(Luận văn) controlling transfer pricing activities in multinational companys branches in vietnam

Research objects and research scope The thesis deals with many issues, from general theory of multinational companies and price transfer activities to controlling transfer pricing activ

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economy, Vietnam has made progress in attracting international investment capital, especially FDI inflows Although undergoing some ups and downs, in general, FDI inflows to Vietnam have continuously increased in both quantity and quality In particular, FDI into Vietnam is carried out mainly by multinational companies (MNCs) in the world Investments from multinational companies are a solution to the problem of how to improve the level of science and technology, the level of economic management and employment for workers It can be affirmed that FDI is

an important source of capital for Vietnam's economy, a driving force and creating dynamic and competitive for our country market

In addition to the positive aspects mentioned above, this form of investment is also showing a worrying phenomenon: many FDI enterprises - branches of multinational companies in Vietnam declare long-term losses in many the year that makes the budget loss a huge tax, at the same time creates unfair competition with domestic enterprises, most likely leading to market stagnation, bad impact on the management mechanism financial management in the FDI sector as well as the goal

of attracting this capital flow of the Government

Facing the above situations, the issue of price transfer in FDI enterprises has been mentioned a lot in recent times According to the statistics, about 70% of FDI enterprises in Ho Chi Minh City declared long-term losses; across the country this figure is over 50%; despite the fact that development is very good and growing at a high rate The situation of "fake losses, real profits"; The fact that more and more large multinational corporation‟s subsidiaries after many years of operation in Vietnam do not incur payable corporate income tax has posed a great challenge for economic managers; at the same time, putting pressure on genuine businesses Facing this situation, the Government, which is directly the Ministry of Finance, has taken many measures, most notably building and implementing guidelines for determining market prices in business transactions between related parties; luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

tends to increase; at the same time, the issue of price transfer control is also facing many challenges Stemming from the above situation as well as through my research and to serve the professional work, I have selected the topic "Controlling transfer pricing activities in multinational company‟s branches in Vietnam" as the subject of my graduation thesis

2 Objectives of the research

The overall objective is to propose solutions to improve the effectiveness of transfer pricing control in multinational corporation branches in Vietnam

Specific objective:

 Clarify theoretical issues about multinational companies and transfer pricing activities

 Complete the theoretical framework for controlling transfer pricing activities

on the basis of studying guidelines on transfer pricing control by national organizations, countries around the world and in the region

 Analyzing the current situation of transfer pricing in Vietnam, indicating the transfer pricing methods implemented by MNCs branches in Vietnam Analyzing the current status of transfer pricing activities control in Vietnam from many angles: from completing the law on price transfer control to implementing measures of professional nature; specify the achievements and limitations of this work

 Proposing solutions derived from the practical situation, having a basis to effectively control the transfer pricing activities of multinational company branches

in Vietnam

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of research methods to achieve research objectives Specifically:

a) Methods of collecting and processing information

The method of collecting and processing information is used by students to collect primary and secondary documents These are the financial statements of several multinational companies in Vietnam; reports on inspection results of multinational company branches of the General Department of Taxation and Tax Departments in some localities; some conclusions of inspection of violations of tax obligations in general, suspicion of price transfer in particular of Inspectorate of the Ministry of Finance, State Audit; relevant legal documents, reports, projects and programs of the Ministry of Finance, the Ministry of Planning and Investment, the General Statistics Office, the General Department of Taxation and tax authorities in some localities Along with that are projects, scientific research projects at many levels, the master's thesis in economics, scientific articles in country and abroad related to multinational companies, multinational corporate finance and transfer pricing Students have processed the information from these documents to achieve the following objectives:

 To systematize the research results before the graduate thesis, find out the problems and problems, exist as well as point out the research gap that the graduate thesis needs to seek, thereby finding new points of the problem

 Finding and collecting scientific bases as well as data from reliable sources serve as an objective basis for the formulation of arguments, demonstrations on both theoretical and practical perspectives

 Present conclusions and research results of the thesis according to my own approach

b) Analysis method

The analytical method is used to analyze the data related to the problems of buying and selling financial and non-financial goods, products and services (internal luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

pricing activities The thesis has analyzed some data to see the impact of transfer pricing in multinational company branches in Vietnam, focusing on eroding the tax base as well as causing the situation of loss of state budget revenue

However, transfer pricing is a very sensitive issue, in addition to some publicly available information and data, many of the documents provided by the authorities are internal documents and have not been published, Some documents contain information that is considered as an asset owned by an enterprise with a limit of users, Some documents have a security nature at the present time, so in the process

of using, students are asked not to publicly make clear the source and name of the business and the name of the multinational companies or the parties have an related relationship But I can confirm that the documents have clear origin, high reliability and are provided by competent authorities in accordance with the process; at the same time, I used and faithfully cited in the thesis

c) Comparison method

This method is used to compare the provisions of the legal system of Vietnam with the provisions of some international organizations such as the United Nations or OECD as well as some other countries on the direct investment policy, tax policy, internal transfer pricing methods as well as other related issues

At the same time, the comparative method is also used to compare and analyze the changes in regulations on price transfer control in Vietnam through periods and analyzes to show the pros and cons of each regulation

d) Case study analysis method

Case study is a qualitative research method that is very suitable to my thesis as well

as to the nature of the research data This method is used by me to analyze in some cases, typical cases of transfer pricing at multinational companies' branches in Vietnam as well as typical cases of controlling transfer pricing of some countries luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

similar to Vietnam respond to transfer pricing activities At the same time, the case study method also allows me to select typical cases, typical transfer pricing questions as evidence for transfer pricing in multinational company branches in Vietnam

e) Secondary data collection method

Due to the nature of the data and research materials, I could not directly investigate the actual data but use the survey results (secondary data) of some authorities as well as specialist research teams The results of these surveys are used appropriately

to increase the reliability of the thesis points

Specifically, the thesis has used the research results: The survey results of the General Department of Taxation; Survey results of the Tax Department in some localities; Survey results of expert group from City University of Economics Ho Chi Minh, Statistical survey results of the General Statistics Office

f) Method of systematization and synthesis

Systemized and generalized methods are used to link research points into a unified whole to express the most complete and profound issues of the thesis

The method of systematization and synthesis also helps me answer the research questions logically and in accordance with the law, with the nature of the problem

4 Research objects and research scope

The thesis deals with many issues, from general theory of multinational companies and price transfer activities to controlling transfer pricing activities in multinational

company branches in Vietnam The object of the thesis is to control transfer pricing activities in multinational companies' branches in Vietnam

Research scope:

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provinces and cities on FDI attraction as well as reports on transfer pricing and big, complex transfer pricing suspects

 In terms of time: the thesis studies transfer pricing and price transfer control

in the period since Vietnam opened its doors to FDI up to the present time, due to

the nature of research data Research should focus mainly on the period from

2008 to 2018.

