REGULATION AND MANIPULATION OF TRANSFER PRICING

Table of contents
Abstract.....................................................................................................................................3
Acknowledgement.....................................................................................................................4
Introduction...............................................................................................................................5
1. Rationale......................................................................................................................................5
2. Target...........................................................................................................................................6
3. Subject and Scope.......................................................................................................................6
4. Method of Research....................................................................................................................6
CHAPTER 1: DEFINITION AND THEORIES OF TRANSFER PRICING................................................7
I - Definition.....................................................................................................................................7
II – Determinants of transfer pricing...............................................................................................7
1- Internal determinants.............................................................................................................7
2 – External determinants...........................................................................................................8
III - Some usual behavior of transfer pricing................................................................................10
1. Modification of capital contribution.....................................................................................10
2. Technology transfer...............................................................................................................12
3. Transfer pricing with a view to market domination:............................................................13
4. Transfer pricing through differentials in tax rates:...............................................................14
5. Transfer pricing in the form of increasing management and administrative costs.............16
IV. Effects:......................................................................................................................................17
1. On MNCs................................................................................................................................17
2. On the countries receiving foreign investment capital:.......................................................18
3. On the capital-exporting countries:......................................................................................19
CHAPTER 2- BRIEF SITUATION OF TRANSFER PRICING IN VIETNAM SINCE “DOI MOI” AND
SOME TYPICAL CASES...............................................................................................................20

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I – Brief situation of transfer pricing in Vietnam..........................................................................20
II- Some typical cases about transfer price in Vietnam since economic reform.........................20

1- Transfer price in VNTRA........................................................................................................21
2- Transfer Price in Vietnam P&G.............................................................................................22
3- Transfer price in Coca cola Chuong Duong Joint Venture Company....................................23
CHAPTER 3- REGULATION AND MANIPULATION OF TRANSFER PRICING..................................25
I- Current approaches to transfer pricing.....................................................................................25
1- Significant regulatory achievements....................................................................................25
3- Market price determination methods..................................................................................26
3- Administrative and penalty methods...................................................................................31
4. Thorough inspection of multi national corporations...........................................................32
II – Long term solutions.................................................................................................................33
1. APA - Advance pricing agreements.......................................................................................33
2. Business morality and social responsibility establishment..................................................33
REFERENCES.............................................................................................................................37
WORK DISTRBUTION AND PERSONAL RESPONSIBILITIES.........................................................40

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Abstract
The sophisticated economic phenomenon called “Transfer pricing” needs ultimate care
from authorities in Vietnam due to its negative impacts on the economy as a FDI
recipient. In the event of Foreign Direct Investment capital being rapidly poured into this
developing country, transfer pricing has made its widespread movement at alarming rate.
Meanwhile, as a newcomer to the global integration, Vietnam is faced with a lack of
relevant experiences to deal with the problem. There are both internal and external
determinants of transfer pricing, among which taxation liability difference substantially
contributes to the movement of profits from countries with high taxes to countries with
low taxes. Multi-national Corporations make use of every discrepancy in either Law or
weakness of market through modification of capital contribution, unreasonable costs in
technology transfer, differentials in tax rates to any augmentation of management and

administrative costs for the purpose of escaping from tax duty and dominating
Vietnamese market. Transfer pricing has made enormous influences on MNCs, foreign
capital recipients or even capital-exporting countries and yet adverse impacts on the
receiving countries are most severe. These could be listed as changes in capital structure,
taxation loss, unfair competition, market domination by foreign enterprises and political
dependence in the long term. Vietnamese government had to intervene in the situation
through legitimate documents with specific circulars giving instructions for market
pricing determination in intra – group transactions. Additional methods such as
administration and penalty, thorough inspection of MNCs and particularly APAs
(Advanced Pricing Agreements) – which is still new and has not yet implemented in
Vietnam – are in great necessity of close co-ordination among all government bureaus. As
a follower, Vietnam shall learn from the precedent countries and accumulate essential
experiences for itself to drive its economy towards a right direction to the goal of
industrialization and modernization in the future.

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Acknowledgement
The assignment was completed by invaluable contribution of many people. Firstly, we
would like to express our many thanks to Ms. Cao Thi Hong Vinh and Ms. Lu Thi Thu
Trang for their precious instructions, corrections, comments, criticism, suggestions and
their assistance during the development of this assignment under their supervision. We
also want to demonstrate our deep gratitude to authors mentioned in our reference for
their valuable support to access the data sources. We want to show our appreciation to our
group members for their time and efforts in the making of this assignment. Finally, we
also would like to convey our sincere thanks to all of our friends for their constructive
discussions, suggestions, sensible contribution and timely assistance.

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Introduction
1. Rationale
When Vietnam joined WTO as the 150th member in 2006, a new era of economic
opportunities was open to this developing nation, among which many experts have
associated the increasing FDI attraction with golden eggs of the economy.
The Foreign Direct Investment (FDI in abbreviation) as we know it not only was poured
into Vietnam with rapidity but also continued to hit new records in total capital
investments during the period 2006 – 2008. The next three years were faced with
declining trend (FDI was a bit off 2008 peak but still remained at high level ) due to a
severe global economic recession; however, a brighter outlook is to be expected by the
end of the year 2012 – it has been forecast that 2012 will see a rise of 17 million VND in
FDI capital. In addition to a surge in number of projects brought by FDI, that in project
size and quality has been widely recognized, not to mention a great deal of nations
( America, Korea, Japan, Hongkong, the UK, Singapore ) as well as large Multi National
Corporations are making headway towards Vietnamese market.
It is clear that the receipt of FDI creates golden chances for Vietnam to access advanced
scientific degree as well as high-level global economic management and approach a
resolution of generating more jobs for the unemployed. Not surprisingly FDI appears as
one of the most important capital suppliers and motivators to the economy which
possibly paves the way for a dynamic and competitive market in the near future.
Enormous economic effects from FDI are what we refer to as positive contributions. Yet
there lie massive dangers caused by this source of investment unless reasonable
managerial and synchronous measures are to be carried out. In recent years many FDI
enterprises have declared to suffer from losses, resulting in a tax deficit to Vietnamese
Government - which directly affects national budget and reduces fair competition for
domestic firms. More seriously, this has decreased efficient use of FDI capital and
weakened the financial management mechanism as well as badly influenced the
Government’s objectives of attracting and controlling FDI.

