At present, Vietnam has been integrating in the economy of region and the world, with an open
door policy to attract the investment. FDI companies has become an active part in the economy of
Vietnam. Howver, taking an advantage of potentials and preferential policies of Vietnam, some FDI
companies have carried out the activities related to transfer pricing. In the transfer pricing
phenomenon at present, an issue necessary to pay attention that is fixed transfer pricing while
making a price is not based on the market price to change the real value of asset as a unlicensed
operation. Article on researching the argument base of transfer pricing phenomenon relevant to
the fixed assets, use of qualitative method of researching to interview the customs officers,
professional tax officers relevant to transfer pricing in some provinces to have a clearer way of
looking at the fact of fixed asset transfer pricing. Through interviews, the authors found that the
issue of transfer pricing was most significant for intangible fixed assets in various forms, so the
authors propose the methods of restricting the transfer pricing phenomenon.
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International Conference on Finance, Accounting and Auditing (ICFAA 2018)
November 23rd, 2018
Hanoi City, Vietnam
Research on the Transfer Pricing Phenomenon of Fixed Asset
at FDI Companies in Vietnam
Nguyen Duc Dunga, Le Ngoc Thanga
aNational Economics University
Submission day: 30/10/2018
Review day: 10/11/2018
Acceptance day: 15/11/2018
Abstract
At present, Vietnam has been integrating in the economy of region and the world, with an open
door policy to attract the investment. FDI companies has become an active part in the economy of
Vietnam. Howver, taking an advantage of potentials and preferential policies of Vietnam, some FDI
companies have carried out the activities related to transfer pricing. In the transfer pricing
phenomenon at present, an issue necessary to pay attention that is fixed transfer pricing while
making a price is not based on the market price to change the real value of asset as a unlicensed
operation. Article on researching the argument base of transfer pricing phenomenon relevant to
the fixed assets, use of qualitative method of researching to interview the customs officers,
professional tax officers relevant to transfer pricing in some provinces to have a clearer way of
looking at the fact of fixed asset transfer pricing. Through interviews, the authors found that the
issue of transfer pricing was most significant for intangible fixed assets in various forms, so the
authors propose the methods of restricting the transfer pricing phenomenon.
Keywords: FDI Companies, Fixed assets, Transfer pricing.
JEL codes: M41
1. Introduction:
Transfer pricing is a popular phenomenon in the world and Organization for
Economic Cooperation and Development (OECD) (2014) has referred to the concept of price
transferring as a transfer of assets, goods or service in the internal company, so this act must
be considered in the transacting scope of associated subjects
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Act of transfer pricing has been increased in the recent years and still continued in
the following years. According to Nguyen Xuan Truong and co-workers (2017) looked back
in the previous years since 2009, there has been 1,100 FDI companies in HCM City
announced on loss, number of progressive lost companies in excess of the owner’s capital
have increased from 141 (in 2007) to 232 in the year of 2009. Next, in 2014, according to
the Ministry of Finance as promulgated with a report of General Department of Taxation has
inspected 870 FDI companies and found out 720 companies violated on the transfer pricing,
evading tax, in which, some counts rate of violation up to100%. In which of violated rate in
HCM City ís 85%, Hanoi is 90%. Authorities have searched for VND 1,500 billion of tax.
In 9 beginning months of year, General Department of Taxation has also carried out checking
1,990 lost companies, with the symbol of transfer pricing, collecting, penalty and refunding
with VND 1,559.8 billion, reduced loss at VND 4,720 billion, reduced the discount of VND
99.9 billion. This is regarded as “figures” alarming on the fact of transfer pricing at present
in companies of Vietnam. There are many ways of transfer pricing especially at the tendency
to carry out the price transferring by means of fixed asset àtransfer has been popular.
According to Le Thanh Ha (2017), operation of fixed asset valuation is an operating
containing a lot of risk. Price valuation is not based on the market price aimed to change the
real value of fixed asset for the purpose of transferring profit or evading tax are illegal.
Operation of transfer pricing of FDI companies in Vietnam not only make loss of revenue in
tax but also caused to the unhealthy situation of competition in economy
Therefore, researching on the transfer of pricing in which of fixed asset transfer
pricing of FDI companies is necessary, contributed to control, prevent the phenomenon of
transfer pricing, evade the loss of tax revenue from these companies in Vietnam
2. Theoretical Framework and method of research
2.1 Theoretical Framework
According to OECD (2010): “Transfer price is the price of tangible goods and
intangible or price of providing service that a company has transferred to the other associated
company”; Fixed asset transfer pricing of FDI companies relevant to the tangible and
intangible fixed assets of companies
• Transfer pricing by means of transfer operation of tangible assets
According to Nguyen Ngoc Lan (2016), the transfer of manufactured machines and
equipment: Machines and equipment are often provided by the parent company for the
subsidiary company as manufactured units. Machines and equipment transferred can be the
medium to support for subsidiary company or can be in the form that parent company will
sell the completed production line to newly established subsidiary company. This equipment
can be purchased from outside, manufactured by the parent company or can be old
equipment of parent company or other subsidiary company has not the requirement to use.
