Transfer Pricing Process: Detailed Guidance for Businesses

Determining transfer pricing is a critical task for businesses engaged in transactions with related parties, particularly as tax authorities increasingly tighten oversight to prevent transfer pricing manipulation and tax evasion. At W&A Consulting, we understand that complying with transfer pricing regulations not only helps businesses avoid legal risks but also optimizes financial strategies. This article provides a detailed guide on the transfer pricing process under Decree 132/2020/ND-CP, along with practical considerations for effective implementation.

What is a Related-Party Transaction?

A related-party transaction is defined as a transaction between parties with a related-party relationship, as stipulated in Clause 22, Article 3 of the Tax Administration Law 2019 and Clause 1, Article 5 of Decree 132/2020/ND-CP. Related-party relationships include:

• A business holding directly or indirectly at least 25% of the capital contribution of another business.

• Two businesses controlled or capitalized by a third party (with at least 25% capital contribution).

• A business is the largest shareholder, holding at least 10% of the total shares of another business.

• Loan, guarantee, or other operational/control relationships as specified by law.

Accurately identifying related-party transactions is the first step to ensuring compliance with tax regulations and preparing proper transfer pricing documentation.

Importance of Transfer Pricing

Proper transfer pricing enables businesses to:

• Ensure Legal Compliance: Meet tax authority requirements, avoiding tax reassessments or administrative penalties.

• Optimize Tax Costs: Ensure transaction prices align with the arm’s length principle, minimizing risks of price adjustments by tax authorities.

• Enhance Transparency: Provide clear documentation to demonstrate that related-party transactions are not intended for tax evasion.

• Support Tax Audits: Transfer pricing documentation is a critical tool for tax authorities to assess risks and verify the reasonableness of transaction prices.

Under Decree 132/2020/ND-CP, businesses must prepare transfer pricing documentation before submitting their corporate income tax (CIT) finalization return, typically by March 31 of the following year for those using the calendar fiscal year.

Transfer Pricing Process

The transfer pricing process consists of four main steps, ensuring compliance with the arm’s length principle and the methods outlined in Decree 132/2020/ND-CP:

Step 1: Identifying Related-Party Relationships

Businesses must identify related parties based on the criteria in Clause 2, Article 5 of Decree 132/2020/ND-CP. Examples include:

• Business A holds 25% of Business B’s capital contribution.

• Businesses A and B are both controlled by a third party (with at least 25% capital contribution).

• Loan transactions from related individuals or entities, where the loan accounts for 10% or more of the capital contribution.

Identifying related-party relationships helps businesses recognize transactions subject to transfer pricing regulations.

Step 2: Analyzing the Nature of Related-Party Transactions

This step involves analyzing related-party transactions to determine their nature and scope. Transactions are categorized into four main groups:

• Tangible Goods Transactions: Buying, selling, exchanging, or transferring goods.

  
  

• Intangible Asset Transactions: Transferring usage rights for brands, trademarks, technical know-how, or technology.

• Service Transactions: Providing internal services, management, or consulting services.

• Financial Transactions: Loans, guarantees, royalty payments.

Businesses must identify material transactions to focus on proving their prices align with market standards.

Step 3: Selecting a Pricing Method

Decree 132/2020/ND-CP specifies five transfer pricing methods, grouped into three categories:

Comparable Uncontrolled Price (CUP) Method:

Compares the price of a related-party transaction with that of a similar independent transaction.

Applicable for transactions with clear comparable data, such as goods or service purchases.

Note: Businesses must provide original invoices and documents to prove prices from independent parties.

Resale Price Method:

Used when a business buys from a related party and resells to an independent party.

The resale price is adjusted based on the gross profit margin of comparable independent transactions.

Cost Plus Method:

Determines the price based on production costs plus a reasonable profit margin.

Suitable for manufacturing or service provision transactions.

Profit Split Method:

Allocates profits among related parties based on their contribution to the value chain.

Ideal for complex transactions involving intangible assets or digital economies.

Transactional Net Margin Method (TNMM):

Compares the net profit margin of the business with that of comparable independent entities.

Often used when direct price comparison data is unavailable.

Businesses should prioritize internal comparable data, then external data (preferably from Vietnam, followed by countries with similar economic conditions).

Step 4: Determining Price/Revenue/Costs of Related-Party Transactions

Using the selected method, businesses determine the price, revenue, or costs of related-party transactions, ensuring they fall within the arm’s length range. For example:

• With the CUP method, the related-party transaction price must match that of comparable independent transactions.

• With TNMM, the net profit margin should fall within the profit range of comparable independent entities (e.g., 10-20%).

Businesses must maintain complete documentation to substantiate the reasonableness of transaction prices when requested by tax authorities.

Transfer Pricing Documentation

Under Decree 132/2020/ND-CP, transfer pricing documentation comprises three main components:

1. Local File:

Details related to party transactions, relationships between parties, and comparative analyses.

Includes contracts, invoices, and related documents.

2. Master File:

Provides information on the group’s organizational structure, business operations, intangible assets, and transfer pricing policies.

3. Country-by-Country Report (CbCR):

Applicable to ultimate parent companies in Vietnam with global consolidated revenue of VND 18,000 billion or more. Details profits, taxes, and economic activities of the group.

Documentation must be prepared before the CIT finalization return submission and retained for presentation upon tax authority request. The submission deadline during an audit is 15 working days, or 30 days during consultation (extendable by 15 days with valid reasons).

Exemptions from Transfer Pricing Documentation

Under Article 19 of Decree 132/2020/ND-CP, certain cases are exempt from preparing transfer pricing documentation but must still declare information per Appendix I:

• Businesses with related-party transactions only with entities subject to CIT in Vietnam, applying the same tax rate, and where neither party enjoys tax incentives.

  
  

• Businesses with total revenue below VND 50 billion and related-party transactions below VND 30 billion in the tax period.

• Businesses with a signed Advance Pricing Agreement (APA) and submitting annual reports.

  
  

• Businesses perform simple business functions without generating revenue/costs from intangible assets.

If your business is seeking a reliable partner to navigate the complexities of transfer pricing, W&A Consulting is ready to assist.

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