What is transfer pricing?


What is the pricing of related- parties transactions (for the purpose of tax filing)?

The enterprise has transactions with non-affiliated companies (also known as independent parties) and transactions with affiliated companies (also known as related-party transactions) (See definition of transactions in Article 5, Decree 132/2020/NĐ-CP).

Due to the nature of transactions with related parties, enterprises can choose price of related-party transactions by themselves so enterprises will tend to choose the prices which will able to minimize the amount of tax payables by all related parties due to the difference in the tax rates.

Because of this issue, so as not eroded the tax, taxpayers having related-party transactions must eliminate factors causing reduction in tax obligations that are controlled or affected by related party relations in order to declare and define tax liabilities imposed on related-party transactions which are comparable to independent transactions having the same requirements. In other words, the enterprises must determine the prices of related-party transactions in a direction to compare with independent transactions having the same requirements, then make appropriate adjustments (if any differences) against the price filled on the official transaction documents for tax calculation. If the enterprises prove that the transaction price is within the range of the price of the independent transactions, no further adjustment will be made, thus no additional tax payable. Therefore, enterprises will often try to build profiles and pricing policies with their affiliates in order to optimize tax obligations while still demonstrating the equivalent of independent transactions so as not to incur unexpected fines and additional taxes.

Despite the above provisions, in many practical cases, both enterprises and tax authorities cannot easily agree on the view of the equivalent independent transaction price due to the influence of many factors. Both sides try to protect their interests as much as possible.



  • The comparison methods for determining the price of related-party transactions are presented in Article 13,14,15 of Decree 132/2020 / ND-CP.
  • Currently, tax obligation related to related-party transactions only mention corporate income tax. Other taxes are not covered by the relevant regulations.


What is transfer pricing? Is transfer pricing illegal?

"Transfer pricing" is not clearly defined in the relevant regulations, however, based on relevant contexts, "transfer pricing" is understood as the act of deliberately not declaring or declaring the prices of the related-party transactions is not equivalent to independent transactions to evade and avoid taxes.

With the above understanding, "transfer pricing" is a violation of the law, and therefore, if detected, it will be tax imposition according to relevant regulation by the tax authorities (See Article 20 of Decree 132/2020/NĐ-CP).


What are the popular transfer pricing methods?

  • Raising the price of fixed assets when contributing capital: Foreign investors contribute capital to domestic enterprises (FDI enterprises) with outdated or fully depreciated machinery and equipment, but value of fixed assets is declared much higher than their real value. Through this way, foreign investors have the fictitious contribution capital, causing loss of revenue to the state budget; at the same time, the corresponding increase in the depreciation of fixed assets increases the cost of the product, leading to a decrease in profit or loss, so the enterprise only needs to pay little or not incur corporate income tax ("CIT") payable in Vietnam.
  • Raising the price of imported raw materials: FDI enterprises buy materials from related parties at a price higher than the market price, increase the input cost of the product, thereby reducing profits or loss.
  • Receiving the transfer of intangible assets / services: Foreign investors, when investing in subsidiaries, often transfer some intangible assets / provide some services such as: technology transfer, technical know-how, copyrights, general management services, purchase support, quality assurance, information technology support ... FDI enterprises can carry out transfer pricing through high pricing of delivered intangible assets / services rendered.
  • Receiving loans with high interest rates: Another popular form is that FDI enterprises receive loans from related parties with interest rates exceeding the normal regulations.
  • Reduction in selling price: FDI enterprises can also transfer pricing through the application of the selling price of goods to related parties at a much lower price than the selling price to independent parties, thereby reducing profits and reducing taxes accordingly.
  • Transferring profits (from abroad to Vietnam) of a part of FDI enterprises in Vietnam to take advantage of great incentives in CIT rate and CIT exemption and reduction period.
  • Transfer pricing between domestic affiliated enterprises to take advantage of different CIT incentives.


Examples of transfer pricing in reality? (source: internet)


Adidas AG is a multinational company established in 1948 in Germany, main activities are to design and manufacture of sports equipment.

Adidas products came to Vietnam in 1993 and until 2009, a new subsidiary of Adidas was established in Vietnam.

There are many arguments that Adidas Vietnam registered its business in Vietnam as a wholesaler but actually incurred costs of the retailer and questioned that this is exactly how Adidas carry out transfer pricing between the parent company and its subsidiaries in the Adidas group to avoid income tax in Vietnam.

Specially, according to the leadership of the Ho Chi Minh City Department of Taxation, under the business registration license, Adidas operated as a wholesaler, not a retailer, but it had earmarked a huge sum of money to equip local retailers, international marketing fee, regional management fee, purchase commission and although not a manufacturer, Adidas Vietnam has generated copyright fee.

In fact, Adidas Vietnam pays Adidas AG the copyright fee of 6% and the international marketing fee of 4% of net revenue for products sold and value of licensed products.

In additional, Adidas Vietnam also has to pay the purchase commission for Adidas International Trading B.V at 8.25 % of the value of each transaction. 

Besides, under the Southeast Asia service contract between Adidas Singapore and Adidas Vietnam, Adidas Singapore and its local subsidiaries, including Adidas Vietnam, provide a service and agree on the collection of related charges.

Because of the incidence of too many intermediate input costs, the cost of importing Adidas products in the Vietnamese market is unreasonably increased and Adidas Vietnam always fall into a loss and not have to pay income tax.


Metro Vietnam

Metro Cash & Carry Vietnam began operations in 2002 with initial capital of $120 million and legal capital of $36 million.

Within 12 years of operation (2002-2013), Metro Vietnam changed its business license 6 times, increasing its investment capital to more than $301 million in May 2013.