One of reasons for the companies to carry out the transfer of price in this transaction is to
reduce tax and maximize the profit by means of asset valuation higher or lower than market
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price. Therefore, tax rules have required the transfer of equipment must be applied with
market price for this type of transaction at the time of transaction
• Transfer pricing by means of transfer operation of intangible assets
Types of intangible assets include the commercial advantage, patent, trademark and
brand, intellectual property, license, publishing right, ability to provide services
Intangible assets without material features, but it is possible to create the economic benefit
in future, it can be defined separately and can be protected with the legal right. According to
Nguyen Huu Anh and co-workers (2016), intangible assets have made the monopoly or
quasi-monopoly in products of ownership companies, so the value of this asset has also
features of market and it is difficult to compare, define on the market. This is also “an
advantage” for the companies to carry out the activities of transfer pricing
Activities of transferring the intangible assets are carried out in four ways:
(i) Selling and collecting money at once
(ii) Transfer that is not necessary to pay money (donating)
(iii) License to change and take the copyright royalty (paid once or many times
according to the percentage of revenue, total amount above a unit, etc...)
(iv) License without losing money to use the copyright
By this way, form of transfer is not necessary to pay money that is nearly not accepted
by the tax authorities in the transactions of transfer pricing and the most popularly is the
form of transferring the intangible assets by means of licenses
As considering the issues relevant to transfer price, intangible asset is divided into three
main groups: Group of intangible assets relevant to production, group of intangible assets
relevant to the marketing activities in companies and group of mixed intangible assets
- For the group of intangible assets relevant to production: Including the assets such
as patents, secrets of production technique. As transferring the patents to the branches,
associated companies, it is necessary to evaluate the monopoly level of company for the
patent because this is a basis for verifying the properly value of assets in transaction and
transfer. For the secrets of technique; depending on the features of manufactured branch,
manufactured articles to define the value of this asset
- For the group of intangible assets relevant to the marketing activities in companies:
This is the asset made from marketing activities, distributing activities and after sale services.
Intangbile assets in this group include the brand name and trade mark, fame of company,
quality of sale team or capability of providing the service and training for ccustomers. For
the trademark and brandname, feature of these assets is also created in the life cycle of
products (or products of one brand name) at a certain market in a certain period of time.
Value of this asset is very small if it is a new product or participating in a new market. This
is an important basis for valuating the transfer of this asset. Fame of company has shown the
commercial advantage of company. Company has a good fame, so sales team has a good
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quality, good after sales services. After sales servies and training the customers are also
important asset of company. Definition on the properly transfer price of this asset required a
very careful knowledge about the features of every branch, every type of product provided
by the company
- Group of mixed intangible assets: These are mixed intangible assets either having
the features of assets relevant to production, or having the features of assets relevant to
marketing activities such as the fame of company originated from the product they have
made with high quality and efficient advertising strategies. Or soft product of informatic
company, sale of soft product for the customer either has feature to transfer the products for
customers to use, but also has the features to transfer the copyright. For these assets, to define
the transfer price in itnernal transactions, that is necessary to define clearly which company
has developed with this asset? Is that company possible to get the money from customer
according to the reasonable price or not?
2.2 Method of researching
This article uses the method of qualitative researching by means of interview
activities. The research uses the method of interview or discuss in group for 7 tax officers
and 8 custom officers. Customs officers strictly relevant to the task of transfer pricing of
enterprises. Group discussion is carried out in some city provinces: Hanoi, Da Nang, Khanh
Hoa, In provinces divided in the unified groups relevant to the tax branch or customs. Ideas
recorded to serve for the research of fixed assets price transfer in FDI companies
3. Result and discussion
By means of interviewing the general ideas of managing officersinterviewed to
control the price transfer as a complicated task required a combination of different
authorities. If lacking the combination, state offices such as tax office, customs office, are
not able to control the activity of transfer pricing more complex. Group discussion related to
the transfer pricing phenomenon of intangible and tangible fixed assets as recorded and
analyzed by the author
- For the transfer pricing phenomenon relevant to tangible fixed assets
Tangible fixed assets transfer from a foreign company to foreign investment capital
contributed enterprise in Vietnam is carried out in the popular ways: joint venture capital
contribution, transfer of asset to form the fixed assets of enterprise, purchase or rent again
the asset to operate production, processing work. In principle, profession of transferring
goods or tangible assets must be agreed by both of joint venture partners. In case, there is no
agreement from one of parties, such assets ,must be appraised by the competent authority.