5 Scientific and practical significance of the thesis

 In term of theoretically: The thesis contributes additionally, develops the theoretical framework of transfer pricing and control of transfer pricing activities These theoretical contributions continue to reinforce the research results of previous scientists in clarifying the nature of transfer pricing, subjective and objective causes

to promote transfer pricing activities of the genera multinational company branch; the impact of transfer pricing on many entities in the current open economy Along with that, the thesis has contributed a number of theoretical issues about controlling transfer pricing in the new situation The theoretical framework that the thesis adds and develops can serve as a rationale for the research after the dissertation and use it

as a useful document to help managers have a more comprehensive view of transfer pricing, with basis to build effective transfer control solutions

 In terms of practice: The thesis has clarified the reality of transfer pricing in some countries in the world as well as in Vietnam; show how countries in the world

as well as Vietnam are applying in price transfer control; assessing advantages and disadvantages of price transfer control in Vietnam over the past time On that basis,

I developed proposals to improve the effectiveness and efficiency of price transfer control The proposals of the thesis have great significance in terms of supplementing and completing policies as well as implementing policies

The thesis can be consulted by relevant agencies in the process of implementing price transfer control at their agencies, units, ministries and branches

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 Chapter 1: Overview of the research topic

 Chapter 2: The theory of transfer pricing and control of transfer pricing activities in multinational company‟s branches

 Chapter 3: Actual situation of controlling transfer pricing of multinational company branches in Vietnam

 Chapter 4: Solutions to control transfer pricing activities of multinational company branches in Vietnam

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CHAPTER 1 OVERVIEW OF THE RESEARCH SITUATION

1.1.1 Foreign researches

1.1.1.1 Textbooks, monographs

- The book "MNCs and Modern Financial Management" by Chaurasia, Harish, Publisher Rajat Publications (2008) The book contains 15 chapters, which cover many general issues about multinational companies: concepts and views about MNCs; formation and development; multinational companies; multinational companies with international trade development; financial management of multinational companies; the role of multinational companies with international direct investment activities [76]

- Book "Multinational Corporations in Political Environments: Ethics, Values and Strategies" by Halley, Nxb World Scientific (2001) The book is 293 pages of the author's research on the issue of multinational companies in the political environment, with content focusing on business ethics, benefits and corporate strategy The book for readers answers why many multinational companies in the world receive great incentives from national governments; Many economic competition activities have the nature and color of political factors and that the governments of many countries can hardly punish multinational companies from other countries by political factors Part IV of the book is my reality survey in many aspects, from data collection, analysis and making judgments and assessments on research issues [85]

- Shapiro, Alan C (1999) with the book "Multinational Financial Management", 6th edition, Nxb John Wiley & Sons This work is considered by many economic experts as a classic work on international financial management, used as a monograph for many major universities in Vietnam The book addresses international financial management issues such as exchange rate management and exchange rate risk, derivative management, cash flow management, and luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

international investment management that Subjects are multinational companies [105]

- A curriculum that is highly appreciated by many international financial experts is the "International Financial Management", the 9th edition by Jeff Madura (2008), Florida Atlantic University This book is used by many major universities in the world as a compulsory curriculum or reference in learning, economic research, and finance The book focuses on financial management issues; in which many contents refer to international investment management, which is multinational companies The author deeply analyzes the content of foreign direct investment; the nature of FDI as well as mentioning some of the ways that multinational companies carry out to redeem profits; rationalize costs [88]

- "International Corporate Finance" Jacque, Laurent L, Nxb Wiley (2014) The book mentions the use of derivative instruments, particularly going into the use of currency derivatives in governance and increasing the cash flow value of multinational companies worldwide The study also provides some good examples

of financial management of multinational companies on cash flow management, which are mainly foreign exchange and corporate bond management [87]

1.1.1.2 Research papers

- Research by Kari Levitt about "Silent Surrender: The Multinational Corporation in Canada" (2002) This can be considered a typical study of multinational companies in a typical G7 country The study focuses on 7 major issues, which emphasize the importance and influence of MNCs in the economic development of each country; decision-making issues in global corporate governance; issues of financial information security This can also be considered

as a document showing the nature of multinational companies: securing internal information, especially financial information [89]

- Author Nick Robins with the study "Corporation That Changed the World: How the East India Company Shaped the Modern Multinational", Pluto Press Publishing (2012) The study refers to the East India company - the company considered by many economic historians to be the first MNCs in the world The author studies the formation, development of this company and the imprints it luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

leaves to the modern economy on how to form a multinational company - the type

of company with a global network and influence influences on the state factor [97]

- Research of the authors group Tagi Sagafi - Nejad; John H Dunning and Howard V Perlmutler "UN and Transnational Corporations: From Code of Conduct

to Global Compact", Indiana University Press Publishing (2008) The study addresses the issue of the behavior of multinational companies, which delves into business development policies, policies to build networks to the impact of MNCs on making the United Nations forming a common agreement, into international practice This once again shows the operation of multinational companies and its policies, in particular financial policies that have a very strong impact; The United Nations must also make recommendations and agree with member states on a number of issues related to MNCs [106]

- "International Financial Management" study of O.P Agarwal, Nxb Himalaya Publishing House (2011) The author's research focuses on international financial management; in which the author mainly studies financial management of multinational companies with the following contents: formation of branches of overseas MNCs, motivation and purpose of forming MNCs, MNCs finance with differences in tax policies and financial policies among countries where MNCs are located [70]

- Kirt C Butler research "Multinational Finance: Evaluating Opportunities, Costs, and Risks of Operations" Wiley Publishing (2012) This is a well-known study of multinational corporate finance when it addresses issues of opportunity assessment, cost as well as operational risk The study shows both theoretical and practical aspects of problems when MNCs perform financial activities, costs and benefits from financial activities such as bill import, cost increases, price regulation transfer Types of operational risks are also mentioned in detail and fully as well

as providing ways to prevent operational risks [91]

1.1.2 Domestic researches

In Vietnam, after more than 30 years of receiving FDI flows whose the largest entities are the MNCs, there have been some studies on multinational companies as well as financial management issues of multinational companies

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1.1.2.1 Textbooks, monographs

- Research by Assoc Prof Dr Phung Xuan Nha "Transnational company - Theory and practice", Hanoi National University Publishing House (2010) The monograph includes 06 chapters, in-depth analysis of transnational companies as well as the role, nature, characteristics and operational strategies of these companies The term used is "transnational company"; however, immediately chapter 1 "Nature, characteristics and operational strategies of transnational companies"; The author has made it very clear that identifying the name of a transnational or multinational company with relative meaning; recently there is no longer a distinction between these two concepts [28]

- The book is currently being used in teaching multinational Financial Management subjects at the Academy of Finance With 5 chapters, the document achieves certain achievements in the study of the structure, form as well as the way

of forming MNCs and some fundamental issues of multinational corporate finance [26]

- The book "International Financial Management" by TS Ngo Thi Ngoc Huyen and MA Nguyen Thi Hong Thu, Publisher of Statistics (2009) The book is

a document compiled by the authors with 578 pages divided into 4 sections, 16 chapters The content is written about the operating environment of multinational companies and international financial management; measure risk and transfer financial statements of MNCs; managing working capital and short-term funding of MNCs as well as MNCs' global funding and system governance issues [20]

- Textbook "Financial Management of multinational companies" (2014), National University Publishing House HCM by the author Huynh Thi Thuy Giang (University of Law Economics - VNU-HCM) The textbook is 202 written pages composed of major issues such as the development of MNCs through the periods and motives of forming MNCs, the objectives of multinational corporate finance management; investment management and risk management of multinational companies; cash flow management and capital transfer management [15]

- The monograph "Financial multinational companies" (2015) by TS Phan Thi Nhi Hieu and colleagues compose, City Economic Publishing House Ho Chi Minh luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

The book explores in-depth issues on multinational companies and multinational corporate finance; which analyzes some practical issues of bill transfer, cash flow management, foreign exchange management, investment options; loan options or how to manage short-term investment cash flow; medium and long term [16]