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Among all of the possibly listed reasons, transfer-pricing is worth considering. It is a
sophisticated matter that is regularly executed by corporations to escape from tax duty.
The Government decided to interfere with the situation by issuing the circular
66/2010/TT-BTC on April 22, 2010 – in place of 117/2005/TT-BTC on Dec 19, 2005 –
which gives instructions for market pricing determination in intra - group transactions.
The question of how transfer pricing could be treated has aroused concerns among
economist circle. While transfer pricing is making its vast movements in Vietnam at an
alarming rate, the country lacks relevant experiences to resolve this headaching problem.
All things considered, we chose “Transfer pricing in Vietnam” as our research topic based
on the urgency of the circumstance and particularly the great necessity of approaching
timely measures towards the phenomenon.
2. Target
Our research paper is aimed at providing a deep analysis of transfer pricing in Vietnam
for the last several years when FDI is being poured into our nation with increasing
rapidity and multi-national corporates have apparently become so dynamic.
We would like to contribute some measures in dealing with transfer pricing for the
establishment of more effective administration over FDI enterprises and improvement of
national budget brought by more tax income from these transfer pricing companies.
Besides, this research paper would enable domestic firms to take a closer look at
international transfer pricing and find out solutions for protecting themselves against
risks in cooperating with foreign partners.
3. Subject and Scope
- Subject: FDI enterprises in Vietnam
- Scope: transfer pricing of FDI enterprises operated in Vietnam since 2006
4. Method of Research
- Methods used are statistics, listing, comparison and analysis of data source

- Data source

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CHAPTER 1: DEFINITION AND THEORIES OF
TRANSFER PRICING
I - Definition
According to Organization for Economic Co-operation and Development (OECD)
transfer pricing guidelines for multinational enterprises and tax administrations (1995),
Transfer prices are the prices at which an enterprise transfers physical goods and
intangible property or provides services to associated enterprises. For managerial
purposes, transfer pricing may be used by multinational enterprises to measure and
evaluate the business performance of specific individual units of a multinational
enterprise. By evaluating the transfer prices charged for intra-group transactions, a
manager can decide whether to buy or sell products and services internally or externally.
When used properly, transfer pricing can help to more efficiently manage profit and loss
ratios within the company.
From a tax perspective, prices of transactions between related enterprises (transfer prices)
are crucial for both taxpayers and tax administrations. Transfer prices determine in large
part the income and expenses, and therefore, the taxable profits of the associated
enterprises in different tax authorities. Nowadays, many countries have regulations to
prevent the use of transfer pricing as a means of evading taxes or similar unethical and
illegal activities.
II – Determinants of transfer pricing
1- Internal determinants
As be concerning with internal cause of transfer pricing, Mrs. Le Thi Thu Huong, deputy
head of the Hochiminh city Taxation Department answered an interview in The Saigon
Times in 14 July 2011: “Other companies opened many offshoots to fake a successful
business result to lure investments. For instance, after one subsidiary is listed on the

stock market, the other subsidiaries will transfer their profits to that listed subsidiary to
increase its stock value to attract investors.” To create a positive insight into company’s
financial conditions in the public eye (including shareholders and other related parties), in
some case, MNCs’ managers make some unforgiving mistakes in brief strategy, products
research and development, new market penetration or unreasonable advertising cost that
result in long term loss. Hence, to attract shareholders and other related parties, managers
must conduct transfer pricing that is used for allocating price among subsidiaries,
diminishing loss, even taxation payable and falsifying artificial profit ( to deceive
innocent investors).
Furthermore, one of the most favorable MNCs’ ambitions is to penetrate into and occupy
a new market, especially rapid developing economies. According to Mr. Nguyen Van
Phung, the deputy head of the Taxation Policy Department, Ministry of Finance in

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Electric Finance, 15 June 2011, has connected transfer pricing to this determinant. In
such circumstances, they must cooperate with some local enterprises, which are
traditionally acquainted with domestic customer and have their own distribution system.
By conducting illegal transfer pricing, augmenting intra-transactions cost and basing on
their abundant financial resource, MNCs create an artificial loss in their subsidiary,
thereby posing a threat to local partners who are relatively smaller in terms of capital
capability and gradually pushing domestic ones out of joint venture enterprise. After
occupying the new market, MNCs make a decision to raise the price to offset the
previous losses. A high proportion of this kind of transfer pricing could be observed in
nations which are regarded as inferior management countries such as Vietnam, Laos or
almost African countries.
2 – External determinants
a- Taxation liability difference
Nowadays, taxation policies in a wide variety of countries are as different as chalk and

cheese, thereby creating favorable conditions for MNCs (Multi-national Corporations) to
transfer pricing. Some countries refer to tax haven because they find they do not need to
charge as much as industrialized countries in order for them to be earning sufficient
income for their annual budgets or this is a way to encourage conglomerates from
industrialized nations to transfer capital as well as needed skills to local population. The
table below illustrates the corporate tax rates in variety of nations around the globe in
2011 that are ranked in ascending order. From this graph, in general, nations which are
more developed also impose higher corporate tax rate than less-developed nations.
According to Sikka and Willmost in “The dark side of transfer pricing: its role in tax
avoidance and wealth retentiveness 2010”, since costs and overhead allocation them to
particular products/services and geographical jurisdiction, such discretion can enable
them to minimize taxes and thereby swell profits by ensuring that, wherever possible,
most profits are located in low-tax or low-risk jurisdictions. Suppose that there two
subsidiaries, one in a high-tax country, and the other in a low-tax country. To reduce the
combined tax liability of two subsidiaries (that is, to increase the combined after-tax
profit), the subsidiary located in the high-tax country will sell goods to the other
subsidiary at lower than normal prices, and buy from it at higher than normal prices. By
applying transfer pricing, although revenues of MNCs only change a little owing to
transaction cost or other incidental expenses, after-tax profit would increase drastically, as
a result, resulting in loss in host countries’ loss of taxation revenue and unequal business
environment.

