BANKING ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL BUSINESS ---------- BACHELOR’S THESIS The control of Transfer Pricing – International experience and lessons for Vietnam Name of Student : NGUYEN THI TUYEN Class : K19KDQTD Course : 2016 - 2020 Student - ID : 19A4050248 Supervisor : M. LE HA TRANG Hanoi, May 2020 BANKING ACADEMY OF VIETNAM FACULTY OF INTERNATIONAL BUSINESS ---------- BACHELOR’S THESIS The control of Transfer Pricing – International experience and lessons for Vietnam Name of Student : NGUYEN THI TUYEN Class : K19KDQTD Course : 2016 - 2020 Student - ID : 19A4050248 Supervisor : M. LE HA TRANG Hanoi, May 2020 DECLERATION I hereby declare that the thesis with the subject: “The control of Transfer Pricing – International experience and lessons for Vietnam” is my personal research with the supervision of my lecturer - Ms. Le Ha Trang.
All of the data I indicated in this thesis is obvious, factual and has legitimate sources. I am confident that this thesis does not duplicate any other researches. Hanoi, 25th May 2020 Nguyen Thi Tuyen i ACKNOWLEDGEMENT During the process of completing the thesis, I have received the encouragement, and guidance of my lecturers, family and friends who have enthusiastically helped me. They played an important role, besides my effort, in the period of thesis research.
Special thanks to M. Le Ha Trang who was dedicated to support and help me all the time of researching and writing the thesis. I am appreciated her essential and useful guidance. I want to say many thanks to my lecturers at the faculty of International Business of Banking Academy for interesting and useful lessons and for valuable knowledge offering during 4 years of university.
I am grateful to my family and my friends who always encouraged me whenever I struggled with the difficulties. The control of transfer pricing which was studied in this thesis is a difficult phenomenon. To efficiently study about this topic, the various knowledge, skills and practical experience are required. Thereby, I clearly understand that my thesis has inescapable limitations and shortcomings.
This is the reason why I would be appreciated to receiving the valuable comments. Sincerely, Hanoi, 25th May 2020 Nguyen Thi Tuyen ii INDEX LIST OF ABBREVIATIONS LIST OF FIGURES AND TABLES INTRODUCTION. 1 CHAPTER 1: OVERVIEW OF TRANSFER PRICING. CONCEPT OF TRANSFER PRICING.
TYPICAL TRANSFER PRICING METHODS. Transfer pricing by rising input costs and lowering output costs. Transfer pricing from the first phase of an investment project. Transfer pricing through the determination of the value of capital contribution in joint ventures.
Transfer pricing with the purpose of dominating the market. Transfer pricing through transferring technology. Transfer pricing through tax spread. METHODS OF DETERMINING TRANSFER PRICING.
Comparable Uncontrolled Price (CUP). Resale Price Method (RPM). Cost Plus Method (CPLM). Profit Split Method (PSM).
Transaction net margin method (TNMM). THE IMPACT OF TRANSFER PRICING. The impact of transfer pricing on Economy. The impact of transfer pricing on Taxation.
The impact of transfer pricing on MNEs. LEGAL FRAMEWORK ON TRANSFER PRICING. OECD specific tax rules. Regulations in EU.
A practical guide of UN about transfer pricing for developing countries. 17 SUMMARY OF CHAPTER 1. 19 iii CHAPTER 2: INTERNATIONAL EXPERIENCE IN TRANSFER PRICING CONTROL AND THE LESSONS FOR VIETNAM. THE CASE OF TRANSFER PRICING IN THE US.
The case of transfer pricing in the US. Experience in transfer pricing control in the US. THE CASE OF TRANSFER PRICING IN CHINA. The case of transfer pricing in China.
Experience of transfer pricing control in China. LESSONS LEARNED FOR VIETNAM FROM INTERNATIONAL EXPERIENCE. 30 CHAPTER 3: THE PRACTICAL SITUATION OF TRANSFER PRICING CONTROL IN VIETNAM. TRANSFER PRICING SITUATION IN VIETNAM.