1.1.2.2 Scientific articles

- Tuong Nguyen in Industry Newspaper (2000) No 24 with the article "From" Transnational Company "to" Multinational Company "a new trend of the world economy" has generalized the picture city and development of multinational companies The author goes from the origin of a transnational company - essentially

a company that has production and business investment activities in many countries but has an owner who carries a nationality to the expansion, multiplication own, general and global greatness of multinational company type The author concludes that in today's modern economy, the classification of these two concepts is only very relative [34]

- Author Nguyen Thi Ngoc Trang in the economic development journal (2004)

No 160 with the article "How do financial and monetary policies affect multinational companies operating in Vietnam?" The article made an assessment of monetary and fiscal policies in the period before 2004 and impacted on MNCs as well as the ways and financial activities used by MNCs to improve efficiency and improve profitability The article has shown that MNCs are always very responsive

in responding to policy changes, always have financial reserves and there are many ways to take advantage of the "loophole" of policy [59]

TRANSFER PRICING ACTIVITIES 1.2.1 Foreign researches

Around the world, research on transfer pricing and transfer pricing control is available in most countries, especially in developed countries - where the MNCs begin The study of transfer pricing and transfer pricing control is on both sides: 1)

is a business strategy of MNCs based on "what the law does not prohibit" and 2) is a market biasing activity, school, causing unequal competition and needing more strict control

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1.2.1.1 Textbook, monographs

- The OECD Organization for Economic Cooperation and Development also soon released a "Report on transfer pricing and multinational companies" in 1979 This report shows how multinational companies changing tax costs at branches, affecting the total tax liability of the whole corporation The report pointed out that multinational companies have the advantage, ability and potential to carry out the bill transfer, re-pricing the transfer price at will not only within the corporation but also among group The report itself was later developed and developed by the OECD as a Code of Conduct for determining transfer prices of OECD member states - a set of principles that later adopted by many countries on the fundamental principles [98]

- OECD research "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" (2001 and amended continuously, the latest version of 2017) and the "Custom Valuation Rules" document of the National Trade Organization WTO economy (2007) These are two detailed and complete documentation of 5 transfer pricing methods, which are the basis for many countries

to establish tools to control transfer pricing through transfer pricing In particular, the OECD document is also a guide for multinational companies, tax authorities of countries on how to negotiate international transaction prices to minimize tax avoidance causing damage to FDI recipients; But at the same time, it also avoids double taxation, which affects the operation of multinational companies The guide

in 2017 is considered a complete, complete version, this document itself has changed many new terms compared to the same name in 2009 [100]

- One of the most prominent and highly practical studies in recent times is the

"BEPS Action Program against erosion of tax bases and Base Erosion and Profit Shifting" G20 Minister and member of the Organization for Economic Cooperation and Development (OECD) passed on October 5, 2015 Currently BEPS is becoming

a central theme, prioritizing international tax reform and management in general, in international tax cooperation in particular on global and regional forums Accordingly, BEPS is particularly practical with developing economies that help protect revenues and maintain and expand tax bases [102]

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1.2.1.2 Science research topic

- Research by Kratzer, Carsten and Blesgen, Martin "Transfer Pricing in Germany: Translation of important law and regulations" (2012), Verlag Dr Nxb Otto Schmidt The study has deeply analyzed, investigated and assessed the issue of transfer pricing in multinational companies and foreign company branches in Germany At the same time, we introduce the principles of basic and the most universal regulations in the management and control of this transfer activity The

392 pages of the study are meticulous in understanding and evaluating transfer pricing issues in the leading European economy [93]

1.2.1.3 Scientific article

- Research by Richardson, Taylor and Lanis in 2013 in the Journal of Contemporary Accounting & Economics: "Determinants of transfer pricing aggressiveness: Empirical evidence from Australian firms" examined factors affecting transfer pricing of public companies listed on the Australian stock market Research results show that companies with large scale, high profitability and high proportion of intangible assets have much influence on transfer pricing fraud The quantitative research results from the regression model also show that the trend of transfer pricing through intangible asset transfer is gradually becoming popular [98]

- The authors Mill, L; Erickson, M and Maydew, E with the "Investments in tax planning" study in the Journal of the American Taxation Association No 20,

1998 Research shows that the group of large-scale enterprises has average tax costs lower than the group of small businesses Since then, large-scale businesses can achieve profit plans through tax plans, and have the resources and incentives to reduce the amount of corporate tax payable The study also showed that large businesses, multinational companies are more likely to actively participate in price-related agreements [96]

- Research by Bernard and colleagues on the NBER Working Paper (2006) with the article "Transfer pricing by US - based Multinational Firms" has shown that multinational companies can use financial leverage, blow seven businesses to carry out corporate income tax fraud by lending loans to subsidiaries in different luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

countries (transfer prices through financial loans) At the same time, the study also showed a sign of recognizing transfer pricing as a structure that tends to tilt more toward the debt [72]

- Gary Stone with "International Transfer Pricing 2012" research The content

of the study consists of two parts: Part 1 is the issue of introducing the forms of price transfer in the world; Part 2 discusses the pricing controls that are generally specific in some countries My research refers to the principle of transfer pricing of multinational companies that are legal, not sued by tax authorities It also shows that auditing and law firms, such as PwC in the United States, are willing to provide services and advice to multinational companies on transfer pricing [84]

1.2.2 Domestic researches

1.2.2.1 Textbook, monographs

Currently in Vietnam there is no textbook on transfer pricing in general and transfer pricing of multinational company branches in particular There are some intensive documents, monographs on this issue can be mentioned as:

- Documents from the Department of Reform and Modernization of the General Department of Taxation "Assessing the status of tax administration and transfer pricing in Vietnam in the 2006-2010 period and orientation to improve tax administration efficiency for this activity in next time" The content of the document consists of 4 parts: Part 1 covers the basic theoretical issues of price transfer and price transfer control; Part 2 outlines the experience of some countries in controlling transfer pricing and lessons learned for Vietnam Part 3 assesses the status of tax administration for transfer pricing activities in Vietnam in the period of 2006-2010 and Part 4 outlines solutions to improve tax administration efficiency for price transfer activities in Vietnam This is a useful document on price transfer activities

in Vietnam, partly explaining the cause of the price transfer activities more and more However, the comprehensiveness and depth of the project to this point still shows many limitations, the solutions also lack radicality [4]

- Ministry of Finance (2011) with References for international experience in tax administration” The document consists of 3 parts: Part 1: a group of issues on simplifying tax administrative procedures, in which the experience of 5 countries is luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

Korea, England, New Zealand, Canada, Australia in the regulation tax collection time Part 2: Group of issues to serve the goals of reform, modernization and integration, in accordance with international practice, which studies the experience

of pre-APA price agreement of 8 countries and draws lessons study for Vietnam Part 3: Group of issues to improve the effectiveness and efficiency of tax administration to match reality and related legal documents The document addresses the experience of countries in some issues related to transfer pricing and price transfer control Studies on the legal basis for managing transfer pricing and coordination mechanisms among countries are not mentioned in this study [2]

