low price to

56
achieve the overall purpose of the entire corporation or entire system. Transfer pricing
enterprises declare higher import value from parent company or lower their selling price
to parent company, which lead to losses reported on financial statements. As a result,
those enterprises do not have to pay tax in host countries. Whereas other enterprises who
do not carry out transfer pricing activities report their true business results and pay
accurate taxes on the basis of their operation.

About the consequence of increasing import value and trade deficit, creating imbalance
between balance of trade and balance of payment: for example, in the case of Hualon
Corporation, the company recorded fixed assets with the real value of 400,000 USD to
16 million USD, meaning that the import value has been increased by 40 times. When
the import value increases, corporations are required to own more foreign currency for
payment activities which increases the demand of foreign currencies. The out flow of
foreign currencies from a country raise the pressure on purchasing price for domestic
currency.

In general, after the detection of a quantity of transfer pricing performed by multinational

corporations in Vietnam, this activity has been slowed down in recent years. However, to
completely get rid of this issue, comprehensive solutions are needed to be done by all
functional authorities.

2.6. Current situation of anti-transfer pricing management in Vietnam

2.6.1. Legal foundation

Regulations on transfer pricing was first mentioned in Circular 74 TC/TCT dated

20/10/1997 of Ministry of Finance. The circular indicated three methods of assessment
transfer price between associated enterprises. Next, Circular 89/1999/TT-BTC dated
07/16/1999 and Circular 13/2001/TT-BTC dated 08/03/2001 of Ministry of Finance
amended and supplemented contents of Circular 74 TC/TCT. In the early stage of
institutional setting, general regulations on transfer pricing was meager, lack of detailed
instructions and did not close to reality. Therefore, despite having been issued for a long
time, these two circulars have not been applied in reality.
In the period 2005 2011, through analyzing limitations of current documents and
considering experience of other countries, Ministry of Finance issued Circular
117/2005/TT-BTC dated 19/12/2005. The circular guides the determination of market
price in business transactions between associated parties, following OECD guidelines.
Five methods of determining market price listed in the circular are comparable
uncontrolled price method, resale price method, costs plus method, profit split method
and transaction net margin method. However, the circular also contains some limitations
about building transfer pricing database and applying inspection procedures to actual
business transactions.

In order to strengthen its regulation, on 22/04/2010, Ministry of Finance issued Circular

66/2010/TT-BTC that regulates the determination of market price in associated
transactions, replacing Circular 117/2005/TT-BTC. Basically, Circular 66/2010/TT- BTC
still covers the majority of the content mentioned in Circular 117/2005/TT-BTC.
Besides, a number of points were amended and supplemented to better fit with
international practice. Regulation on tax inspection suffered a fundamental change,
expressing the intention of tax authority in fighting against transfer pricing.

On 20/11/2012, Parliament approved Law 21/2012/QH13 which amends and

supplements some articles of Law on Tax Administration. In particular, Section 6 and 7
of Article 1 specify that tax authority shall apply the mechanism of advance pricing
agreement (APA) in order to prevent double taxation and tax evasion. On the basis of
Law on Tax Administration and Decree 83/2013/ND-CP, on 20/12/2013, Ministry of
Finance issued Circular 201/2013/TT-BTC guiding the application of APA in tax
administration. This is a big improvement of the legal framework, creating a favorable
platform for Vietnamese tax authority to fight against transfer pricing, especially in FDI
enterprises.

This measure has been widely used in Europe and many countries in Asian region such
as China, Indonesia, Thailand, Malaysia, etc. In Vietnam, tax authority has been allowed
to apply APA since January 2013. APA is an agreement in writing between the taxpayer
and the tax authority or between the taxpayers and one or more tax authorities from one
or more jurisdictions with which Vietnam has signed the avoidance of Double
Tax Agreements for a specified period of time. The agreement also requires specific
basis to determine the tax liabilities, its pricing method or the arms length price. In
Vietnam, APA should be established prior to the submission of corporate income tax
finalization declaration.

Moreover, on 28/10/2015, Minister of Finance set up four Bureaus of transfer pricing

inspection under four provincial taxation departments (Ho Chi Minh City, Hanoi, Dong
Nai, Binh Duong) where a large number of joint companies and foreign enterprises
usually have associated transactions, and one bureau of transfer pricing inspection under
the General Department of Taxation.