Corporate Tax Rates 2011
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Country

Rate (%)

Country

Rate (%)

Bahrain

0

Vietnam

25

Bahamas

0

United Kingdom

28

Macau

12

The Philippines

30

Hongkong

16.5

Pakistan

35

Russia

20

United States

40

China

25

Japan

40.68

(Source: Corporate and Indirect Tax Survey 2011, KPMG)
b- Economic and financial conditions
The underlying economics of how a company conducts business is the key to determining
proper transfer pricing policies. But those underlying economics can and do change, both
to the evolution of a company’s business can and do change, both due to the evolution of
a company’s business, and more generally, to changed economic and financial conditions
(Kash Mansori, Ph.D, Transfer pricing in 2009: three reasons to consider it carefully)
including exchange rate and inflation, the two most crucial elements in macroeconomics.

Firstly, the exchange rate should play a role in the process of transfer pricing, because it
affects the competitive position of a subsidiary operating in a foreign market. Demand in
the foreign market depends on the foreign-currency price, which also depends on the
exchange rate. If the foreign currency depreciates against the domestic currency, the
foreign-currency price will rise and this may affect the competitive position of the
subsidiary adversely, particularly if the demand for the product is elastic. In this case, the
transfer price measured in domestic currency terms must be lower, or MNCs show an
inclination to withdraw their capital, which has been invested at that subsidiary to keep
their fund undamaged. As the result, MNCs not only gain profit from usual activities but
from exchange rate fluctuation.
Secondly, the problem of inflation within the context of its effects upon the purchasing
power of internal consumers and depresses effect on export trade, to be more precise,
inflation exerts an erosive effect on monetary assets within countries experiencing hyper
inflation. In most cases, MNCs use generally recognized practices to mitigate the
deleterious effects of inflation in host countries. A preferable method is to withdraw funds
to a safer haven by charging to a subsidiary located in rapid growing inflation higher than
normal prices and being charged at lower than normal prices. Thus, transfer pricing can

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be, and actually are, used as a device to counteract inflationary erosion of assets and
preserve MNCs’ initial capital investment.
c- The correlation between interest of joint venture partners and of MNCs
Transfer pricing can be used to preserve the MNCs’ share in the profit generated by a
joint venture. To accomplish this objective, the MNCs charge the joint ventures high
transfer prices, hence, this kind of practice would create conflict between MNCs and the
foreign partners in the joint ventures, because the foreign partners prefer low transfer
prices from MNCs and they prefer high transfer prices to the foreign partners. If parties
cannot make a concession for the sake of agreement, interest of both parties would be

affected negatively. This is why the transfer pricing policy should be agreed upon prior to
the establishment of a joint venture.

d- Political instability
Shulman (1968) in “Transfer pricing in the multinational firm” has added a new
determinant influencing transfer pricing to some extent: when a MNC operates in a
country in which there has been a tendency for the government to be overthrown (or
shaken by a sudden coup) with recurring regularity, it is to the interest of the company to
keep as little cash as possible in that country. The high feelings of nationalism which
often accompany a revolutionary regime further endanger assets of foreign businesses,
and exportation is a risk in such situations. Therefore, removals of profits and cash
outflows by way of transfer pricing give some assurance of stability to the MNCs’ aftertax profit.
III - Some usual behavior of transfer pricing
In reality, tax authorities, custom authorities - in the implementation of tax inspection,
management and supervision - have fought and struggled with transfer pricing and make
punishment on thousands of cases of enterprises for fraud in price or service charges
every year. Among those fraud cases, it is transfer pricing that accounts for the most.
However, the outcome is just a reimbursement of import-export tax, value-added tax and
corporate income tax; and those cases are unfortunately not put into the process of
statistical classification and analysis regarding the issue of transfer pricing.
Based on review of cases of transfer pricing which were inspected in recent years, it is
reasonable to recognize the signs of transfer pricing under the following forms:
1. Modification of capital contribution
As Vietnam has opened its economy to attract more foreign cash-flows with the
expectation of improved tax revenue, employment and economic activities, numbers of
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Multiple National Corporations (MNCs) choose Vietnam as their investing destination.
However, through international transactions, especially in capital contribution, foreign