- Ngo Thi Ngoc Huyen (2014) with her team with the Report "Study on price transfer problem of FDI enterprises in the city Ho Chi Minh: Current situation and solutions " The research report consists of 145 pages, 34 tables of data, 5 appendices, divided into 4 chapters, in which the analysis of the situation of transfer pricing and price transfer control in FDI enterprises is conducted One highlight of the report is that the research team uses both qualitative and quantitative methods with secondary data from the General Department of Taxation and the City Tax Department Ho Chi Minh City, Hanoi Tax Department, Binh Duong Tax Department and primary data from expert surveys With illustrated data, the authors have portrayed a part of the actual situation of transfer pricing, general assessment of price transfer control on 5 aspects: institutional and legal for transfer control price; facilities and information data; association activities to control transfer pricing, status of tax inspection supervision and the status of human resources engaged in taxation [21]

1.2.2.2 Thesises

- Duong Duc Thang (2014) with "Solutions to control price transfer activities

of FDI enterprises - Branches of MNCs in Vietnam", Master's thesis in Economics

at the Academy of Finance The thesis has basic analysis of FDI enterprises - which according to the author stated that most FDI enterprises in Vietnam are subsidiaries

or have transactions associated with multinational companies The master's thesis offers a number of ways to identify transfer pricing signs, suggesting some solutions

to control transfer pricing in Vietnam [50]

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- Nguyen Thi Hong Van (2012) with "Solutions to strengthen anti-transfer pricing in Vinh Phuc province", Master's thesis in economics at the Academy of Finance Thesis has some research, research and analysis of transfer pricing in Vinh Phuc province The thesis has presented a number of cases with signs of transfer pricing and some ways of struggling to control transfer pricing The major drawback of this master's thesis is the viewpoint, which emphasizes the fight against transfer pricing, and a relatively partial view of this issue; not keeping up with the current trend is controlling transfer pricing [64]

- Tran Tien Tai (2013) with "Identification and solutions against transfer pricing of FDI enterprises in Vietnam", Master's thesis in economics at the Academy of Finance The thesis has identified some forms of price transfer in Vietnam, mentioned a number of "anti" transfer pricing measures However, the limitation of the thesis is limited evidence, solutions are not yet oriented, lack of practical solutions as well as solutions of nature of prevention and control [ 43]

1.2.2.3 Science research topic

- Research "Proposing some methods of anti-transfer pricing in invested enterprises in Vietnam" by Nguyen Thi Lien Hoa in Financial Journal (1999) The study has proposed a number of anti-transfer pricing methods Basically this time the heavy solutions on administrative orders, many theoretical issues about economics have not been studied in depth However, this can be considered as an early research on anti-transfer pricing methods in Vietnam [17]

foreign Nitin Jain with "Transfer pricing in Vietnam's garment industry" (2013) This

is a study of the international tax and transfer tax expert of Ernst & Young Vietnam,

an expert with 13 years of experience in the transfer pricing field With his research, the author has deeply analyzed how the transfer pricing ability takes place in the FDI companies in the garment industry with associated activities At the same time, the author also proposed specific specific recommendations on price transfer control

in FDI enterprises in garment industry operating in Vietnam [23]

- Ministry-level Science Project chaired by Assoc Prof Dr Nguyen Thi Phuong Hoa in 2012 "Enhancing state control over price transfer activities" The study has systematized the basic theoretical issues about the nature, meaning and luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

content of state control with price transfer activities in enterprises The thesis has made suggestions on directions and solutions to strengthen state control of price transfer activities, especially in the context of deep integration into the world economy However, the topic only stops at the state control of price transfer activities, not clarifying the nature of transfer pricing among associated enterprises; The factors and relationship between factors affecting the effectiveness of state control for transfer pricing have not been identified [18]

TO THE TOPIC 1.3.1 Achievements

- Successes of foreign researches: Foreign studies have raised the basic theoretical issues of transfer pricing and control of transfer pricing; methods recommended by countries and international organizations to control transfer pricing; typical transfer pricing activities and the trend of applying price transfer methods of multinational companies recently In particular, the research system of multinational companies and financial management of multinational companies has been clearly and detailed and specific for all types, both in terms of organizational structure as well as financial management

- The success of domestic studies: studies have portrayed quite a lot of theories about the nature of transfer pricing and transfer pricing procedures of multinational companies, studying the transfer pricing activities of FDI enterprises - branches of MNCs in Vietnam and propose some solutions to control this activity Studies on the theory of multinational companies have also partly demonstrated the issues of corporate governance for MNCs branches in Vietnam

1.3.2 Problems that have not been analyzed

- Limitations of foreign researches: There are no studies mentioning the phenomenon and price transfer activities of multinational companies in Vietnam, there is also no evaluation work on the management and control of price transfer by Vietnamese State management agencies over time Data on surveys and analysis of transfer cases have not yet had data on the branches of MNCs operating in Vietnam luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

as well as no studies on multinational corporate governance in Vietnam, especially financial governance

- Limitations of domestic studies: domestic studies lack a comprehensive assessment, shown in the following aspects:

Firstly, there are no in-depth studies and analysis of financial management of multinational

companies in Vietnam, especially the relationship between financial management of multinational companies and the transfer pricing

Secondly, the reasoning has not been fully resolved why the transfer pricing control

process is very difficult; the reasons why transfer pricing warnings in Vietnam appear from

1999, 2000, but until now the law on price transfer pricing control is still incomplete

Thirdly, studies have not carefully studied transfer pricing conducted by FDI enterprises -

branches of MNCs at all stages of the organization of investment activities and business deployment in Vietnam Specifically: stages of investment capital contribution,

technology transfer, loan, in the process of buying and selling raw materials, machinery and equipment, and in the implementation of management consulting services, training, hiring experts

Fourth, does not clarify the problem: the advantages that branches of MNCs in Vietnam

have to carry out transfer pricing activities

Fifth, there are few studies evaluating mechanisms and policies and implementing price

control of Vietnam on the basis of accounting, auditing and tax policies; management mechanism for financial inspection and supervision

Sixthly, the legal documents on price transfer control issued by relevant Vietnamese

agencies have revealed many shortcomings, but there have not been any studies before the thesis mentioned this topic Therefore, it is possible to assess the solutions that the previous researches on the topic only stop at the general level, difficult to apply in practice Decree 20/2017 / ND - CP of the Government on "Regulations on tax administration for

enterprises with associated transactions" and Circular 41/2017 / TT - BTC of the Ministry

of Finance guiding the implementation of the Decree Decree 20/2017 / ND - CP with effect from May 1, 2017 has not gone deep into the reality of the economy but has also revealed some limited shortcomings, some "gaps" need This is a practical problem that requires the thesis to study and have appropriate solutions

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RESEARCH GAP

From the generalization of success and limitations of previous studies, there are the following theoretical and practical issues that have not been clarified or have not been studied in published and foreign scientific works, should be further research This is the gap for my thesis to study Those are:

 The first, the problems both in theory and practice of transfer pricing and

transfer pricing activities have been mentioned by the research before the thesis However, these are very complex issues and are closely linked to the internal transfer of multinational companies, between businesses that are linked and dependent on policies and approaches of each country Therefore, it is necessary to continue research on transfer pricing, adding theoretical issues to meet the requirements of practice

 The second, the studies before the thesis on the status of transfer pricing in

Vietnam are relatively many but often stop at the level of research and evaluation from a general perspective The in-depth analysis of clarity of the interconnected nature of transactions between related parties with multi-national affiliates has not been implemented

 The third, there has been no research in depth to study specific solutions for

each form of transfer pricing in Vietnam but most of them only stop at providing general solutions, lack of solutions to go into the specific case

 The fourth, There have not been any studies to analyze and deeply assess the

limitations of the control of transfer pricing activities of MNCs in Vietnam over the past time The research before the thesis just stopped at the general assessment, not yet evaluated a full process from building legal regulations to implementation as well as handling transfer pricing