Recently, in 2016, Ministry of Finance, for the first time, proposed the building of a
Decree on managing transfer price of associated transactions, which is under the
direction of government in Resolution 19/2016/NQ-CP. Accordingly, associated
transactions within the scope of this Decree include transactions of commercial,
economic and financial relations between related parties.

2.6.2. Initial achievements of anti-transfer pricing management

In recent years, tax authority has gained some initial achievements in fighting against
transfer pricing, collecting arrears of thousands of billion for state budget. In detail, in
2011, tax authority reviewed 3,144 enterprises which had to declare information about
associated transactions. 2,023 enterprises have made declarations, covering about 64%.
Also in this year, tax authorities at all levels inspected 921 companies which declared
losses and had transfer pricing signs. Then, competency authorities adjusted losses
deduction of 6,617 billion VND; collected arrears and penalized of 1,669 billion VND,
increasing the amount of tax receivable from FDI enterprises by 11.3% compared to
2010.

In 2012, focusing on inspection of enterprises having transfer pricing signs, tax

authorities examined 2,161 enterprises to determine actual revenue and profit; from that
collected arrears and penalized nearly 747 billion VND, adjusted losses deduction of
4,776 billion VND. Continuing this direction, in 2013, tax authorities inspected and
checked 2,110 companies; then collected arrears and penalized of 988 billion VND,
adjusted losses deduction of 4,192 billion VND. Especially, during the year, General
Department of Taxation established three inspection delegations working at three FDI
enterprises locating in Binh Duong and Dong Nai, as well as supported 17 local tax
authorities to inspect 44 FDI enterprises. The result was collecting 187 billion VND of
tax arrears.

In 2014, inspection of 30 big multinational corporations involving in associated

transactions contributed over 1,500 billion VND of arrears. In 2015, tax authorities
inspected 2,500 enterprises, adjusted losses deduction of 6,500 billion VND, collected
arrears and penalized of 600 billion VND to the state budget.

2.6.3. Difficulties in fighting against transfer pricing

2.6.3.1. Objective difficulties

The first difficulty and also the difficulty of Vietnams society and economy is the low
economic starting point, which results in lacking of technical infrastructure to meet
management requirements of the state. During the previous time, the country did not
have economic conditions for investment activities in international cooperation on tax;
was not eligible to invest in systems equipped with modern computers which is the
essential conditions to collect and process information in fighting against transfer
pricing.

International economic integration brings not only opportunities but also challenges. The
rapid increase of FDI, coming along with transfer pricing activities, creates significant
challenges to an unexperienced country as Vietnam. The experience of Vietnamese
enterprises and tax authorities in transfer pricing is limited. This is one of the great
difficulties in applying regulations on transfer pricing in Vietnam. Therefore, enterprises
may have many difficulties in making a dossier to determine the appropriate market
price. Tax authorities may also have difficulties in examining companies pricing profile
while their experience of the issue remains inadequate.

Another difficulty is the collection and screening information in the context of various
and complex international transactions on global scale. Not all tax authorities of
countries are willing to cooperate to provide information; besides, they do not always
have the updated information and offer timely. Meanwhile, in order to determine transfer
price, sufficient information is needed.

Circular 201/2013/TT-BTC of the Ministry of Finance mentions to the application of

APA in tax management. Theoretically, APA can help reducing the declaration of losses
mentioned in many multinational companies. However, since the application of APA is
based on voluntary principle, tax authority cannot force foreign capital enterprises to
implement APA. Besides, APA still remains some disadvantages that need to be removed
and improved. In specific, APA agreement is very complicated so the application may be
only applied to big corporations. When negotiating on a unilateral basis, APA cannot
achieve a high level of certainty because other countries may not agree with the
negotiated outcome. Additionally, it is very difficult for a quantity of countries to
participate in APA, especially for countries with low or no tariff. An important concern
of APA that makes company hesitate to join is that taxpayers must provide too much
information. Although the terms of information privacy are included in APA, companies
still do not want to disclose their confidential information such as their own recipe, risk
management methods, etc., especially when such information is served for the benefit of
their competitors. Although APA remains some limitations, it is still one of the useful
method that can be applied to prevent transfer pricing activities. Government may apply
this agreement in effectively and efficiently so as to control the happening of this action
in Vietnam.

