F6 acca lesson 5 module tp (transfer pricing)

F6 ACCA TAXATION LESSON 5 – TRANSFER PRICING

I LEGISLATION

Transfer pricing was previously governed by Circular 66/2010/TT-BTC dated 22 April 2010, which replaced Circular 117/2005/TT-BTC dated 19 December 2005, with the aim of providing more specific guidance on the implementation of transfer pricing requirements and strengthening tax authorities’ control over transfer pricing practices in Vietnam

However, Circular 66/2010 is no longer in force Since then, Vietnam’s transfer pricing regulations have been updated as follows:

Decree 20/2017/ND-CP (effective from 1 May 2017) together with Circular 41/2017/TT-BTC introduced a three-tiered transfer pricing documentation system (Master File, Local File, and Country-by-Country Report), officially replacing Circular 66/2010

Decree 132/2020/ND-CP (effective from 20 December 2020) further consolidated and updated the rules on related-party transactions, transfer pricing methods, and compliance obligations Decree 20/2025/ND-CP (effective from 27 March 2025, applicable for fiscal year 2024 onward) amends and supplements Decree 132 to address practical issues, particularly financial transactions with credit institutions

Decree 122/2025/ND-CP (effective from 1 July 2025 to 1 March 2027) introduces updated rules on Advance Pricing Agreements (APAs), delegating approval authority directly to the Ministry of Finance

II SCOPE OF GOVERNING

Entities under the scope of transfer pricing regulations

Organizations and individuals engaged in the production and trading of goods or services, carrying out all or part of their business activities in Vietnam, and having transactions with related parties (as defined under the regulations) are required to comply with transfer pricing rules They must declare, determine, and fulfill their corporate income tax obligations in Vietnam in accordance with the arm’s length principle

Transactions subject to transfer pricing regulations

All business transactions conducted between related parties are subject to transfer pricing regulations These include:

Sale, purchase, exchange, lease, transfer, or assignment of goods;

Provision or receipt of services;

Loan arrangements, financial support, guarantees, and other financial transactions;

Transactions involving the use, transfer, or assignment of tangible or intangible assets, including intellectual property rights;

Cost sharing or cost allocation arrangements

Transactions not subject to transfer pricing regulations

Business transactions between a Vietnamese business establishment and its related parties involving products or services whose prices are directly determined or regulated by the State under the Law on Prices (amended from the Ordinance on Prices dated 25 December 2001),

or any subsequent amendments and replacements, are not subject to transfer pricing regulations

III WHY THERE IS A NEED FOR TRANSFER PRICING REGULATION?

The introduction of transfer pricing regulations is to prevent a company, by way of transactions with its affiliated parties with the price not on the arm length basis so as to reduce or decrease its obligation of paying tax

IV HOW TO DETERMINE A “RELATED PARTY”?

Decree 132 provides a more detailed and comprehensive definition of related parties, including but not limited to the following cases:

Capital relationship

One enterprise directly or indirectly owns 25% or more of equity of another enterprise; or

A third party holds at least 25% equity in both enterprises

Control and management relationship

One enterprise directly or indirectly controls another through management, administration, appointment of directors, or influence on financial and operational policies

Loan and financial dependency

One enterprise guarantees or provides loans to another, where the value of loans/guarantees is

at least 25% of the owner’s equity of the borrowing enterprise and accounts for more than 50%

of the total medium- and long-term debts of that enterprise

Family relationship

Enterprises where members of the same family (spouse, parent, child, sibling) directly participate in management, control, or ownership

Location and business dependency

Enterprises conducting business in a manner where one is wholly dependent on the other in terms of supply, sales, or operations (e.g., exclusive distributor arrangements, shared resources)

1 Related party by control

Control test refers to the case where a party is directly/indirectly controlled or being controlled

by other party or both parties are directly/indirectly controlled/being controlled by a third party

in terms of equity, shares or in the provision of loan

The following circumstances will give rise to the “related party” relationship:

• Either party directly or indirectly holds at least 20% of the equity or the total property of the other business establishment; or

• Both parties have at least 20% of their equity or the total property held directly or indirectly

by a business establishment or a third party; or

• Either party is the biggest shareholder directly or indirectly holding shares with a value of

at least 10% of the equity or of the total property of the other party; or

• Either party provides the other business establishment with a guarantee or a loan in any form, provided that such loan accounts for more than 50% of the total value of long and medium term loans of the borrower business establishment; or