 The fifth, evaluate the shortcomings of the management mechanism of

relevant agencies over time; refer to international experience and guidance to propose solutions that are appropriate for the practical situation

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CHAPTER 2 THEORETICAL RATIONALE OF TRANSFER PRICING AND CONTROL

OF TRANSFER PRICING ACTIVITIES IN VIETNAMESE MULTINATIONAL COMPANY’S BRANCHES

MNC’S BRANCHES 2.1.1 Overview of MNCs

2.1.1.1 Concept, purpose and organizational structure of MNCs

a) Concept of multinational company

In order to survive and develop in the developed international economy environment, businesses must strive to find inputs for the production process and market for their output products, avoiding uncertainties due to the impact of a business cycle in a country It is this that makes the production and business activities of enterprises not only encapsulate within the framework of a country but have even crossed the border to many countries in the world, thereby forming multinational companies

The continuous development in size, organizational structure and ownership of MNCs in the past decades has given rise to different concepts and definitions about multinational companies Some of the following points of view can be mentioned:

The first points of view only emphasizes the role of cooperation and the concept of

MNCs is an international company Persons in this view are not interested in the

origin of the company and the nationality of the company or the nature of the production relations of the country with the company or its branches In general, they are only interested in the international production, trade, and investment activities of MNCs, in other words, internationalization of business operations Those who follow this view have almost no distinction between multinational and transnational companies A number of researchers and materials can be mentioned

in this line of view such as:

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 Assoc., PhD Phan Duy Minh (2010) defines “Multinational Company is a production and business company but an organizational structure consists of a main company in a country and has branch companies operating in five, six other countries or more” [26] Also shared with Assoc Phan Duy Minh is TS Ngo Thi Ngoc Huyen said that "a multinational company is a company engaged in producing and selling products / services in many countries Typically, a multinational company consists of a parent company based in the country and at least 5 or 6 subsidiaries abroad "[20] Or like Assoc Phung Xuan Nha (2010) also argued that the nature of a multinational company is "a large-scale company of assets, a wide range of operations in many countries and seeking profit globally" [30]

 Expanding and representing this flow of views, researcher Agarwal, O P (2009) defines a multinational company as very simple, "Multinational Company is

an organization with business activities in many countries" [70] As the author Jeff Madura (2010) also stated the concept that "Multinational Company is a company engaged in some form of international business" [88]

The second group of views attaches great importance to the issue of ownership of contributed capital in overseas activities as a characteristic to identify and distinguish between multinational and transnational companies Accordingly, multinational companies are referred to as multi-ownership, but are evident in the thesis: considering MNCs as a company that belongs to the owner in a certain country In this way, people pay attention to the ownership and nationality of capital, ie who and where the business investment capital is The owner of capital in

a particular country has a parent company based in that country and carries out domestic and foreign production and business by establishing foreign subsidiaries as

a typical form of this group of views

With this second perspective, there are quite a number of technical definitions about MNCs:

 In 1999, UNCTAD defined in the World Investment Report as follows:

“MNCs are legal or non-legal entities including parent companies and foreign subsidiaries of them Parent companies are defined as companies that control assets of other economic entities in foreign countries, often done luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

through owning a certain percentage of equity, usually 10% or more ” [109] This percentage of ownership allows the parent company to have significant influence and influence on its subsidiary

Through the above two groups of points of view, it can be seen that the differences between the groups of views are increasingly narrowed Especially in the current context, the issue of clear separation of owners is increasingly difficult due to the trend of securitization around the globe Therefore, by studying the previous points

of view as well as to agree on the approach and easily assess the role and impact of

MNCs, the term MNCs I use in the thesis is to refer to a company that conducts foreign direct investment, including a parent company with a certain nationality with partially or wholly owned subsidiaries operating in FDI projects in many countries , in which the parent company has significant management or control rights. Accordingly, the term FDI enterprises are used in the thesis to refer to branches of multinational companies

b) The purpose of forming a multinational company

An enterprise that develops into a multinational company often aims for the following:

 First, from the need to internationalize the manufacturing and market sectors

to avoid trade barriers, quota, and import tariffs in countries consuming goods; at the same time, it is possible to use raw materials and cheap labor on the spot

 Second, it is the need to use the competitiveness and comparative advantages

of the host country, to implement the transfer of high-level technologies

 Third, seeking higher profits (towards maximizing profits) and dispersing risks encountered in the international investment process such as exchange rate risks, currency risks, policy risk .; at the same time avoid having to suffer the effects of the business cycle factor when producing in a single country

 Fourth, the protection of monopoly on technology or production know-how

in an industry that does not want to transfer is also the reason for local expansion to produce Besides, optimizing costs and expanding markets is also the purpose of MNCs

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The rapid growth of MNCs makes the expansion of MNCs' business activities more and more diverse in many forms such as franchising, joint ventures, acquisition, merger (M & As) However, basically, MNCs can be classified into 3 large groups according to the production vehicle structure as follows:

 "Transversal" multinational companies are multinational companies that

produce or trade in similar or similar products in the countries in which they are present A typical company with this structure is McDonald‟s

 "Vertical" multinational company is a company that has production facilities

or branches, subsidiaries in some countries that produce goods which are inputs of other products of subsidiaries or branches in other countries A good example of the

"vertical" type of company structure is Adidas

 "Multidimensional" multinational company is a company that has many

branches or subsidiaries in many different countries that these companies develop and work together both horizontally and vertically (E.g : Microsoft )

2.1.1.2 Ways of forming a multinational company

A company can use a number of methods and approaches to conduct international business, thereby becoming a multinational company:

 International trade: International trade is the simplest approach that

companies can use to enter the market through export or gain suppliers at low cost through imports This approach leads to the lowest risk for MNCs because the company does not invest any of its capital at risk If the MNCs suffer from a decline

in imports or exports, it is often possible for companies to reduce or terminate their business at a low cost

 Patent: patent is a company providing technology (copyright, patent,

trademark or trademark) in exchange for certain fees or benefits This helps MNCs use their technology in foreign markets without a major investment in these countries or export shipping costs But it will be difficult for MNCs to ensure quality control according to their production process

 Franchise: franchise is an action that company provides a particular service

strategy or sales method, along with assistance and may be an initial investment for luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

the recipient franchise in exchange for recurring fees Franchising allows MNCs to enter foreign markets without spending a large investment in those countries; especially in the present context when most barriers to franchising are gradually removed

 Joint venture: joint venture is a business owned and operated by two or more

different companies Many MNCs select joint ventures with a domestic enterprise in the country receiving investment to enter the market Most joint ventures allow joint venture parties to take advantage of their advantages; in which MNCs have advantages in capital, technology, production management level, domestic enterprises often have resources on workshop conditions, local legal knowledge as well as administrative processes

 Merge and acquisition of existing activities (M&A): MNCs regularly acquire

other companies in foreign countries, especially under conditions of securitization taking place at the current high level The acquisition allows MNCs to have full control over foreign businesses, thereby speeding up access and dominance of foreign markets The acquisition allows MNCs to have full control over foreign businesses, thereby speeding up access and dominance of foreign markets

 Establish new subsidiaries abroad: companies can penetrate foreign markets

by establishing new activities in other countries to produce and trade their products Just like mergers and acquisitions, setting up new subsidiaries overseas requires a large initial investment This is a very preferred way for MNCs because it is perfectly suited to meeting the needs of MNCs