2.6.3.2. Subjective difficulties

Firstly, the legal framework on anti-transfer pricing has not been completed. Considering
the legislation, regulations on transfer pricing and anti-transfer pricing activities are not
really full and clear. In addition, regulations on transfer pricing have just been circular;
thus, legal effect is not high, causing difficulties for the implementation process. Decree
on transfer pricing has just been developed in late 2016 and has not been officially
issued.

Circular of Ministry of Finance does not provide specific guidance on inspection process
and specific steps that tax authorities conduct examinations and inspections of
companies relating to affiliated transactions with other parties. It has been shown that a
lot of enterprises are puzzled about this issue; however, the general answer is that there is
no official document of tax authority on a specific inspection process. This will cause
confusion for companies and will also easily lead to making incomplete and inaccurate
pricing profile, resulting in additional time and costs for both enterprises and tax
authorities.

Secondly, the power of tax authorities is still limited. Vietnams current legislation only
allows tax inspection in a short period of time. In other countries, an anti-transfer pricing
inspection lasts from 18 to 24 months on average, especially, there is inspection lasting
13 years. There is no country in the world controlling the duration of an inspection of
transfer pricing; however, in Vietnam, the longest time of inspection is 30 days that puts
pressure on competency authorities. Besides, authorities have not been given the
authority to investigate tax in enterprises. One of the important basis to determine
whether transfer pricing happens or not is having adequate and reliable information of
taxpayers. However, without the power to investigate (with specific powers such as
sudden inspection, searching, arresting), it is very difficult to collect information.

Thirdly, information system of taxpayers has not been completed. In recent years, the tax
authority has made great efforts in collecting, processing and storing information system
of taxpayers in order to build the database for tax administration activities. Database of
taxpayers was initially built, but still poor due to lack of diverse and timely updated
information sources.

In addition, punishment for violating enterprises is not strict enough. Tax law regulates a
low level of penalty without specific and strict punishment in order to deterrent violating
companies. In fact, there have not been particular sanction applying to companies which
do not submit transfer pricing documents or deliberately declare wrong information.

Besides, the professional capacity of the tax officials about transfer pricing issue is still
limited. In order to select the appropriate pricing determination method, tax officials
must have experience, skills as well as knowledge of foreign languages, information
technology and economic background. However, recently, most of tax

62
authorities do not have experienced economists and technicians having deep knowledge
of specific and complex industries. Along with that difficulty, there are not many
inspectors who have strong knowledge about both taxation and information technology
skills. Therefore, carrying out the analysis of corporations business activities and
analyzing the determination of transfer price of enterprises relating to affiliated
transactions are still difficult. This is a very important issue that needs to be extremely
concerned in finding solutions in order to improve the effectiveness of the fight against
transfer pricing.
 CHAPTER 3. RECOMMENDATIONS TO CONTROL
TRANSFER PRICING ACTIVITIES IN VIETNAM
FDI has contributed positively to the growth and development of Vietnams economy in
recent years. FDI has also affected some other parts of the whole economy, increasing
domestic investment resources, shifting economic structure, reforming state- owned
enterprises, improving administrative procedures, completing market economy
institutions and promoting international economic integration. On the other hand, the
attraction of FDI has not met some expected targets of attracting high technology,
supporting industries, infrastructure development investment and technology transfer.

FDI is one part of Vietnams economy. It is encouraged by the government for long term
development, guaranteed legal rights, benefits and equal treatment. From present to
2020, the government sets out 3 general orientations for the attraction of FDI as follows:

Firstly, select the projects of high quality, high technology, environmentally friendly,
highly competitive products and suitable with the orientation of economic restructuring
of each region, sector and country. Secondly, attract large-scale projects, highly
competitive products which contribute to global value chain of multinational
corporations; from that build and develop the system of supporting industries. Thirdly,
gradually shift attracting FDI with the advantage of cheap labor to competing by high
quality human resources.

In order to implement these above orientations, the government will implement many
measures, including revision of investment incentive policies, renovation and renewal of
investment promotion, completing the process involved in the control of imported
machinery and equipment, enhancing the efficiency of state management after granting
investment certificates, etc.