companies, which have taken advantages of modern, progressive technologies or resource
abundance, usually use transfer pricing methods for modifying capital contribution. In
Special Reports of Vietnamnet Bridge (30/03/2012) with title “Transfer pricing skills
plentiful”, its author – Kim Chi, the Vietnamese economic specialist– wrote that: “The
overvaluation of the initial investment equipments can help MNC to transfer a sum of
money back to the parent group right in the investment period… Since the foreign
partners had higher capital contribution in the joint ventures, they have the right to make
decisions in important issues.” To be more specific, as penetrating into Vietnam market,
most MNCs choose to establish a new joint venture enterprise with other local partners
because they offer, at least in the principle, an opportunity for each partner to benefit
significantly from the comparative advantages of the others. Local partners bring
knowledge of the domestic market, familiarity with government bureaucracies and
regulations, understanding of local labor markets, and possibly, existing manufacturing
facilities, especially land or other immovable properties, which are often evaluated under
their market value. On the other hand, foreign partners can offer advanced progress, and
product technologies, management know-how and access to export markets. Because of
poor management and non-comprehensive assessment system, valuation of MNCs’ initial
contribution is mostly overstated (actually it is often not easy to determine what these
assets are worth) compared with undervalued assets of local partners, thereby foreign
parent corporation would easily gain majority of ownership and transfer huge amount of
capital back to home countries initially.
For example, (an imaginary instance), a joint venture golf enterprise established by the
agreement between Long Thanh golf JSC and Macau entertaining corporation will go
into business next month. Macau partner contributes to the joint venture 5 million USD,
however, according to price assessment of the International Appraisal Organization,
foreign assets only worth 3 million USD. Therefore, Vietnamese company must suffer a
loss of 2 million USD, equivalently 67%.
Through modification of capital contribution, there are three subjects sustaining losses:
Vietnam firms enjoying lower profit and other benefits than they would have deserved,
Vietnam government losing a significant tax revenue as a huge amount of capital is

transferred back to foreign territories and lastly, Vietnam consumers must purchase
overvalued products.
Furthermore, through transfer pricing, majorities of ownership are belonged to foreign
partners, as the results, they would undertake management and almost operating
activities. In several cases, foreign corporations could create artificial net losses, resulting
in eroding local financial capabilities. To some extent, Vietnam must make concessions

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and transfer their equity and ownership to foreign partners. In the nutshell, by applying
these strategies, the joint ventures are gradually swallowed by MNCs.
2. Technology transfer
Technology transfer is the process of skill transferring, knowledge, technologies, methods
of manufacturing, samples of manufacturing and facilities from institutions or
corporations of developed nations to ensure that scientific and technological
developments are accessible to institutions or corporations of developing nations who can
then exploit the technology into products, processes, applications, materials or services.
According to Prof. John H. Barton in “New trends in Technology transfer”, the concerns
were that costs of the technology (many of which were hidden through transfer prices)
were too high.
Transfer pricing through technology transfer has constituted large proportion compared
with other kinds of transfer pricing. Take a typical instance, Vietnam Brewery Joint
Venture Company was established according to an agreement between Food No.2 Stateowned Company (in Ho Chi Minh City) and Heneiken International Behler Corporation
(Netherlands). The Vietnam Brewery Company’s operating license (287/GP on 09
December 1991), which entered into force in accordance with Foreign Investment Code,
was issued by State Committee for Cooperation and Investment ( Ministry of Planning
and Investment currently). In 1994, the operating license was changed that to be granted
to Asia Pacific Breweries Pre Ltd (Singapore) for co-operation (License No.287/GPDCI
on 27 October 1994. Total initial capital investment was 49.5 million USD and legal

capital was 17 million USD. Vietnam party owned 40% and Singaporean party owned
60% over total capital investment; their main manufacturing sector was brewery
production for domestic consumption and exportation. During their operation, the
financial situation was quite gloomy, sustaining a huge loss throughout many consecutive
years. The main reason was that they must cover very high copyright fees (royalties)
which showed an inclination to augment each year. To be more precise, during the period
of difficulty in profit seeking, Vietnam party suffered losses because of unreasonable
royalties, whereas the foreign party still developed powerfully as they take advantages of
possessing and disposing their exclusive copyright.
In the historical process of development, Vietnam must take full advantage of technology
transfer from other developed countries which have higher productivity than our country.
The government of Vietnam also pays special attention to develop and encourage
technology transfer to rural, mountainous areas and infant industries such as automobile
manufacturing or high-tech sectors with the aim of approaching neighboring countries
(Thailand, Malaysia,…) in short term and powerful countries (the United States,
European nations). However, Vietnam would not implement technology transfer at all
cost, because it also takes other crucial aspects into account, including an economic
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aspect in general and transfer pricing problems in particular. Therefore, although transfer
pricing and technology transfer are not two sides of a coin, they must be redefined clearly
for avoiding transfer pricing in technology transfer.
3. Transfer pricing with a view to market domination:
When multinational companies (MNCs) enter a new market of some nation, their priority
target is to gain market shares of domestic companies which are operating in the same
business field. In order to obtain this strategy, MNCs usually try to make a joint venture
with a domestic one rather than to make an investment with its foreign capital at 100%.
The reason lying behind this fact is that MNCs wants to make use of the available
distribution channels and market shares of domestic companies. Afterwards, the joint

venture will be gradually terminated when MNCs use different techniques including
transfer pricing ones to push local companies out and turn the joint venture affair into a
company with its foreign capital at 100%.
Thanks to these techniques, MNCs will dominate the market of domestic companies
which are operating in the same business fields in that country. In addition, by pushing
the domestic partners out of the joint venture, MNCs will gain all of the profits derived
from their business activities in that country without spending much of their capital and
time market research and advertisement.
In e-Finance, 30/11/2011 issue, Mr. Nguyen Van Phung - senior economic specialist, the
deputy head of the Taxation Policy Department, Ministry of Finance – said that “It should
be fair to mention the role of domestic enterprises in this type of transfer pricing. With
exclusive contracts on the import and distribution of goods or with the exclusive
contracts signed with MNCs on the sale and consumption of their products, domestic
enterprises (including FDI ones and domestically-invested ones ) lend a hand and support
MNCs effectively to achieve their overall business strategy by maximizing profits and
obtaining all of our resources. If inspection, market comparation and market supervision
is implemented, it is likely to identify that whether the products - say the ones by
pharmaceutical industry or dairy industry - are involved in transfer pricing or not.”
In 2009, there were more than 6,000 enterprises with foreign investment capital in
Vietnam, whose commitment capital was 33 billion USD in total. Moreover, foreign