THE PRACTICAL SITUATION OF TRANSFER PRICING CONTROL IN VIETNAM. TRANSFER PRICING CONTROL ASSESSMENT. Achievements in transfer pricing control. Many multinational corporations take advantage of preferential tax policies in Vietnam.
Vietnam lacks effective anti-transfer pricing measures. RECOMMENDATIONS FOR TRANSFER PRICING CONTROL IN VIETNAM. Supplementing and completing the legal framework for transfer pricing in Vietnam. Improving the professional qualifications of officials, especially tax officials.
Developing a legal information channel on transfer pricing. Undertaking other effective preventive measures of transfer pricing. 45 SUMMARY OF CHAPTER 3. 1 iv LIST OF ABBREVIATIONS APA Advance Pricing Agreement BEPS Base Erosion and Profit Shifting CIT China's Enterprise Income Tax Law CNY Chinese Yuan CPLM Cost Plus Method CUP Comparable Uncontrolled Price DIR Detailed Implementation Regulations FDI Foreign Direct Investment FRX Forest Laboratories Inc.
GDP Gross Domestic Product ITP International Transfer Pricing IRS The Internal Revenue Service MNEs Multinational enterprises OECD Organization for Economic Cooperation and Development PSM Profit split method R&D Research & Development RPM Resale Price Method SAT China's State Administration of Taxation TNMM Transaction net margin method UN United Nations USD United States dollar VND Vietnam Dong v LIST OF FIGURES AND TABLES Figures and Table Page Table 3.1: Amount of foreign direct investment into Vietnam in 34 2019 (Unit: percentage) Table 3.2: Loss declared by some FDI enterprises in 2016 (unit: 35 VND billion) vi INTRODUCTION 1. The necessity of the research In recent years, Globalization has become the significant phenomenon in the world, which has led to not only the economic expansion but also critical issues. The occurrence and operation of multinational enterprises (MNEs) bring about more employment opportunities, modern technology, taxes or other revenues to host countries, including Vietnam. For instance, Unilever Vietnam many times is voted as the best place to work and the most favorite employer in Vietnam, has more than 1,600 employees nationwide and indirectly creates jobs for tens of thousands of workers through third parties, suppliers and distribution agents.
Besides, Samsung Electronics Vietnam has invested in modern factories and research centers in Vietnam with huge capital. In 2018, Samsung’s exports in 2018 accounted for 25% of Vietnam's exports. The MNEs have contributed a great deal of boosting economic development in Vietnam. Besides the positive achievements, the drawbacks of global expansion have caused detriment to the Vietnamese economy.
One of the most highlighted issues is Transfer pricing which has led to distribute profit among related organizations and reduce the tax payment for Vietnam. The government has enforced laws and regulations to control and limit Transfer Pricing such as - the first legal document referring to transfer pricing - Circular No. 74/1997 / TT-BTC of October 20, 1997 of the Ministry of Finance, guiding tax on foreign investors and the latest ones are Decree No. 20/2017/ND-CP regulating tax administration for associated transactions, Circular 41/2017/TT-BTC guiding the implementation of a number of articles of Decree No.
20/2017/ND-CP effected in May 2017. Administrative departments were established in order to control Transfer Pricing behavior. Counter-intuitively, legal regulations above have not successful in controlling Transfer pricing yet. The phenomenon of MNEs declaring losses while turnover notably increased is quite common, accounting for about 50% of the total number of MNEs in the country.
For instance, by December 2012, the total accumulated losses of Coca-Cola Vietnam amounted to 3,768 billion VND, exceeding the initial investment of 2,950 billion VND, in fact, the company's output was still growing over 1 25% per year. A similar example is Keangnam Vina who always reported losses for 5 years. According to the tax authorities' data, as of 2011 when the Keangnam Hanoi Landmark building started operating, the company's revenue reached over 5,200 billion VND but the company reported a loss of 140 billion VND. Experience has shown the ineffectiveness of controlling Transfer pricing in Vietnam motivated me to choose the issue “The control of Transfer Pricing – International experience and lessons for Vietnam” as a subject of the thesis.