Coming along with the development of FDI is transfer pricing activity performed by
multinational corporations with increasingly sophisticated means. Transfer pricing has
appeared in Vietnam for a long time. Also, financial and strategy authorities have defined
this activity as one of the top issues that need more attention and strict
management since through transfer pricing, multinational companies have caused losses
of domestic tax revenue. Moreover, the fact that FDI companies increase importing
prices of machines and equipment much higher than their actual value rises the prices of
final products in the market. As a result, these multinational companies have the reason
to declare losses in their operation. In a long time, it may create unequal competitive
environment with domestic enterprises or more seriously, create invasion of domestic
enterprises. Overall, strengthening the control of transfer pricing is getting more and
more important in preventing tax losses, reducing products prices which create benefits
for consumers and increase revenue for state budget.

Based on the current situation of transfer pricing in Vietnam, I propose some

recommendations and solutions to improve the efficiency of anti-transfer pricing
activities as follows:

3.1. Adjusting corporate income tax rate

Obviously, multinational corporations do transfer pricing in order to maximum their

operation profit. Vietnams current corporate income tax rate in 2017 is 17%. This
number can be considered a low rate in the world; however, it is still higher than some
countries. Especially, there are countries which impose no corporate income tax. With
the same amount of revenue, multinational corporations may save millions of USD if pay
tax in those countries compared to Vietnam. Therefore, to reduce transfer pricing, the
simplest way is to lower corporate income tax rate of Vietnam so that multinational
companies may pay tax and contribute to Vietnams economy.

Because lower tax rate may also have impacts on other issues in the economy other than
contributing to reduce transfer pricing, it needs much consideration and scrutiny from
government. Therefore, this method appears hard to implement.

3.2. Letting State Auditor participate in anti-transfer pricing

Through managing the annual revenues and expenditures budget of tax authorities and
customs agencies, State Auditor is able to detect and provide reliable evidence of transfer
pricing activities performed by multinational companies. Being a specialized agency of
the Parliament, State Auditor has the power to request related parties to
provide complete, accurate and timely documentation that serves the audit. Moreover,
State Auditor also has the power to request relevant authorities to cooperate in
performing the assigned tasks. Thus, if there is involvement of the State Auditor, signals
of transfer pricing violations may easily be uncovered.

3.3. Completing legal system

In general, since issuing Renovation policy, opening the economy, Vietnams

government has made considerable efforts that makes Vietnam's economy gradually
integrate with the worlds economy. It cannot be denied that there are a quantity of
positive changes in the law and the investment environment of Vietnam, which are
increasingly closer to international practice and attractive to foreign investors. However,
in current situation, there still remains limitations of the legal documents system and the
implementation of legislation. The government needs to find solutions to resolve these
problems in order to improve the effectiveness of the law. The issuance of legislation
musts come from the actual needs of the economy, musts be consistent with the actual
conditions of each period of time and musts meet the economic management objectives
of government.

Firstly, the Ministry of Finance should amend and supplement the inadequacies of
Circular 66/2010/TT-BTC dated 22/4/2010 guiding the valuation of m market price in
business transactions between the associated parties. Besides, government should
promote the building of Decree on managing transfer price of associated transactions,
from that issue the Law on transfer pricing. Besides, competency authorities need to
complement legal normative documents on the right to determine prices and advance
pricing negotiate, the right to determine tax for enterprises involving in associated
transactions and transfer pricing.

On the other hand, Vietnam also needs to clearly regulate the comprehensive and
stringent punishment for enterprises who declare inaccurate number of payable tax,
creating a warning to companies. Vietnam can refer to sanctions imposed for transfer
pricing activities in some countries as follows:
In Australia: The amount of fine will equal to 50% of the tax avoided if tax paying
enterprises use transfer pricing for the purpose of reducing the amount of tax payable.
The amount of fine will equal to 25% of the tax avoided if tax paying enterprises use
transfer pricing for other purposes.

In China: In case that tax paying companies are unable to declare market prices on time,
tax authorities will impose fines of up to 2,000 Yuan (equivalent to 6 million VND). This
amount can be up to 10,000 Yuan (over 30 million VND) in severe cases when firms do
not declare the market prices on time.