It is worth noting that during this period, Metro Vietnam continuously declared losses with accumulated losses amounting to $1,657 billion and only in 2010 stated profit of 173 billion VND.

Despite losses, Metro Vietnam continued to open 19 more retail outlets nationwide. From this result, the tax inspection agency found to have conducted transfer pricing, thereby requesting Metro Vietnam to adjust losses, reduce deductions and tax arrears with the amount of more than VND 500 billion. At the same time, it is determined that Metro Vietnam was profitable in 2010 and 2011 with the amount of VND 234.8 billion.

Of these, the biggest loss reduction is related to franchise fees, expenses not related to business operations of Metro Vietnam, expenses for provision for devaluation of inventories, expenses for provision for bad debts,… with the amount up to VND 335 billion.

The contractor tax adjustment for salary reimbursement expenses paid to Metro Cash & Carry Germany to pay foreign employees working at Metro Vietnam is about VND 62 billion; adjusting and reducing input VAT on advertising, marketing and promotion support from suppliers up to VND 110 billion.

Due to the large and unreasonable expenses recorded in the expenses of Metro Vietnam, most notably the cost of franchising, this company has continuously declared losses for decades.

According to the General Department of Taxation, in the period 2002 - 2013, the cost of franchising that Metro Vietnam has to pay to its parent company in Germany has reached VND 731 billion.

In addition, the cost of salaries, bonuses and allowances for the board of directors and foreign experts paid to individuals through Metro Cash & Cary GmbH (MCC) in Germany is also a very large number, up to VND 699 billion.

According to the General Department of Taxation, these are related-party transactions for Metro Vietnam to carry out transfer pricing.



Keangnam Vina is a real estate company with 100% capital of Korea. Keangnam Vina began operation in Vietnam since July 2007, It signed a turnkey contract with Keangnam Enterprise - a subsidiary of Korea Keangnam Group, as EPC general contractor.

The total value of the contract is up to $871 million. The role of Keangnam Enterprise is not only in surveying, designing, providing equipment, machinery, constructing the project, but also providing financial consulting services and loan arrangements for Keangnam Vina.

In 2008, Keangnam Vina's financial consultancy fees paid to Keangnam Enterprise amounted to $30 million, loan arrangement service fees were up to $20 million, advertising consulting costs, land use rights consultancy, Investment licenses are also up to several million USD.

Due to those expenses, Keangnam Vina continuously stated losses and therefore did not pay corporate income tax. This loss of course turned into a profit of Keangnam Enterprise in Korea. Meanwhile, Keangnam Enterprise only has to pay foreign contractor tax to Vietnam at a tax rate much lower than Vietnam's corporate income tax rate.

The operation of Keangnam Vina after 5 years shows that this company always declared losses. According to the tax authority, as of 2011 when the Keangnam Hanoi Landmark building started operating, the company's revenue reached over VND 5,200 billion, but the company declared a loss of up to VND 140 billion.

From this situation, the Vietnamese tax authority has entered into an inspection and found to have conducted transfer pricing of Keangnam Vina.

After the inspection, the tax authority asked to exclude all unreasonable input costs. Many illegal construction costs were forced to be adjusted. Therefore, the total value of EPC contracts from $ 871 million has decreased to only $ 699 million.

The inspection results forced Keangnam Vina to admit transfer pricing behavior and had to adjust the price up to VND 1,220 billion. Not only that, Keangnam Vina is also subject to corporate income tax arrears up to VND 95.2 billion due to the adjustment of profits in the 2007-2011 period.



Starbucks Group (UK) has approved loan agreements with high interest rates and high royalties fee to transfer profits to an associate company in the Netherlands. In the UK, Starbucks continuously expands and rapidly develops its chain of stores, by 2012 Starbucks UK has more than 700 stores across the island nation and the cumulative total revenue after 14 years of doing business in the UK is more than £3 billion ($4.8 billion). However, due to implementation of transfer pricing and regular loss declaration, the total tax amount paid by the company in 14 years was only £8.6 million ($13.7 million). According to BBC News, with the corporate income tax rate in the UK of 28%, the British government could have collected a tax from Starbucks of about £840 million, but actually only got more than 1% of the that money.


e. Bay

Another case of transfer pricing in the UK is the e. Bay Group. The Group had revenue in 2010 of £789 million, profit estimated at  £181 million. According to BBC News, with the corporate income tax rate in the UK of 28%, e. Bay must pay about  £51 million. However, e. Bay has carried out transfer pricing procedures to reduce profits to £4.3 million, so they only have to pay about £1.2 million in 2010. If compared with actual profits, e. Bay pays only 0.66% of profits, a very low percentage of UK corporate income tax. However, the British tax authorities have to accept because the valuation, business accounting, and tax payment activities of e. Bay are considered "fully complying with tax regulations".



Facebook is facing a lawsuit from the Internal Revenue Service (IRS). The lawsuit went to court in San Francisco and the crux of the lawsuit was a 2010 agreement between Facebook and a subsidiary based in Ireland. The IRS accused Facebook of deliberately underestimating the intellectual property it sold to its subsidiary, thereby evading billions of dollars in taxes.

Before being released to the public, Facebook valued the assets at $ 6.5 billion, but according to the IRS, the assets are worth up to $ 21 billion. If the IRS wins the court case, it is estimated that Facebook will have to pay additional taxes and late payment interest as well as a fine of up to $ 9 billion.

Ireland has a lower corporate tax rate than the US, so the move helps to reduce the tax payments of multinational companies. Besides Facebook, many other tech giants including Google and Amazon also choose Ireland as a "tax haven". By selling intellectual property rights to their "puppet" branch overseas, tech companies seek to transfer profits to extremely low tax countries like Ireland.