However, in fact that defining the price of capital contributing assets is no simple and carried
out rightly according to the regulation. According to some specialists, many foreign partners
have an intention to count the price very high with real value for machines and equipment
imported by them in Vietnam to contribute the joint venture capital. For the case that foreign
enterprises enhance the value of importing asset value to contribute the investment capital
occurred quite popular. This trick brings back a lot of profits for companies such as
increasing the gradually capital contribution to override the right to coordinate the joint
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venture and divided at the high interest rate; increase the rate of counting the annual
depreciation from then to increase the cost price of product. In addition, joint venture is lost
in extension will cause the State to lose the tax revenue that makes the joint venture to
become a company with its 100% foreign capital
- For the phenomenon of transfer pricing relevant to the intangible fixed assets
However, according to the interview tax officers has shown the most difficult to the
tax authority, it is difficult for customs office to define the logic of expenses for subsidiary
company of Vietnam to pay for parent company in foreign country on transferring the
intangible assets. Due to the value of intangible asset value is very complicated problem, it
is difficult to define because the most of highly monopoly feature, depending on the
subjective calculation of mother company, so it has not the market value to compare, adjust.
When asking the specialists relevant to the intangible assets problem such as land, trademark
has any problem in inspection and checking the price, the specialist has shown that some of
small provinces has not many FDI companies such as Khanh Hoa, fixing a price has also a
lot of difficulties. Most of officersshowed that Vietnam has not built the data base on price
for the types of fixed asset that caused difficulties to inspect, check the operation of transfer
pricing of companies
Some of tax officers showed that foreign companies in fact have transferred to the
subsidiary companies of Vietnam with a lot of old technology, out of date and
semiautomatic, for example as in a tea processing company of Taiwan. This caused to the
consequence as: one aspect, we still have to use the old technology, out of date, the use
caused influence to the environment; in other words, we must pay for copyright fees for
technology transfer is very high compared with its real value. The cause of this status is due
to take part in the joint venture, the side of Vietnam has not a good preparation in negotiation,
so drafting the contract has been made in available by the foreign partner. Therefore,
technology transfer cost has been imposed by the side of foreign country at very high price
level. As deciding the price of intangbile assets, in addition to consider the technical features,
legality, economics, transacting price in the market, investment expenditure, policies of
encouraging the commericialization,... it is necessary to consider more the specific element
of this asset like: protecting situation; protecting scope; remained time in the protective term
as written in the protective degree; risk ability happened in the process of using the patent,
for example: the ability is cancelled in validity, encroached; difficulties, obstacle to
economy, technique in use, exploitation, commercialization
By means of interviewing the tax cadres, customs officersin some provinces
interviewed have shown that transfer pricing is very complicated, so it is necessary to
coordinate with many office, branch to check. In addition, some officer shave felt that
penalty on companies related to FDI is not strong enough. Therefore, in addition to increase
the penalty level related to transfer pricing, so it is necessary to have a law relevant to transfer
pricing. Law can be adjusted only in some areas, bear the price intensive. If it is not carried
out early, transfer pricing has been becoming more serious
4. Conclusions and Policy Implications.
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FDI Companies are often big tax payers due to the transfer pricing activities have
influence on the State budget sources. Therefore, management authorities need to have the
solutions to restrict on the transfer pricing of FDI companies in general meanwhile there are
professions related to the fixed assets of companies
• First point, increasing the combination in the management operation of
transfer pricing between the State authorities
Transfer pricing has a lot of purposes to reduce the direct tax, indirect, beneficiary
from the dividend, Associating transaction activities of companies are not in a province
that is related to many different sectors, related to many different nations, so it is difficult to
control without any combination between the departments and different locals. In addition,
according to the Decree No 20/2017/NĐ-CP on regulating the tax management for the
companies with associated transaction to grasp the associated relationships that is necessary
to grasp in fact transaction of enterprises, personal relationship of transacting parties. So, in
the operation of supervising, inspecting that is necessary to have a cooperation of relevant
parties in State Management such as General Department of Taxation, General Department
of Customs, State Auditing, Bank, Appraisal Offices,....