In India: Local tax authority may impose a fine of up to 300% of the amount of tax
avoided. Tax paying companies are required to calculate annual taxable income and are
obliged to pay taxes in advance. When this obligation is not completed, the late
payments shall bear interest rate of 18% per year.

In Korea: The amount of fine is imposed from 10% to 30% of the tax avoided. Besides,
enterprises shall have to bear the interest rate on late payments of 18.25% per year. If
companies fail to submit proving documents as requested, they may be fined up to 30
million Won (equivalent to about 600 million VND).

In New Zealand: If enterprises fail to submit proving documents when being requested,
tax authorities may impose fines of at least 20% of the amount of tax avoided.

In the Philippines: Tax paying companies must bear a fine equivalent to 25% to 50% of
the tax avoided. In addition, this amount of tax avoided is considered as a late payment
which will incur interest rate of 20% per year.

One of the major problems that create difficulty for competency authorities in fighting
against transfer pricing activities is that punishment for violating enterprises is not strict
enough. Tax law regulates a low level of penalty without specific and strict punishment
in order to deterrent violating companies. Therefore, Vietnams government should learn
from other countries regulation in order to issue effective rules applied to violating
parties.
 3.4. Tightening control of multinational corporations

Many enterprises have do tax evasion through transfer pricing; however, the quantity of
companies which have been detected is still a small number. Therefore, taking business
activity of multinational companies into framework is extremely urgent. The reality of
applying regulations into business in recent years indicates that the management of
Ministry of Finance has not shown effectiveness. In this new situation where there have
been regulations on transfer pricing, the work of implementing these provisions needs to
be strengthened and efficiently promoted.

3.4.1. Issuing regulations in identification of transfer pricing behavior

in enterprises

Although the identification whether or not transfer pricing happens in operation of

enterprises is an extremely difficult job, it plays a very important role. If these signals are
given, FDI companies will have to adjust their financial results in order to avoid falling
into black list, which leads to investigation of tax authorities.

Specific identifications include: enterprises suffered losses in two continuous years or

more after starting stage, involved in transactions with associated parties which are
located in low-tax countries. Sometimes, companies suffered the situation of rotational
profits and losses or irregular operation results. In some cases, companies present profit
margins that are much smaller than other enterprises in the same industry or in the same
group. Moreover, one of the above signals appearing at a company sometimes go with
these other cases such as: production equipment of enterprises is purchased from parent
company or associated companies in the same group, or enterprises final products are
sold to parent company or other associated parties. If a corporation appears to contain
these signals, it is almost certain to conclude that it is deliberately planning to do transfer
pricing. Thus, tax authorities must hold the list of those enterprises to handle and conduct
investigations.

3.4.2. Gathering accurate and full information

Gathering credential information from different sources is also extremely necessary to be

aware of how multinational corporations are performing and whether they are
comply with regulations or not. In order to achieve this purpose, conducting direct
interviews with staffs of enterprises is an effective choice. Direct interview has some
advantages in comparison with other forms in which all issues related to the production
and distribution are often covered in interviewing process, such as production function,
marketing function, distribution function and after sales services, etc. Other than direct
interviews, tax authorities may also need to check documents and other information
including organizational structure, reports on existing pricing policies within company,
existing agreements within company in the fields of distribution, research and
development, cost allocation, or information about product and marketing activities such
as product lists and reports on inventory analysis. This knowledge is very useful to
understand the information gathered from interviewing process.

3.4.3. Examining and storing information

Tax authority must require enterprises to make proving documents for purpose of
explaining the reasonableness of determining transfer price across borders. By doing
that, competency authority can control the transfer pricing activities within companies.
In addition, tax authority may also consider the following issues:

Collecting information about enterprises which have associated transaction with the FDI
company being examined. However, this approach depends on the control of foreign
legal bodies, or in other words, relates to international law, information about relevant
enterprises seems to be limited within a certain legal scope. As of the date 08/10/2016,
Vietnam had signed Double Taxation Avoidance Agreement with 75 countries and
territories around the world, this has helped foreign tax authorities in the fight against
domestic transfer pricing.