Evaluation of ways to form multinational companies:

Modes of increasing international business activity range from a simple approach to international trade to a more sophisticated approach of acquiring foreign companies

or establishing new subsidiaries in another country Foreign acquisition and establishment of new subsidiaries are the most obvious manifestation of FDI And now, the common and main way of a business when developing into a multinational company is to carry out international investment through the formation of overseas branches

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2.1.1.3 Classify foreign subsidiaries of multinational companies

A multinational company consisting of a parent company and many subsidiaries in countries around the world Subsidiaries operate abroad under the management of the parent company and are often referred to as overseas branches There are the following types of subsidiaries:

 Pure subsidiary: The owner (of the parent company) owns more than 50% of the total assets of the company, from which the parent company has the right to appoint or dismiss members of the organizational, managerial and executive apparatus of the subsidiary

 Associate: The owner (belonging to the parent company) occupies a significant portion of capital to have certain effects but not enough ownership to have authority as in the case of subsidiary

 Branch: subsidiaries operating abroad with 100% capital owned by the parent company

In the strong development trend of globalization, the development of MNCs is now increasingly strong, the subsidiary form that exists in the form of associate almost exclusively exists for a short time during the the beginning of the investment process Therefore, throughout the thesis, the concept of the multinational company branch I use is to refer to a branch with full legal status of a multinational company

in a foreign country, in which the parent company holds keep control of branch operations

2.1.1.4 Impact of FDI of MNCs on the process of socio-economic development of

the host country

a) Positive impacts

 First, FDI contributes to boosting economic growth, improving the

efficiency of using domestic resources Accordingly, FDI has a positive impact on important factors deciding the economic growth rate: adding domestic investment capital and improving the international payment balance, receiving modern technology transfer and developing modern technological capabilities, developing human resources and creating jobs, promoting import and export and creating links luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

between industries [32 ,tr.206 Phung Xuan Nha, Công ty xuyên quốc gia – Lý thuyết và thực tiễn]

 Second, FDI contributes to promoting economic restructuring towards

industrialization and modernization This is because FDI often focuses on high-tech industries with competitiveness such as industry or information, thus contributing to economic restructuring in the direction of increasing the proportion of industry and services At the same time, FDI will also contribute to the restructuring of agriculture, diversifying products, increasing the value of agricultural exports and acquiring some advanced technologies, seedlings with high quality yield, creating some new methods with high efficiency

 Third, FDI helps solve labor problems, improve the quality of human

resources and change labor structure The FDI sector directly and indirectly creates jobs for local people, has a strong impact on labor restructuring towards industrialization and modernization FDI enterprises are considered to be pioneers

in on-the-job training and external training, improving the qualifications of workers, technicians, managers, in which a part is on management capacity, the level of science and technology is enough to replace foreign experts In addition, FDI plays

an important role in improving the quality of labor through spillover effects, updating skills for suppliers and buyers [32, tr.224 Phùng Xuân Nhạ (2014)]

 Fourth, FDI is an important technology transfer channel, contributing to

improving the technological level of the economy Usually, the FDI sector uses technology that is higher or equal to the advanced technology already in the country and which is popular in the region Therefore, through investment activities and technology transfer contracts, the FDI sector contributes to promoting the transfer of advanced technologies for the nation to receive investment and improve technological capacity in many fields Along with that, under the impact of technology spillover of FDI sector, it is implemented through the production linkage between FDI enterprises and domestic enterprises, from which domestic enterprises have access to technology transfer, mastering advanced technologies

 Fifth, FDI has an impact on improving competitiveness at all three levels:

national, business and product Products of the economy become more diverse in luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

terms of quality improved thanks to modern advanced production technology Businesses are more competitive, from two perspectives: branches of MNCs and local businesses themselves Since then, the position and national competitiveness have also been enhanced and improved

 Sixth, FDI contributes to improving economic management and corporate

governance capacity, creating additional pressure on improving the competitive environment Most MNCs have advanced and modern management and economic management capabilities Through the process of receiving investment, the receiving country can step by step learn and grasp these factors In the course of its investment, MNCs always demand a modern, competitive business environment This forces governments to approach and apply international standards appropriately to the reality of the country, contributing to boosting FDI attraction

 Seventh, FDI enterprises - branches of MNCs are important subjects, directly

promoting the international integration process of countries MNCs with branch networks in many countries, even globally, have a strong impact on openness and international integration The transfer, linkage, investment activities of MNCs also motivate each country to make appropriate adjustments to policies and laws to both facilitate economic development and control operations of MNCs affiliates

b) Negative impacts

 Firstly, FDI enterprises - branches of MNCs can carry out the exploitation

and overuse of natural resources in investment-receiving countries Due to the profit target, foreign investors often exploit inefficient natural resources, lack of attention

to environmental protection, especially in the case where the investment recipient country lacks an effective legal system and monitoring

 Secondly, FDI may cause imbalance in the industry or economic region The

profit target is the primary goal of MNCs, which may contradict the economic policy making of the investment recipient country When implementing FDI projects, MNCs are often interested in focusing on high-profit industries, sectors and areas with favorable conditions Meanwhile, national governments should pay attention to ensuring the balance of economic structure, strong development of luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

strong areas but at the same time reducing the development gap between economic regions Therefore, it is possible that the Government will not achieve the objectives set out in FDI attraction

 Thirdly, if technology transfer and management experience are not

implemented sufficiently, or only transferred outdated technologies, the factor of

"leapfrog" to the technology of the late starting countries will completely disappear

On the other hand, the receiving country not only does not improve the state of technology, but also suffers from technological pollution, turning the country into a technology waste dump [31 Phùng Xuân Nhạ (2010)]

 Fourthly, if the investment-receiving country lacks effective management

solutions, lacks supervision, especially for developing countries, lacks assessments

on environmental and socio-economic impacts The synthesis of FDI projects can completely fall into a one-way dependence on foreign economic and technical partners, no access to high technology, causing environmental pollution and creating unemployment for agricultural workers, especially projects using a lot of agricultural land Then, the efficiency of receiving investment capital will not be as expected or inadequate with the costs, especially the environmental costs

 Fifth, economic benefits from FDI to the host country may disappear

completely if there are not effective management measures Stemming from the goal of maximizing profits, MNCs can perform many frauds, financial activities aimed at shortcomings, legal loopholes to bring maximum value to the whole corporation

2.1.2 Reasoning on transfer pricing in multinational company branches

2.1.2.1 Viewpoints on transfer pricing of multinational companies

The content describes a phenomenon that reduces the tax obligations that we now call transfer pricing that appeared in the IRC - Interal Revenue Code of the United States since the 1930s Over time, along with the development and strong functioning of MNCs and the ways in which governments use it to control, the following viewpoints about the transfer pricing can be summarized:

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 Viewpoint 1: Transfer pricing is a deliberate act of collusion between companies in the same group to negotiate prices not based on market prices, to transfer profits from one company to another in different countries in order to avoid filing full tax, thereby improving the business efficiency of the whole corporation The basis for setting such transaction prices comes from business freedom Accordingly, related enterprises have the right to decide on the transaction prices they deem appropriate (Garry, 2012) [84]

 Viewpoint 2: transfer pricing is the valuation of goods and services transferred between related companies in different countries to optimize the profits

of the corporation (KPMG 2012) [92]

 Viewpoint 3: Transfer pricing is a subjective and deliberate activity of multinational corporations and among companies in the same group in order to minimize the payable tax amount by valuing the purchase and sale of products, materials which does not follow the market price to get the highest profit (E Baistrocchi, 2012) [73]