Example:

FPT Corp holds 50% shares in FPTInformation System and FPTInformation System holds 40% shares in Lac Viet Ltd FPT Corp and Lac Viet Ltd are considered as related party since FPT Corp indirectly holds 50% * 40% = 20% shares in Lac Viet Ltd

2 Related party by management

Management or administration refers to the case where a party is directly/indirectly manage or being managed by other party or both parties are directly/indirectly manage/being managed by

a third party in terms of management, administration by a board of management or board of directors or by members in such BOD or BOM

The following circumstances will give rise to the “related party” relationship:

• Either party appoints its members to the board of management or inspection committee of the other business establishment, provided that the number of members appointed by the former accounts for more than 50% of the total members of the board of management or the inspection committee of the latter; or a member appointed by the former has the right to make decisions on financial policies or business activities of the latter; or

• Both parties jointly have more than 50% of the number of members of their board of management or jointly have a member of their board of management, who has the right to make decisions on financial policies or business activities, appointed by a third party; or

• Both business establishments are managed or controlled in terms of personnel, finance or business activities by individuals who are members of a family in a relation between a husband and a wife, parents and children (irrespective of whether they are natural or adopted children, daughters-in -law or sons-in-law); siblings of the same parents (irrespective of whether they are natural or adoptive parents); grandparents and grandchildren who have consanguinity; both uncles or aunts and nephews or nieces who have consanguinity;

Example:

David Lam is the general director of Dai Lam Company whilst his eldest son, Robert Duc is the Financial Director of Duc Loi Ltd In this case, Dai Lam Company and Duc Loi Ltd are considered as related parties

3 Other cases

The following circumstances will also give rise to the “related party” relation:

• Both parties have a relation concerning the headquarters and permanent establishment or are permanent establishments of a foreign organization or individual; or

• Either party is engaged in production and trading of products using intangible property and/or intellectual property rights of the other party, provided that the payment for the use of such intangible property and/or intellectual property rights accounts for more than 50% of prime cost (or cost) of the products; or

• Either parties directly or indirectly provides more than 50% of the total value of raw materials, supplies or input products (excluding depreciation of fixed assets) used for production or trading of relevant output products of the other party; or

• Either parties directly or indirectly controls more than 50% of turnover of sales (calculated

on the basis of each type of products) by the other business establishment; or

• Two parties have agreed to conduct business co-operation on the basis of a contract Example:

Bach Tuoc Co is a producer of motorbike chain and sells around 60% of its products to for Ever Fortune Dream Co, a motorbike assembler The two companies are considered as related party

V DETERMINING MARKET PRICE IN RELATED PARTY TRANSACTION

Under Circular 132, a company having transactions with its related parties is required to demonstrate its transactions prices with related parties are similar to “market price”

There are five methods to determine “market price”, namely:

• Comparable Unrelated Transaction Price

• Resale Price (Gia ban lai)

• Cost Plus Profit (Gia von cong lai)

• Comparable Profits (So sanh loi nhuan)

• Profit Split (Tach loi nhuan)

Below is an outline of each method For detail, please refer to Circular 132

1 Comparable Unrelated Transaction Price

In this method, the unit price of products in an independent transaction will be used as the basis for calculation of a unit price of products in related transaction

Conditions for application

The method shall be applicable, provided that:

• There is no difference which causes a significant effect on prices of products in transaction conditions upon comparison between an independent transaction and a related transaction; or

• There are differences causing a significant effect on the prices of products, but these differences are excluded in accordance with the guidelines in Circular 132

Matter of consideration during application

Elements significantly affecting prices of products usually include:

• Physical properties, quality and trade names of products;

• Contractual conditions on supply and delivery of products (for example: volume (if it affects the price), period of delivery of products, period of payment);

• Right to distribute and sell products resulting in an effect on the economic value;

• Market in which the transaction is conducted

Typical cases for application

This method is usually applied in the following cases:

• Individual transactions concerning each type of product circulated on the market;

• Individual transactions concerning each form of services, copyright, loan agreements;

• A business establishment conducting both independent transactions and related transactions concerning the same type of product

Example:

May 108 is a Vietnamese company with 100% capital funded by Louis Vuiton (France) in engaged in processing of garment and textile products In 2010, May 108 conducted two transactions ofprocessing of trousers as follows:

• Transaction 1: Processing 1,000 dozens of trousers for the parent company at the price of USD60 per dozen on delivery terms as FOB Haiphong port of Vietnam (Louis Vuiton was responsible for export)

• Transaction 2: Processing 1,000 dozens of trousers for Levies in USA at the price of USD100 per dozen on delivery terms as CIF New York Port of USA

Suppose that Levies does not have any relation with May 108 and Louis Vuiton and the two transactions are equivalent in terms of transaction conditions except that the significant difference is costs of transport and insurance for shipment of goods from Hai Phong Port to New York Port being USD3 per dozen

The comparison between transaction 1 (related transaction) and transaction 2 (independent transaction) indicates that transaction 1 did not correctly show the market price Therefore, May 108 must adjust the turnover from the transaction with Louis Vuiton as follows: (USD100 minus (-) USD3) multiplied (x) by 1,000 = USD97,000 As a result, the turnover from the two transactions with Louis Vuiton and Levies as declared by May 108 for tax calculation for 2010

is USD197,000, of which the processing charge which May 108 has declared that it received from S is USD97,000 in place of USD60,000

2 Resale Price

In this method, the reselling prices (or selling prices) of products sold by the company its independent parties will be used as the basis for calculation of the purchase price (cost) of products paid by the affiliated party

Purchase prices of products paid by the affiliated party shall be calculated on the basis of the price of products sold in independent transactions minus (-) gross profits minus (-) other expenses (if any) included in the price of purchased products (for example: import duty, customs charges, insurance and costs of international transport)

Conditions for application

This method shall be applicable, provided that:

• There is no difference in transaction conditions which causes a significant effect on the ratio of gross profit to the selling price (net turnover), upon comparison between an independent transaction and a related transaction; or

• There are differences causing a significant effect on the ratio of gross profit to the selling price (net turnover) but such differences are excluded in accordance with the guidelines provided in accordance with Circular 132

Matter of consideration during application

Note that elements significantly affecting the ratio of gross profit to the selling price (net turnover) usually include:

• Costs expressing the functions of the business establishment (for example: exclusive distribution agent, performance of advertising or promotion programs, warranty and so on);

• Type, size, volume, cycle of products purchased for resale and nature of activities of the transaction on the market (for example: wholesale, retail and so on);

• Method of cost accounting (i.e it must ensure that items constituting the gross profit and turnover from the related transaction and from the independent transaction are equivalent and subject to the same accounting standards)

Typical cases for application

This method is usually applied to transactions in respect of products in the phase of provision

of simple services and commercial distribution which have a short cycle from purchase to sale and rarely suffer seasonal changes At the same time, before the products are sold, they are not processed, assembled, changed in their nature or do not bear a trade name in order to considerably increase their value

Example:

Swatch VN is joint venture of Swiss Watch and operates as a distributor of watches for Swiss Watch:

• In 2025, C received 1000 watches from D for amount of 3 50KUSD

• C sells all watches in the same year for 400KUSD

Knowing that Gymiko Vietnam is a watch distributor and having operations similar to Swatch

VN Gymiko Vietnam has gross profit margin in 2010 of 20%

In this case the cost of watches from Swatch VN’s transaction with Swiss Swatch shall be: 400KUSD (1-20%) = 320KUSD only

3 Cost Plus Profit

The method of prime cost plus profit shall use the prime cost (or cost) of products as the basis for calculation of the selling price of such products sold to an affiliated party

The selling price of products sold to the affiliated party shall be calculated as the prime cost (or cost) of products plus (+) gross profit

Conditions for application

The method shall be applicable, provided that:

• There is no difference which causes a significant effect on the ratio of gross profit to the prime cost (or to the cost) in transaction conditions upon comparison between an independent transaction and a related transaction; or

• There are differences causing a significant effect on the ratio of gross profit to the prime cost (or to the cost) but such differences are excluded in accordance with the guidelines as provided in Circular 132

Matter of consideration during application

Note that elements significantly affecting the ratio of gross profit to the prime cost (or to the cost) usually include:

• Costs showing the operational functions of the business establishment (for example: production under a contract, research and development of new products, proportion of added value of the product to the scale of the investment in business);

• Obligations to perform contracts (for example: period for delivery of products, costs for quality control, storage or payment terms);

• Transactions between affiliated parties in order to perform a joint venture contract or business co-operation contract for production, assembly, manufacturing or processing of products or to implement agreements for supply of inputs of production and for off-take of output products;