Information security is also a problem to be particularly concerned in order to protect the

rights of enterprises. It is also one of the most concerns of many companies when facing
the requirement of submitting documents and providing information to tax authorities.
Hence, Vietnams Department of Taxation should issue regulations ensuring the
confidentiality of information which is provided by taxpayer. It will create trust for
enterprises when submitting proving documents. Moreover, there should also be
regulations that competency authorities shall be fined if illegally revealing
information of companies. On the other hand, violating enterprises must also be
punished. The amount of fine may be determined for specific case such as not providing
sufficient documentation or submitting incorrect information.

Gathering information about competitors in the market is also an effective that tax
authority can use to manage transfer pricing activities in an enterprise. These information
may include pricing policies and profitability of competitors. By comparing indicators of
diffirent companies operating in the same industry, competency authorities may find
suspicious points in operation of multinational corporations.

3.5. Building database system for purpose of determining transfer price

In general, so far, competency authorities have not built a database system which
provides information about the prices of traded goods between independent companies
and associated companies. Therefore, when an internal transaction occurs, authorities
will be very difficult to find similar transactions for purpose of comparing and
considering whether this internal transaction is in compliance with the arm's length
principle or not.

In order to have a database used as a source of data to compare the prices of transactions,
authorities must gather data from different time periods, different types of transactions so
as to diversify the database system. Gathered data should not be data which is taken in a
time that market suffers large fluctuation (in that period of time, prices do not reflect the
objective market).

Database must be unified and should be available that citizens can easily search from
time to time. Government should create a website that contains data about transaction
prices. Assessing this website, relevant authorities and enterprises can look up and use as
a basis to determine whether transactions of enterprises are related to transfer pricing
activities or not.

Besides, agencies should enhance extracting information from banking system. This is
an effective source which provides the true data and documents about transfer
transactions and transfer price.
In some cases, authorities can build a system of economic intelligence agencies which
will be in charge of collecting information about multinational corporations in
international scope. These agencies may collect and provide information about
corporations which are headquartered in many countries in the world in order to be able
to promptly report the detailed information about companies operations when they
invest in Vietnam. These intelligence agencies also pose a warning about the unclear
activities of these multinational companies occurring in other countries. Economic
intelligence agencies recognize trading transactions arising between subsidiaries within
one multinational company and between independent parties in order to make the
standard in inspection and investigation.

3.6. Narrowing tax incentives

Difference in corporate income tax between countries is one of the reasons that lead to
transfer pricing behaviors of multinational companies. Nowadays, Vietnam has come
through the stage of attracting FDI at all costs; therefore, government and relevant
competency authorities should review and adjust towards narrowing the gap of tax
incentives between sectors and regions. Obviously, in order to achieve certain goals, it is
needed to implement tax incentives; however, government may also consider other ways
to regulate economic problems. Tax incentive is used only in the most favorable
circumstance than other ways of incentives such as subsidizing or supporting
development of infrastructure. Moreover, the effectiveness of project evaluation must
also be enhanced. If the appraisal of investment projects is done well, it can detect
promptly transfer pricing behavior through raising value of contributed capital of
multinational companies.

3.7. Promoting the capacity of tax officials

Because of the fact that transfer pricing has been performed relative commonly and
become more and more difficult to detect, it is necessary to increase the capacity of tax
officials who work directly in tax issues of enterprises. Tax department needs to prepare
all of its officials with professional skills, foreign language and information technology
knowledge in order to control effectively and efficiently transfer pricing troubles at all
levels. Tax department must enhance training for these officials of determining and
managing transfer price through both intensive training classes and practical case studies
associated with actual situation. Besides, conferences may be organized so as that tax
authorities can review and draw experience in the management of transfer pricing.
Additionally, another important way is learning experience from other countries which
have achieved much success in anti-transfer pricing. Tax officials may be sent to attend
conferences abroad to learn the way those countries have done, then apply to Vietnam
situation.

Besides, Department of Taxation should have some forms of reward and encouragement
given for those individuals and authorities which have gained outstanding achievements
in their work. Moreover, discipline should also be created to limit the negative activities
such as tax officials colluding with enterprises to declare wrong price in business
transactions.