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enterprises accounted for 13.8% of the national total output included in exports.
Particularly, they accounted for 80% of the export of high-quality processed products. It
can be clearly seen that foreign companies are gaining more and more market shares in
Vietnam, which proved that FDI enterprises are very successful in penetrating into
Vietnam's market as well as expanding their scales of production.
4. Transfer pricing through differentials in tax rates:

According to Eric J. Bartelsman - ESI, Department of Economics, Free University of
Amsterdam, the Netherlands – “The amount of income shifting is the enforcement of
transfer pricing rules by the tax authorities.” When the income tax rates in two countries
have a considerable differential, MNCs will use transfer pricing techniques to reduce the
amount of taxes they must pay. They will transfer their profits to countries which have
low tax rates. Meanwhile, they use tricks of increasing the operating costs, which makes
their business in the countries with high tax rates always at a loss.
A typical example is the case of Foster - a beer manufacturing company. At that time, the
selling price of a keg of Foster's beer quoted for their agencies was 240,000 VND. The
tax rate of special consumption is 75%. Thus, the amount of special consumption tax for
each keg of beer is:
- Price for computing special consumption tax = Selling price including special
consumption tax/(1 + tax rate) = 240,000/(1 + 75%) = 137,143 VND
- Amount of special consumption tax = 137,143 x 75% = 102,857 VND
In brief, if the price of a keg of Foster's beer is 240,000 VND, Foster Vietnam is obliged
to pay an amount of special consumption tax equal to 102,857 VND. Having borne such
a large amount of tax, the investors of Foster Vietnam sought a way to reduce it. They
decided to establish a company named Foster Vietnam Limited Company. This company
is responsible for buying complete products of the two Foster's breweries. The selling
price of a keg of Foster's beer quoted by them for Foster Vietnam Limited Company is
only 137,500 VND Vietnam. As a result, the amount of special consumption tax for each
keg of beer is:
- Amount of special consumption tax = 137,500/(1 + 75%) x 75% = 58,929 VND

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When Foster Vietnam Limited Company sells their products in the market, the company
must pay a value-added tax of 5%. Assuming its market selling price remains unchanged,
which is 240,000 VND per keg of beer, then the amount of value-added tax it must pay

is:
- Amount of value-added tax = 240,000/(1 + 5%) x 5% = 11,429 VND
Now the total of special consumption tax and value-added tax that investors must pay
after forming a Foster's Vietnam Limited Company for each beer is 58,929 VND +
11,429 VND = 70,358 VND. If we compare the total amount of tax paid by investors
before and after the establishment of Foster Vietnam Limited Company, it can be seen
that they have saved an amount of tax equal to 32,499 VND (equivalent to 31.60%). With
this strategy, the income tax paid by the investors may not be altered or otherwise
changed in a way which is beneficial to them because they can add up the cost of
business management or the cost of depreciation or the cost of advertising in order to
reduce income tax supposed to be paid.
Another transfer pricing technique that involves the differential in tax rates among
countries is the manipulation of price in the purchase of goods. When import tariffs are
high, parent companies sell raw materials or complete goods at low prices in order to
avoid paying a large amount of import tax. In this case, parent companies will instead
enhance the activities of consulting, training, marketing support in order to make up for
their loss. On the other hand, when import tariffs are low, MNCs will sign import
contracts at high prices to increase their operation costs so as to avoid tax payment.
Similarly, according to Mr. Nguyen Van Phung, “FDI enterprises lower their output prices
in export contracts with their parent companies or the abroad partners of their parent
companies. However, when dealing with that issue, the management authorities of the
state or even the joint venture in Vietnam has no information about whether the partners
of the contracts have any relation with the FDI enterprises or not, which helps to propose
plans and suggest sanctions over the determination of the market price in accordance with
the law.”
An example was found in an interview with Mr. Nguyen Dinh Tan – Department of
Taxation in Hochiminh City – “In the general inspection and review on tea15


manufacturing industry of FDI enterprises in Lam Dong, the tax authorities detected that

the export prices were much lower than operating costs. Afterwards, based on the
equivalent price of the similar product in the domestic market, we made those enterprises
to quote their export prices in accordance with the provisions of the Tax Administration
Law, thereby reducing losses up to hundreds of billion VND. When these enterprises use
tricks on prices for both their outputs and inputs, it is sure that their financial statements
always show continuous losses. There is a sad and bitter story of those who have traveled
abroad and seen the products on which "Made in Vietnam" are printed with the prices at
tens or hundreds of dollars but the domestic workers indeed get only one, two dollars or
even less.”
By studying the case above, the financial experts claimed that although state authorities
are able to identify this case as an act of transfer pricing, Vietnam law at that time was not
really strict or no sanctions are available for such acts. Therefore, state authorities cannot
control the separation technique regarding the production and the commercial procedure
of Foster, which enables them to evade tax and reduce the amount of taxes payable.
5. Transfer pricing in the form of increasing management and administrative costs.
According to Mrs. Le Thi Thu Huong - The Deputy Head of the Hochiminh City
Taxation Department – “Many FDI enterprises, especially those operating in the fields of
restaurants, hotels, offices for rent, are paying too high for foreign staff foreigners in
accounting, financial advisory, asset management. However, the tax authorities have not
had any effective measures to prevent this method of transfer pricing.
Parent companies often force their subsidiary ones to enter into a contract of hiring
consultants or intermediaries. A number of joint-venture partners are even forced to hire
specialists at a high cost but a low efficiency. This allocation of cost is entirely at the
subsidiary companies' expense.
Some subsidiary companies hire FDI managers with high salaries. In addition, they have
to pay a large sum of money to foreign companies which provide them with those
managers. In some cases, there is also a signal of transfer pricing in this operation if the
company providing human resources is a subsidiary company of the same corporation.