 Viewpoint 4: Transfer pricing is understood as the implementation of the price policy for products (tangible assets, intangible assets, services, loan interests) exchanged between related parties which are not according to the usual trading price

in the market, in order to minimize the total tax payable of all related parties worldwide This is the view given by the OECD and currently used by many organizations, many countries as a definition of transfer pricing [100 OECD (2008)]

From the above point of view on transfer pricing, it is necessary to distinguish transfer pricing with the case of declaring a low transaction price for regulatory authorities to evade taxes For cases of declaring low transaction prices for managing agencies to evade tax, the transaction parties still make full payment according to the agreed prices; meanwhile, in the transfer pricing transaction, the transaction price is the negotiated price, the parties will not have to pay the difference between the internal transaction price and the market price

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Today, transfer pricing is very sophisticated, aiming at many goals, not merely minimizing the tax of all MNCs Therefore, the determination of how to transfer prices should be based on reality, not just based on OECD definition Therefore, I

would like to make my point, accordingly that Multinational company transfer pricing is the implementation of a price policy between related parties that does not follow market prices This transfer pricing definition includes the following features:

 Transfer pricing occurs only in companies that have transactions made between entities in the related group, or as related parties The basis for determining the relationship between entities is the factor of management, administration or capital contribution These are the conditions that determine the influence and harmony of interests between the subjects

 Purchase and sale prices are determined not according to market prices but based on MNCs' calculations

 In order to ensure fairness in trade and to control, prevent trade frauds or transfer pricing, it is necessary to determine the value of transactions, ie transfer pricing Transfer pricing valuation is the use of methods to determine the prices of transfer pricing transactions within MNCs in accordance with international practices and is accepted by the countries where the MNCs branches operate

 The purpose of transfer pricing is to minimize the tax liability of the whole group This is the most recognizable goal, besides there are some goals through transfer pricing such as market dominance, quickly recovering capital in countries receiving investment

 Transfer pricing basically does not violate the laws of each country because MNCs often calculate very carefully and target legal loopholes, this makes it difficult to control the transfer pricing activities of each country

2.1.2.2 Causes of transfer pricing activities of multinational companies

a) Objective causes

 Derived from the freedom to dispose in business, industry, products that are not prohibited by laws Economic entities have the right to determine the prices of transactions, so they have the right to buy or sell goods and services at the desired luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

prices [50, tr.4 Dương Đức Thắng (2014)] This causes the majority of MNCs' transfer pricing activities are "legally", causing difficulties for price transfer control

 The strong globalization process in all aspects of the current context is the influencing agent that forces the governments of the countries to open the economy

so that goods, products, services, capital are free to circulate This creates favorable conditions for MNCs to expand their business in the form of overseas branches and subsidiaries, creating "links" to carry out transfer pricing

 There is an objective difference in tax policy; differences in national accounting and auditing regimes due to different socio-economic characteristics as well as countries' strategies to attract FDI [21 Cục Thuế TP Hồ Chí Minh] Therefore, the difference in the level of tax regulation between countries, the difference in the level of business preferences among regions of a country as well as the differences in accounting and auditing is entirely possible, creating opportunities for MNCs to develop transfer pricing strategies

 There exist many countries in the world that turn themselves into tax havens, where the procedures for establishing businesses are very easy, the corporate income tax is very low, even 0; commitment to keep trade and financial secrets only for the purpose of strengthening the attraction of MNCs to register companies, transfer global profits to low tax rates to reduce tax obligations

 Controlling transfer pricing is an inevitable necessity because of the operation of MNCs, national companies are beyond the control of a country Meanwhile, the coordination between government agencies of the countries is still not tight, making the transfer pricing conditions exist and develop

 Policy mechanisms as well as the legal framework for controlling transfer pricing of many countries are incomplete, especially in developing and undeveloped countries

b) Subjective causes

 The level of corporate governance and financial management of MNCs is very high MNCs have strong economic potential, a team of good and professional financial managers and analysts who can cover up the transfer pricing in a very sophisticated way Contrary to this, in many countries receiving investment, the luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

qualifications of state officials in finance, customs, tax, science and technology still exist many limitations

 Multinational companies with financial potential, ready to implement

"lobbying" (lobbying) with officials and legislators in developed countries, thereby creating a favorable institutional policy environment, bringing transfer pricing into legal tax evasion [21] This exists in the United States or in many Western European countries, despite full, strong and strict legal regulations, with highly qualified international tax officials but impossible to completely prevent tax evasion through transfer pricing

 MNCs also receive the support of leading audit firms, making the struggle to control transfer pricing very difficult [21 Ngô Thị Ngọc Huyền (2014)] Major auditing companies like Deloitte, E&Y; KPMG all have a transfer pricing advisory service for businesses, helping transfer pricing activities to be implemented based on solid and protective principles

2.1.2.3 Forms of transfer pricing by multinational companies

Based on the various objective and subjective conditions, MNCs conduct different transfer pricing methods to maximize the profits There are many forms that MNCs can use to conduct transfer pricing, which can be divided into loss transfer pricing and profit transfer pricing (Review of the MNC branch's finance in the host country)

First, loss transfer pricing or profit deduction transfer pricing include:

a) Transfer prices through the form of raising the value of assets contributed as capital

This is one of the typical forms of transfer pricing when MNCs make foreign investments in the form of joint ventures or establish 100% foreign capital companies

When investing in the form of joint venture, in the first stage, price transfer acts are

carried out step by step through capital contribution: foreign investors invest through contributing capital to enterprises by machines, equipment and technology Most domestic enterprises are limited in financial resources, so they contribute luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

capital mainly by land use rights However, the value of land use is often undervalued, while the technology equipments and machinery contributed by foreign investors are often specific, outdated or fully depreciated but due to domestic firms having limited capacity and qualifications for valuation, lack of information, databases for comparison, so in the valuation process, these machines and equipments are often pushed by much higher prices than their true value On the other hand, the tax and customs authorities determine the tax on the basis of the value according to the invoice documents (supplied by the partner) Since then, the depreciation cost of fixed assets is also higher than normal (if determined by market price)

For the form of investment in the establishment of a 100% foreign capital company,

raising the value of capital contribution will help investors improve the annual depreciation rate, ie increase the cost of inputs This will help investors quickly return fixed investment capital, thereby reducing investment risks, while also reducing the CIT obligation to be paid in the investment recipient country

Although this is a popular and traditional transfer pricing method, it is not easy to monitor and detect it because many assets are taken to contribute to capital such as high technology, equipment, production lines usually dedicated to a line, a specific product, which is difficult to accurately determine the market price of assets This is more difficult when the investment-receiving countries are developing countries, the ability of asset valuation them self are not high, the rental

of asset valuation often costs a lot

b) Transfer pricing by raising the value of intangible assets

Another common form of capital contribution by foreign investors is to contribute capital by intangible assets: technology software, brands, and recipes that the determination of the value of these assets is often difficult because there are no specific criteria for evaluation Foreign investors' lifting of the value of intangible assets during the capital contribution process will help increase the proportion of foreign investors' capital contribution, thereby deciding the voice in the enterprise

In some cases, the capital contribution side with intangible assets has produced an luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

audit firm's certificate, but the reliability and truthfulness of these certificates are difficult to verify