3.8. Stabilizing macro economy and the value of Vietnamese currency

Stabilizing Vietnams macro economy and maintaining economic growth are crucial in
current situation. In general, foreign investors are likely to invest in economies which
maintain fast and stable growth because these economies will bring more business
opportunities and higher profitability. In contrast, investors often consider carefully when
investing in environment containing potential risks such as unstable political
environment, high inflation rate and large economic fluctuation. Operating in these
environment, foreign investors tend to withdraw their investment quickly to avoid and
limit risks. Meanwhile, transfer pricing is seen as one of the most effective methods to be
used. Therefore, government of Vietnam should build economic development strategies
based on the optimal use of its existing advantages. Vietnam has a stable social and
political environment which is a significant advantage of the country in attracting foreign
capital.

The devaluation of Vietnamese currency compared to other foreign currencies is one of

the top concerns of foreign investors because it affects directly to the preservation of
their capital. Therefore, the devaluation of the currency will create motivation for foreign
investors to do transfer pricing in order to minimize risks. As a result, stabilizing the
countrys currency is also an important task to limit transfer pricing behaviors of

72
multinational enterprises in Vietnam. Government needs to closely coordinate the
activities of relevant agencies including State Bank, Ministry of Finance to make
financial solutions so as to control and stabilize Vietnamese currency. State Bank also
needs to reserve an amount of foreign currency in order to serve local demand and
regulate the market. By doing this, State Bank can avoid fluctuations in exchange rate
which negatively impact business and production activities of the industry.

3.9. Promoting anti-corruption activities

In fact, the problem of corruption in Vietnamese system usually ranks at a serious level.
It decreases the belief of foreign investors in attracting capital policies of Vietnam and
overall, in the sustainable development of Vietnam's economy. Obviously, investors will
assess the investment risk in Vietnam higher, then change their investment into a safer
economy. Some other investors may still decide to invest in Vietnam, however, at the
same time, they will also find methods to mitigate risks. The most typical methods is
doing transfer pricing activity. Solving the problem of corruption becomes a necessary
condition to attract foreign investment in Vietnam.

Completely solving corruption is an extremely difficult problem. However, Vietnamese

government needs to make efforts to control and minimize this problem.

When it took effect on June 1, 2006, the Anti-Corruption Law created a mechanism to
prevent and uncover corruption cases. However, in the last ten years, a number of the
Laws stipulations have been inadequate to combat corruption in Vietnam prompting the
Vietnamese Party and State revise the law. It is agreed that more regulations are needed
on handling violations of the law. The law needs to stipulate mechanisms for law
enforcement, monitoring and oversight, and define the responsibilities of heads of
agencies and organizations.

Moreover, another effective method in fighting against corruption is deploying smart

technology. Just as government-induced distortions provide many opportunities for
corruption, it is also the case that frequent, direct contact between government officials
and citizens can open the way for illicit transactions. One way to address this problem is
to use readily available technologies to encourage more of an arms-length
relationship between officials and civil society; in this respect the Internet has been
proved to be an effective tool to reduce corruption. In some countries, the use of online
platforms to facilitate the governments interactions with civil society and the business
community has been particularly successful in the areas of tax collection, public
procurement, and red tape. Vietnamese government should apply this way in the
countrys situation in order to more effectively fight against corruption.

3.10. Changing banking activities

Payment through banks should be promote in order to control transactions which are
incurred in the entire economy. Banks documents will help competency authorities to
examine and monitor transactions as well as entities involving in these transactions.

Government shall issue regulations to strengthen the control of business activities

through credit. It is needed to strictly appraise loan agreements on basis of the efficiency
of projects, using of loans, ability to repay and sources of repayment. Implementing this
policy not only helps to make healthy credit environment but also procide accurate
information about expense ratio, interest rate or other financial and economic indicators
in many sectors. These ratios can be used as standard to compare transfer price and
determine whether there are transfer pricing activities in companies or not.

Banking system will be the supplier of information and data including purchasing price,
profit margin of every enterprise in all industries. Accordingly, Department of Taxation
may gather information and calculate average index, serving tax authorities in
determining taxable profits of multinational companies.