16

In some other cases, transfer pricing is implemented through abroad training such as
appointing specialists and workers to study and intern at parent companies with high
costs.
Another typical form of transfer pricing of FDI companies is payment to consultants sent
from parent companies. It is very difficult to determine the quantity and quality this type
of consulting. Taking advantage of this, many FDI companies implement transfer pricing,
which is actually the transfer of profits to the capital-exporting countries under the name
of consulting charges.
An example was found in an article by Mrs. Duong Thi Nhi – Financial Advisory Group,
Ministry of Finance – “Once a FDI enterprise operating in hotel business in Ho Chi Minh
City deliberately increased "management fees" paid to foreign parent companies for
operating games in hotels from 3% to 40%, which is a typical example of transfer pricing
in the form of increasing management and administrative costs. If the provision of
taxation were applied under Circular No. 05/2005 and Circular No. 134/2008 issued by
the Ministry of Finance, the government tax revenue would still be negligible compared
to the amount of money that FDI enterprises and their parent companies would take
away. On the other hand, if a fixed cost were applied, there would be many obstacles
since the provision of the law on foreign investment is still in force.”
IV. Effects:
1. On MNCs
- Positive impacts:
MNCs can benefit from favorable investment policies (like tax deduction, investment
opportunities...) and thus are able to avoid their responsibilities in the country in which
MNCs are investing. With transfer pricing, MNCs will preserve their capital investment
and quickly get cash flows for other investment opportunities. Hence, transfer pricing
will help MNCs to quickly dominate the market in the target country in which they are
investing.
- Negative impacts:

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If being identified and sanctioned for the commitment of transfer pricing, MNCs will be
fined very strictly and have their business license withdrawn. Furthermore, MNCs may
get a bad reputation for their violation and a tighter supervision from tax authorities in the
countries in which MNCs will invest then.
2. On the countries receiving foreign investment capital:
- Positive impacts:
In case of a reverse transfer pricing, if the country receiving foreign investment has low
income tax rates, it can increase the national income.
- Negative impacts:
According to Mr. Le Xuan Truong – The Academy of Finance – “The capital structure of
the country receiving foreign investment will be changed dramatically and suddenly
because the implementation of transfer pricing of MNCs result in a fast and strong capital
inflow. On the contrary, this amount of capital afterwards tends to flow out within a short
time. Consequently, it creates a distorted image of economy of the country in different
periods.”
Regarding countries which are considered to be "tax heaven", they are the beneficiaries in
short-term transfer pricing. Nevertheless, in the long term, they have to face many
financial difficulties after MNCs have withdrawn their investment capital owing to
previous unsustainable incomes in a short term, which have not accurately reflected the
strength of the economy.
With the implementation of transfer pricing and manipulating the market price, the
government of the receiving countries will have to cope with many obstacles in making
macro-economic regulatory policies and developing the domestic infant industries.
Transfer pricing will disrupt the balance of international payments and the economic
plans of the countries receiving investment capital. Therefore, it can be concluded that
unless the target country closely controls and supervises the business operations of

MNCs, it will become dependent on them and this will possibly lead to political
dependence in the long term.

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3. On the capital-exporting countries:
- Positive impacts:
In an issue of Mrs. Kimberly A. Clausing - Department of Economics in Reed College,
USA named “The Impact of Transfer Pricing on Intrafirm Trade”, she agrees that capitalexporting countries can gain more foreign currency and thus improve their balance of
trade and international payments. When the form of operation of parent companies gets
better, it will do well to social and economic efficiency by contributing more taxes to the
state, which has a good impact on the GNP growth of capital-exporting countries.
- Negative impacts:
If tax rates in countries receiving investment capital are lower than those in capitalexporting countries, there will be an unbalance in tax plans due to the loss in tax revenue
in capital-exporting countries. Consequently, management objectives of the macro
economy in these countries will face a number of certain difficulties owing to many
unexpected shifts of investment flows, which do not tally with the management of the
government.

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CHAPTER 2- BRIEF SITUATION OF TRANSFER PRICING
IN VIETNAM SINCE “DOI MOI” AND SOME TYPICAL
CASES
I – Brief situation of transfer pricing in Vietnam
After 20 years opening trade, FDI companies have great contributions to exports,
unemployment rate improvement and have been now leading in manufacturing value of
industry. However, their impacts on national budget are different totally.

Basically, FDI products are sorted in three types: the first one is intermediary products,
the second one is final products which are consumed in the foreign market based on
orders of parent companies and the last one is consumed domestic products.
Referring to the first type, FDI enterprises are indeed workshops with mainly imported
products and total value of them are exported to prepare for the next process and then
price is fixed from that. After all, the real story is not to keep a business account of profit.
Vietnamese companies are not received any tax but FDI companies are reimbursed and
their income is not taxed.
As for the second one, FDI enterprises have a little profit but not remarkable. Vietnam is
not allowed to know about keeping business account of profit because capital belongs to
foreign companies, so exports do not contribute to GDP.
Concerning the third type, though they are consumed domestically, materials are
imported from foreign ones. Due to close process, consumed domestic products are
supposed to be imported.
Statistics of taxation department indicate that 60% of enterprises in Ho Chi Minh
reported loss. This result shows that Ho Chi Minh did not gain any income tax from
enterprises.
Loss becomes the trend of FDI enterprises over the country. It is reflected through low
contributed rate of this field.
According to experts, loss of FDI enterprises is not owing to the difficulties in producing
but because of transfer pricing to avoid tax in Viet Nam.
II- Some typical cases about transfer price in Vietnam since economic reform
The target of multinational companies is to minimize their cost and increase their revenue
in order to both enlarge markets and maximize shareholders’ profits. One of the best ways

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to attain those targets is to reduce taxes, especially in Vietnam, which has such a high
tariff.