Some recommendations will be released on regulations and practical activities put in for improving efficiency. Literature review Becoming one of the most complicated economic issues, Transfer pricing on which has been kept the eyes by some researchers, both individuals and organizations. Their studies have great potential to identify and work out the questions on Transfer pricing. The research of Abdel-Khalik, A.
(1974) – “Transfer pricing-a synthesis” – provided insights into the situational orientation of several Transfer pricing approaches and evaluate the nature and scope of some Transfer pricing models. Abdel analyzed the expansion of these models in the economic theory of the companies, mathematical programming and analytic approaches. “Managing International Transfer Pricing Policies: A Grounded Theory Study” which was released by Jamie Elliott in 1999 investigated specific transactions at the subsidiary level, found valuable contributions to our understanding of ITP within MNEs. “International Transfer Pricing 2013/14” of Nick Raby developed defensible Transfer Pricing Policies and demonstrated the specific issues of many countries.
In 1995, The OECD originated guidelines called “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” as a widespread principle. The advantages of guidelines are limiting the tax evasion by preventing Transfer pricing among associated enterprises. The research “Transfer Pricing and Corporate Taxation” of author King, Elizabeth which focused on the various transfer pricing cases was written for who 2 work related with tax in 2012. The case studies reflected in particular the US views as for example the FIN 48 specifications.
This publication was an extremely useful tool for practitioners and tax directors grappling with complex and contentious transfer pricing issues of various kinds. It contained a series of highly detailed case studies, which draw on the author's two decades as a government economist specializing in transfer pricing and valuation, a transfer pricing economist with Price Waterhouse. The publication “a comparative empirical study of international Transfer pricing practices and audits in new Zealand, Australia and China” by Jian Li in 2005 illustrates comprehensive statistical proof on the ITP practices of the developing and developed economies. As a consequence, the author showed statistically significant differences between the' ITP methods used by Chinese companies and their New Zealand and Australian counterparts.
Furthermore, ITP practices and audits across New Zealand, Australia and China, have been thoroughly analyzed in this essay. These international studies above play a significant role in finding a solution to control Transfer pricing over the world. However, the different characteristics of cultural, economic, politic and legal in Vietnam makes the Transfer pricing activities distinct. Therefore, we need a specific research to accommodate international effective experience to the domestic practical situations.
In Vietnam, the research “Chuyen gia trong doanh nghiep co von dau tu truc tiep tu nuoc ngoai (FDI) – kinh nghiem quoc te va bai hoc cho Viet Nam” was made public by Mr. Duong Van An in 2016. The author assessed the practical status of Vietnam's policies, laws, and responses to transfer pricing in FDI enterprises and proposed science-based solutions to enhance Vietnam's resilience to transfer pricing in FDI enterprises. The thesis contributed to supplementing and developing the theoretical framework on transfer pricing in general and transfer pricing in FDI enterprises in particular.
Furthermore, it provided a practical basis to clarify the conflict of interest between FDI attraction and the damage caused by transfer pricing in FDI enterprises. In 2010, besides, the writer Nguyen Thi Quynh Giang released the study “Chuyen gia trong cac cong ty da quoc gia o Viet Nam” in which analyzed and 3 examined previous case of transfer pricing in Vietnam and over the world. After that, she recommended some measures to prevent Transfer Pricing activities to assure the stable business development. As a result, the operation model of MNEs was particularly studied in order to obviously know about Transfer Pricing methods they applied.
It also assessed the perception of the authorities in Vietnam about this phenomenon. In fact, Vietnam is still a developing country, having an economy facing significant challenges in the process of economic integration.