3.11. Other solutions

Anti-transfer pricing can not be done individually in one country. There must be close
coordination between relevant countries in fighting against this illegal activity.
Therefore, building a fundamental and long-term solution requires Vietnams
government to sign agreements with other countries in the world in order to repel this
issue together. Moreover, Law on tax administration must allow the use of information
provided by foreign tax authorities as the legal basis to make tax arrears of foreign
companies investing in Vietnam. In near future, more Bureaus of transfer pricing
inspection should be established. These authorities will closely collaborate with other
agencies such as Department of Taxation, Department of Planning and Investment,
Department of Industry and Trade, etc. Those competency agencies control the whole
process of business activities of foreign investors from the time it was licensed,
importing equipment and raw materials, to the manufacture and sale of products. At the
same time, enterprises which often declare losses should be announced professedly in
order to promote the supervision of consumers.

A reason that multinational corporations often use to explain why they have to import
raw materials from its parent company is that Vietnamese companies are not able to
produce or produce without quality assurance. Thus, to deal with current complex
transfer pricing situation, besides the above solutions, Vietnam needs to invest more in
production in order to replace import. Especially, ancillary industry needs to be
developed and invested more so as to reduce imports and proactively control market
prices of inputs. Thereby, government can control market prices of outputs and enhance
competitiveness of Vietnamese enterprises.
 CONCLUSION
It is undeniable that international integration has brought tremendous positive changes to
Vietnam's economy, promoting economic growth, improving standard living of citizens.
On the contrary, integration also comes with serious international challenges which
Vietnamese government is facing. One of these issues is transfer pricing problem in
multinational corporations. Through the topic Managing transfer pricing activities of
multinational corporations in Vietnam, this thesis has achieved the following main
results:

Firstly, the thesis analyzed and generalized the most basic characteristics of the operation
of multinational corporations and transfer pricing issues. The identification of transfer
pricing as well as motivation and its effects were also analyzed specific. Besides, it also
provided the experience to control transfer pricing activities from some other countries in
the world, creating foundation for the study of transfer pricing in Vietnam.

Secondly, through the analysis and assessment of managing transfer pricing activities of
Vietnamese government so far, the thesis clearly indicated the achievements as well as
limitations in the fight against transfer pricing in Vietnam.

Thirdly, through research situation, the thesis presented the need of strengthening the
control over transfer pricing, and, at the same time, propose some recommendations and
solutions to complete management of transfer pricing activities at multinational
corporations in near future.

Transfer pricing is an unavoidable issue of economic integration, which takes place not
only in Vietnam but also in the whole world. From the purpose of maximizing profits of
multinational corporations, transfer pricing is performed through evading tax obligations
in countries receiving foreign investment. Transfer pricing results in negative impacts on
the development of economy, restructuring investment, causing tax losses, creating
unfair competition and misleading economic development orientation of those countries.
Transfer pricing activities in Vietnam are becoming more and more complicated with
many increasingly sophisticated methods in order to deceive competency authorities,
thereby causing huge losses to the state budget. Facing this situation, Vietnams
government as well as Ministry of Finance have been making great efforts to improve
their control. The draft Decree on transfer pricing was released October 2016, and
expected to be effective in 2017. For the first time, Vietnam has a Decree which indicates
transfer pricing activities in the country. This Decree is expected to mark a big
transformation in the fight against the current transfer pricing situation. In addition,
Vietnamese government should also propose other effective solutions and coordinate
with relevant functional departments to jointly repel this problem. As a result, Vietnams
economy can grow along with the international economy.
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 APPENDIX
FDI capital in Vietnam 1988 2016

Unit: Billion USD

Year Registered capital Disbursed capital

1988 0.342 -

1989 0.526 -

1990 0.735 -

1991 1.284 0.429

1992 2.078 0.575

1993 1.839 1.118

1994 4.262 2.241

1995 7.925 2.792

1996 9.635 2.938

1997 5.956 3.277

1998 4.873 2.372

1999 2.283 2.528

2000 2.763 2.399

2001 3.266 2.226

2002 2.993 2.885

2003 3.173 2.723

i
Year Registered capital Disbursed capital

ii
2004 4.534 2.708

2005 6.840 3.301

2006 12.004 4.100

2007 21.349 8.034

2008 71.727 11.500

2009 23.108 10.001

2010 19.887 11.000

2011 15.319 11.000

2012 16.348 10.470

2013 23.352 11.500

2014 21.922 12.500

2015 22.760 14.500

2016 24.373 15.800

Total 337.456 154.917

Source: Synthesized by author

ii
i