• Second point, completing the systems of legal documents relevant to transfer pricing
On 24/2/2017, the Government has promulgated the Decree No 20/2017/NĐ-CP to
regulate the tax management on the associated transaction companies. Decree No 20 is
valid to implement from 1/5/2017. This decree is used to replace for the Circular No
66/2010/TT-BTC on 22/4/2010 of the Ministry of Finance. This is regarded as a great
improvement for the transfer pricing operation of companies. However, Decree No 20 has
not put forward the penalty level specifically for the transfer pricing of companies. Strict
penalty level has an advantage of transfer pricing restriction. Additionally in future, by
means of interviewing many opiuniosn has given the opinions that Ministry of Finance has
also researched the promulgation of Pricing Transfer Law to make a basis for promulgating
the regulations of control and dealing with the effect of transfer pricing operation to the
economy
• Thirdly, building the data base on price for transactions
By means of making a survey on the functional authorities such as tax office, customs
the problem on controlling the main transfer pricing lack of database on the price of
transacting goods. Database on providing the information on market price can be compared,
creating a condition for evaluating the associated transactions as enumerated. As evaluating
an internal profession of purchase and sale, the authorities have difficulty in finding the
reference price to compare. The problem is more complicated in comparison with the types
of goods like auto that transfer pricing is dependent on the option of customer, attached
accessories to the automobile caused the definition of transfer pricing is very complicated if
there is no enough database
For a database on price is accurate, the Sate has to upgrade frequently, continuously
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and supplemented from the different sources of trustworthy information. At present, there
are a lot of pricing database systems such as Onesource, Osiris, Oriana used broadly in
countries supported selecting the compared sample to become much more simply (OECD,
2017). In order to meet the requirement of integration as well as saving costs, authorites in
Vietnam has early specific instruction to these databases to be recognized to use in Vietnam
or not; and if in case of conformity, so it is necessary to have a mechanism of purchasing
data of big auditing companies
• And so on, building more the method of negotiation prior to fix a price
In case that is difficult to define on price according to the traditional method, some
specialists have petition on applying with the previous method of negotiation on defining the
price (APA). APA is a negotiation in text carried out before this associated transaction
happened. This is a voluntary method, appreciating a cooperation between the parties and
APA is able to support for the company to be active in making a business plan, using the
source efficiently. However, the implementation of APA required a lot of database source
for appraising. Method of pre-negotiation on defining the price has been applied
conformably in developing countries
Preventing and anti-transfer pricing has always been a complicated issue for almost
countries including Vietnam. If the company has taken advantage of transfer professions to
reduce the tax amount payable and synonym with the State Bank has a loss of revenue and
create an unequal competitive environment between the companies. The State has to build a
legal system, build a data base as well as increasing the coordination between the
management authorities on the transfer pricing operation, to minimize the possibility that
Company will abuse the tax preferential polices. For the cases difficult to define on the
transfer price, the State authority is able to apply according to the method of pre-negotiation
on defining the price. Researchers continue to look for signs of price transfer, as well as price
transfer for domestic companies.
5. References
Ministry of Finance (2010). Circular No 66/2010/TT-BTC instruction to carry out
defining the market price in business transaction between the parties with associated
relationship. as promulgated on 22/4/2010
Government (2017). Decree No 20/2017/NĐ-CP tax management regulation on the
associated transaction companies. as promulgated on 24/2/2017.
Lê Thanh Ha (2017). Control the transfer pricing operation in the branch of muti-
national companies in Vietnam. The thesis, Academy of Finance
Nguyen Huu Anh, Nguyen Thi Phuong Hoa and Nguyễn Hong Thuy (2016).
Transfer pricing and Transfer pricing control in companies of Vietnam. National Economics
University Publishing House
Nguyen Thị Lan (2016). Identifying the tricks of tax evasion, avoiding tax of multi-
national companies operated in the territory of Vietnam. Bach Khoa Publishing House Hanoi
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Nguyen Xuan Truong, Pham Thị Khanh Linh and Phan Nguyen Ngoc Mai (2017).
Analysis and evaluating on the impacts on the transfer pricing of companies in Vietnam.
National Scientific Seminar “ Transfers pricing fact for Vietnamese Companies and impacts
of economic”. National Economics University in October 2017, page 63-81.
OECD (2010). “The transfer pricing guidelines for Multinational Enterprises and Tax
Administrations”. OCED, July 2010
OECD (2014). Model convention with respect to taxes on income and on capital.
OECD, Paris.
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