In addition, Vietnam law in terms of transfer pricing has not been finished. As a result,
these multinational companies have evaded or disobeyed the law to carry out the action
of transfer pricing by many ways, which is very difficult for Vietnam tax office to realize
or to punish if realizing.
1- Transfer price in VNTRA
In 1994, VNTRA Company was a joint venture between Hanoi electrical equipment jointstock company and ABB Asia Pacific Company (in Asia and Pacific-the biggest group in
the field of electrical equipment over the world) with initial capital 24.7 million USD and
legal capital 10.97 million USD in which Vietnam invested 35%, equivalently 3.84
million USD. After 7 years, the company experiences a continuous loss owing to its
unstable quality and inappropriate methods to approach the market; moreover,
Vietnamese partner was lack of financial potentials to maintain the company’s activities.
In May 2002, Vietnam party completely accomplished all legal formalities necessary in
order to withdraw their initial equities and transfer them to another party, namely ABB
Asia Pacific Company, a 100% foreign owned company. After Vietnamese withdrawal,
VNTRA experienced a reverse trend in which its profits swelled continuously at the
speed of 22% per year on average because of ABB’s strong financial potential and
available accumulated experiences. In March 2005, basing on state policy on
privatization, VNTRA was renamed as Hanoi’s transformer manufacturing joint-stock
company.
In fact, ABB is the first-rate group in the field of electricity and automatics. The group
ABB operates all over the world with a system of subsidiary companies in above 100
nations and the number of staff up to 117 thousand. In 1993, ABB was present at Vietnam
and this business has had more than 600 staffs working at Hanoi, Bacninh, Danang,
Vungtau and Hochiminh city. Vietnam ABB manufactured mid- voltage products such as
set switch gears, mid- voltage set with its newest technology for the sake of attending to
the domestic market. In addition, the factory also supplies ABB’s establishment with
products’ parts in order to manufacture high-voltage accessories.
The problem here is that whether VNTRA actually lost or not while the foreign partner
associated is a renowned company in the world having a lot of managing and marketing
experiences. The question about transfer pricing in VNTRA association is established.

ABB Company set products imported from foreign nations at too high prices, making
prices of products sold in the market also very high and its operation cost always at a
high level.

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With the aim of setting up an image of high quality products, reducing income taxes and
its main purpose to exclude Vietnam partner from the association, this company always
maintained the loss over years. The fact has shown that the company’s illusive loss is
totally reasonable. However, during that period Vietnam law was not finished and the
ability of tax staff is limited so it was really difficult to realize ABB’s violation.
2- Transfer Price in Vietnam P&G
Vietnam P&G is an association company between Procter & Gamble Far East Company
and The East Company and was established on 23 November 1994.
Total initial cost of this association was 14.3 million USD and increased to 367 million
USD in 1996 in which Vietnam occupied 30% and the foreign partner 70%, equally 28
million USD. After 2 years, 1995 and 1996, this association lost a huge number of
money, equivalently 311 billion VND, which accounted for three fourth of its gross
capital. In detail, the association lost 123.7 billion VND in 1995 and 187.5 billion VND
in 1996.
Now we will analyze the following causes and expenditures in order to explain this loss:
the time 1995 and 1996 was the first stage P&G accessed Vietnam market so P&G aimed
to build its trade mark in Vietnam and to make its products popular to consumers here.
With the aim of controlling the market, in the two years 1995 and 1996, P&G spent a
large amount of money on advertisement up to 65.8 billion VND, which was such a high
number in the field of Vietnam advertisement at that time.
During this time, advertisements of its products such as Safeguard, Lux, Pantene, Header
& Shoulder, Rejoice and so on were all present at most of the broadcasting channels,
broadcasting stations and the Press. Meanwhile, people all were used to hearing

advertising slogans, for example: “Rejoice makes hair smooth and defeats scurf”,
“Pantene strengthens your hair”,… The sum of these advertisements’ cost occupied up to
35% its net revenue, exceeding far from the level allowed in Tax law, which is not above
5% total cost and being seventh as much as the cost shown in the initial economic data.
Apart from these advertising expenses, other expenditures also exceeded them in the
initial economic data. The company’s first year salary fund established was 1 million
USD. However, the fact had shown that the company spent 3.4 million USD, 3.4 times
higher.
The main reason was that P&G employed 16 foreign experts while it was only from 5 to
6 foreign experts in the initial economic data. Moreover, another reason for this serious
loss in the first year was that the real sale reached only 54% plan while the company
endured a remarkable increase in the cost, resulting in the loss of 123.7 billion VND in
the first year. The next year was totally similar and the company continued to lose 187.5

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billion VND. The cumulative number of loss in the next two years was 311.2 billion
VND that occupied three forth the association’s total capital. In July 1997, P&G’s Chief
Executive Officer invested 6 million USD illegally, which brought about the company’s
borrowing cash to pay staff’s salary. In that situation, foreign companies required to
contribute 60 million USD into capital so Vietnam had to contribute 18 million USD.
Because Vietnam party lacked of financial capacity, they had to sell their shares to
foreign ones and that made P&G become 100% foreign owned company.