• Transactions of provision of services to affiliated parties

Example:

Luis Vuiton Vietnam is a subsidiary Luis Vuiton France and it is responsible for the processing

of LV shoes product for LV France LV Vietnam's business outcome in 2009 are as follows:

• Turnover (i.e processing fees): 15bil VND

• Cost of sales: 13 bil VND

• Selling expenses and G&A expenses: 1.8bil VND

Knowing that May 10 is a similar business in textile industry and in its contract with independent overseas vendor, the processing fees shall be determined as: (cost of sales + Selling expenses + G&A expenses) * (1 + 7%)

LV VN taxable turnover during the year shall be: (13 bil + 1.8 bil) * (1 + 7%) = 15.836 bil VND

4 Comparable Profit

The method uses the profitability ratio of products in independent transactions selected for comparison as the basis for calculation of a profitability ratio of products in related transactions when the transaction conditions of such transactions are equivalent

Profitability ratios shall be calculated as a ratio of before-tax profit (income) to net turnover, costs or assets for production or business activities in accordance with the regulations on accounting and financial reporting Any loan interest or depreciation for fixed assets may be included in the before-tax profit (income) of an enterprise in order to calculate results of production or business before payment of such costs Profitability ratios which are usually used shall include:

Conditions for application

The method shall be applicable, provided that:

• There is no difference which causes a significant effect on the profitability ratio in transaction conditions upon comparison between independent transactions and related transactions; or

• There are differences causing a significant effect on the profitability ratio but such differences are excluded in accordance with the guidelines provided in Section I of Part B of this Circular

Matter of consideration during application

Note that elements significantly affecting profitability ratios usually include:

• Elements in relation to assets, capital and costs for performance of main functions of a business establishment (for example, production or processing using machinery invested by the business establishment will earn higher profit than production or processing using machinery borrowed from another establishment for processing);

• The nature of business lines, category of products and phases of production or sale (for example, finished products are made from raw materials or semi-finished products);

• The method of cost accounting and structure of costs for products (for example, products are in the period of depreciation in accordance with the fast depreciation method but not in accordance with usual depreciation methods)

Typical cases for application

This method shall be considered as a method developed from the method of reselling prices and the method of cost plus profit Therefore, it is applied widely in the cases similar to these methods

5 Profit Split

This method use profit earned from one related general transaction conducted by several affiliated business establishments (or parties) as the basis for calculation of an appropriate [share] of profit for each of such affiliated business establishments (or parties) in the manner

as independent parties would distribute profit in equivalent independent transactions

A related general transaction in which several affiliated business establishments (or parties) take part means the transaction of the sole and special nature comprising several related transactions which have a close relation with each other in terms of exclusive products, or closed related transactions between relevant affiliated parties

Typical cases for application

This method shall be considered as a method developed from the method of reselling prices and the method of prime cost plus profit Therefore, it is applied widely in the cases The case where related parties jointly take part in research and development of new products or development of products being exclusive intangible assets; or where transactions are in the process of transitional production or business between such related parties from raw materials

to final finished products for distribution of products attached to the ownership or use of the sole intellectual property

Example:

Samsung Vietnam and Samsung Korea are subsidiaries of Samsung Corporation Samsung Vietnam is responsible for the development and design of Ominia 9000 whilst Samsung Vietnam is for the manufacturing of the production

In 2025:

• Samsung Korea incurred USD10mil for the development of Ominia 9000;

• Samsung Vietnam incurred USD100mil for the production of Ominia 900

• Total sales during the years is USD150mil

Profit split in 2025 shall be as follows:

• Samsung Korea: (150-100-10) 10/110=USD3.64mil ;

• Samsung Vietnam: (150-100-10)*100/110=USD36.36mil

6 Requirement in applying the appropriate method and comparable data

Which method is allowed?

Circular 132 provide that the election of a method for determining “market price” must follow the rules as bellow:

• The selected method must conform with transaction conditions and has the most reliable and complete information and data sources for comparative analysis

• From the market price derived in the selected method, the company shall itself select the most appropriate value among values of the standard market price margin to use as the basis for adjustment of the relevant value of the related transaction The most appropriate value is the value showing the highest similarity in transaction conditions of the independent transaction selected for comparison with the related transaction

• Comparable data must be covered for at least 3 consecutive years