In addition to capital contribution by intangible assets, foreign investors also transfer production and business technology to the related party in the investment receiving country and collect royalties Under the current regulations of most countries, royalties are subject to a much lower tax rate than corporate income tax rates (most of them regulate tax rates on royalties at levels 5 %; 7.5%; 10%; 15%) Thus, foreign investors have saved relatively much net profit when converting forms from paying royalties instead of dividends

c) Transfer pricing through buying, selling raw materials, semi-finished products to the parent companies or related companies

This form of transfer pricing aims to reduce the payable tax amount, or even cause a

"fake loss, real profit" status, not to fulfill tax obligations In many cases, the business does not directly deal with the parent company, but deals with the related parties of the parent company In these cases, the state management agencies, and in many cases even parties to the joint venture do not know

In a similar way to the valuation of the above fixed assets, enterprises that are partners in special affiliate relations also agree on the price of material and fuel supplied to each other in the direction of increasing declaration price higher than the market price

This is also one of the ways to help companies transfer profits abroad through payment of imported goods with the parent company or other branch in MNCs The import of foreign materials from FDI enterprises is also one of the factors leading to trade deficit in the countries receiving investment In addition, the import of raw materials from parent companies or other branches abroad at high prices also increases the input costs of businesses, thereby reducing the amount of tax payable

d) Transfer pricing through changing product prices with parent companies and associates

Many branches of MNCs carry out transfer pricing through a large devaluation of the market price of many goods sold to a parent company or a company with luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

transfer pricing transactions This often happens as follows: companies sell products

at low prices often in countries with high corporate income tax rates, sell products

to associates in countries / regions with low corporate income tax rate Thereby making the business situation in the company subject to high CIT rate becomes

"gloomy", limiting the need to pay corporate income tax

e) Transfer pricing by improving administrative costs One of the positive effects of FDI inflows for investment-receiving countries, especially developing countries, is learning advanced management experience However, on the other hand, it is undeniable that this is also one of the popular forms that companies make to transfer profits abroad under different names:

 MNCs branch hires managers with a high salary, and has to pay a sum of

money to the foreign parent company or another branch for providing managers

 Enterprises send experts and workers to study and practice at the parent

company with high costs This is actually a form of price transfer

 MNCs branches hire consultants from the parent company and pay fees, but

it is difficult to determine the quantity and effectiveness, so it is difficult to assess whether the cost is high or low, suitable or inappropriate Although the tax authorities find it unusual, there is no basis to determine the fraudulent pricing and processing costs of enterprises

As a rule, the more business, the more experienced, the lower the costs but the management costs in these businesses are increasing As a type of expense, which involves a lot of internal operations, based on internal regulations and contracts, this

is also an expense which is for enterprises to raise prices to distort prices, reduce profits or even make loss, evading tax payment obligations The high wages of high-level employees from the parent company or from organizations with the same interest group are often factors that push input costs It is worth mentioning that when FDI enterprises implement this form of transfer, domestic joint venture partners are the more affected people because they cannot determine the exact number of expenses to spend in comparison with the benefits they earned

f) Transfer pricing through improving advertising costs luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

This is a form of price transfer used by many multinational companies and FDI enterprises This method is especially used if FDI enterprises exist in the form of joint ventures with foreign partners holding the dominant capital

Improving advertising costs, especially in the case of a host country, lacks strict regulations on determining reasonable advertising costs, advertising expense rates

on total expenses then this method can help FDI enterprises achieve a lot of goals: create a virtual loss phenomenon (very high turnover but higher costs); brand image dominates the market At the same time, the partners of the host countries often only after a few years of losses will not have enough financial resources to continue to exist in the joint venture, forced to resell the contributed capital; transforming a joint venture enterprise into a 100% foreign capital company

g) Transfer pricing through direct lending

One of the most popular forms now is the phenomenon of transfer pricing through lending among members of a MNC There are two cases of MNCs that often apply this transfer pricing form:

 When a branch makes a profit in a country with a high corporate income tax rate, the branch will lend to its parent company or other branches with low interest rates (even without interest) to help all MNCs with capital to expand their markets

 When a branch is located in a country with a high CIT rate, they can proceed with borrowing from the parent company or other branches with very high interest rates, thereby making pre-tax profit (minus interest loan) negative, avoid paying CIT Lenders often have their headquarters in places with low tax rates on interest, from which the total profit of MNCs is greatest

Second, profit transfer pricing

This is a very sophisticated form of transfer of FDI enterprises - branches of MNCs Some ways are often used by MNCs to make profit transfer pricing, which are:

 First of all, it is most noticeable that some FDI enterprises, after a short

period of operation, apply for conversion into a joint stock company to list on the stock market In the process of implementation, many businesses have incorrectly luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

valued assets, took advantage of the conversion to "capitalize assets", sold off shares, and even transferred the entire capital out of the country which receives investment, both gaining profit for the parent company and causing confusion in the national capital flow

 Second, some businesses are members of corporations, applying for listing

on the stock market; related enterprises that have implemented price transfer to increase profits of enterprises will be listed on the stock exchange This will distort the results of the financial statements of the issuing companies, making the value of shares increase when listed; misleading the prices of issued shares, causing artificial imbalance in supply-demand in the stock market, causing market disruption

 Third, in the process of preparing an enterprise to gain monopoly in

processing and distributing certain types of goods and services in order to compete for market share of such goods or services, the related parties may transfer revenue

and profit for that enterprise This form also creates errors in financial statements

and deviations in the market evaluation of investors, creating unequal competition between enterprises, pressing small and medium enterprises

 Fourth, in the condition that many countries actively attract external capital

with the goal of rapid and sustainable growth, those governments have many preferential policies for investors in many fields, related enterprises have transferred revenue and profit from other sectors, industries and areas without preferential treatment to enterprises enjoying preferential treatment to reduce payable tax and increase profit of the group

2.1.2.4 Impact of transfer pricing activities of multinational companies

 If the investment recipient country has a tight monetary policy, the transfer luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si

will help transfer some of the profits abroad, ensuring the goal of maximizing profit

of the entire MNCs

 Conducting transfer pricing helps MNCs quickly seize control of joint ventures, disguise small competitors in the investment-receiving country to dominate the market

 The valuation of obsolete assets and equipment at high prices in the process

of joint venture, joint venture, on the one hand helps local companies change technology at low cost, on the other hand, recovering investment capital quickly in the countries receiving investment

 Through buying and selling behavior, MNCs can avoid risks in product research and development activities, reducing exchange rate risks, market research risks

However, when the transfer pricing behavior of MNCs is found, MNCs will be subjected to severe sanctions from the host country and the relevant countries such as: subject to a large fine, or withdrawal of business license and termination of all business activities in that country In addition, branches of MNCs in other countries will be subject to the attention of the tax authorities in that country, the reputation of MNCs around the world will also be reduced At the same time, one of the negative impacts to be made is that transfer pricing will distort the financial assessment of the group, making it difficult for planners and administrators of the MNCs themselves The implementation of transfer pricing is calculated very carefully, but it is difficult to avoid these negative impacts

b) Under the perspective of related countries

Transfer pricing not only has a negative impact on the investment-receiving country but also seriously affects the investment-exporting country MNCs with the goal of maximizing profits can implement all transfer pricing methods and cause serious and long-term consequences for both countries

First, the nation receives investment

 Through transfer pricing, MNCs value high inputs, thereby shortening the payback period, so that capital flows tend to flow back from the investment luan van tot nghiep download luanvanfull moi nhat z z @gmail.com Luan van thac si