3- Transfer price in Coca cola Chuong Duong Joint Venture Company.
Coca Cola Chuong Duong is a joint venture between Chuong Duong Beverages
Company of Vietnamese Ministry of Industry and Coca Cola Indochina PTE.LTD. This
Joint Venture Company‘s invested capital is 48,7 million USD and its legal capital is 20,7
million USD, in which Viet Nam shared 8,3 million USD with the land-use right of 6

hectares in 30 years, accounting for 40% of invested capital. This Joint Venture is
licensed to produce beverages of some brands like: Coca Cola, Fanta, Sprite…relying on
the license of Coca Cola, Atlanta, Georgia, New York and others. After a long time
operating during 1995, this company transferred price through some behaviors as
follows:
At the time of joining capital, foreign partners raised capital value by quoting higher
price of machines, equipment and production line of beverages. Because at that time,
Vietnamese qualifications and verification of assets were restricted, we could not control
this problem. Vietnamese Law also failed to regulate this situation.
Until 1996, realizing the effect of this issue, Investment Law made some changes but
they did not work due to general modifications. Hence, Joint venture succeeded to
transfer price by fixing higher price of inputs. After officially doing business, Coca Cola
commenced to use some strategies to control market shares of domestic companies. To do
that, Coca Cola started with strategies of dumping price, advertising products and
establishing brands by promoting and sponsoring to be famous in Viet Nam market.
Although the company just penetrated in Viet Nam in a short time, its brand name
covered most of Viet Nam market and steps by steps occupied all market shares of
domestic companies.
The rivalry between Coca Cola and Pepsi kicked domestic beverages like Hoa Binh,
Chuong Duong out of the market. Those companies either closed their business or
automatically got out of main markets like Ho Chi Minh or Hanoi to move to countryside
ones. A few companies had to do business in other fields like Tribeco, producing soya
milk- a new brand name. In terms of dumping price, selling price of Coca Cola reduced
remarkably each year. There are some periods that price dumped by 25% or 30%

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revenue, which led to their loss. As a result, Coca Cola Chuong Duong controlled
domestic market. Selling price declined but revenue increased, which indicated that

consumed produces rose from expanded market shares of Coca Cola. When comparing
the selling price of one can of Coca Cola in Viet Nam and USA, we realized the clear
price difference. One can of Coca Cola sold in USA at the price of 75 cents equaled to
10.500 VND while it was sold in Viet Nam at 5000 or 7000 VND. We could realize that
this strategy was controlled by the parent company. In world cup 1998, Coca Cola
invested 1.3 billion VND without Vietnam joint venture‘s agreement. Along with this
promotion, Coca Cola increased the capacity of one can from 200 ml to 300 ml but the
price remained unchanged. Consequently, Coca Cola faced a loss of 20 billion VND.

Rate of return

1996

1997

1998

-24.8%

-24.5%

-52.1%

-11.3%

-26.3%

-22.12%

-46.5%

11%

52%

Profit/ net assets
Profit/ sales

-22.1%

Change

(Source: Ho Chi Minh Taxation Department: hcmtax.gov.vn)
Besides, Coca Colas included 40% cost of materials which were imported from the parent
company. As for beverages, cost of inputs makes up for 50% total cost so input value
imported from the parent company is big. According to report of company, cost of input
accounted for 60.14% of total cost, 68.18% of revenue. This rate was too high and
unreasonable compared to others companies and rate of return of Coca Cola. This may
result from enumerating higher price in bills compared to real price. The aim of this was
to make a loss of Vietnamese company but to gain profit for the parent company from
selling inputs at high price. This transferred profit to the foreign company while subsidies
in Viet Nam suffered a loss.
Above cases were transfer pricing situations in Vietnam last time, which affected badly
on small business in Vietnam and lose billions USD of tax revenue of government. In this
situation, enterprises in Viet Nam and offices controlling companies received FDI should
be more careful and find some solutions to face with this, as well as control much better
FDI to burst our economy at the time of globalization.

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CHAPTER 3- REGULATION AND MANIPULATION OF
TRANSFER PRICING
Although a clear signal of transfer pricing has been appeared for a long time as nearly
50% of the total FDI enterprises in Vietnamese declare unprofitable (or extreme losses),
but still expand production lines and employment. Vietnamese authorities even make
their effort to search for authentic evidence of transfer price damaging the economy as
well as the legislative system. As the result, establishing strict regulation and
manipulation of transfer pricing is an imperative matter that requires both the government
and enterprises themselves.
I- Current approaches to transfer pricing
1- Significant regulatory achievements
Transfer pricing has been determined as a considerable matter because the situation of
transfer pricing has been now augmenting in transaction with foreign elements. The first
legal document referring price transferring was Circular 74/1997/TT-BTC, which shown
the tax guide with regard to foreign investors, and then followed by Circular 89/1999/TTBTC & 13/2001/TT-BTC. When Circular 05/2005/TT-BTC which guided the contractor
tax appeared, this problem was removed from the modified contents. 19/12/2005, transfer
pricing was also repeated at 117/2005/TT-BTC Circular issued by the Ministry of Finance,
which guided the implementation of determining market prices in the business intratransactions among m u l t i - national organizations. Thus, 117/2005/TT-BTC Circular
was considered a legal document which adjusted transfer pricing measures, particularly
by means of transfer pricing methodology. The significance of this methodology was to
determine the transaction price among the m u l t i - divisional organizations in order
to bring the fake price equal to the correct market price.
On 22 April 2010, the Ministry of Finance issued Circular 66/2010/TT-BTC (Circular 66),
providing taxpayers (MNCs) with updated transfer pricing regulations. Circular 66 was
superseded by the regulations issued under Circular 117 (which was applied from 2006).
The regulations provide instruction on a range of matters, including mandatory
contemporary transfer pricing documentation as proof of arm’s length dealings that will
be specified further in the following section and annual declaration of related-party
transactions in tax return filing. Taking into account that failures to submit annual

declarations and maintain transfer pricing documentation risk deemed taxation.
A platform for information exchange between the Vietnamese tax authority and foreign
tax authorities has been established for preventing from double taxation. This means
information on multinational’s transfer pricing may be lawfully obtained and exchanged

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