Transfer pricing is the pricing of goods,services and intangibles between related parties, like a parent company and itsaffiliates. Apart from tax avoidance, it has also been usedto charge unduly high prices for certain goods in markets without intensecompetition. Over the years, several big multinational firms operating in Vietnam haveshowed losses in their books while doing obviously well in the market. Soft-drink maker Coca-Cola, for instance, hasbeen accused in the US of avoiding billions of dollars in taxes throughtransfer pricing adjustments. Vietnam has taken a significant step forward indealing with transfer pricing with Decree 20, which was issued this Februaryand took effect on May 1. Experts say the decree has brought Vietnameselaw closer to global legal standards. The decree expands on existing regulations and introduces new concepts underthe Organisation for Economic Cooperation Development (OECD)’s guidelines forfighting base erosion and profit shifting (BEPS) tax avoidance strategies. Nguyen Thi Lan Anh, deputy head of the GeneralDepartment of Taxation (GDT)’s inspection division, said at a recent conferencethat the decree marks significant changes in tax registration and evaluation ofrelated-party transactions in Vietnam. These include a three-level tax declaration, newtransaction registration forms, and new guidance on derived expenses fromrelated-party transactions. The operating income margins of tax paying companies or individuals will becompared with that of independent entities through a master file, a local fileand a country by country report. New price evaluation standards for related-party transactions are alsointroduced by comparison to independent transactions, based on productdistinctions or functions and contract clauses. Earnings appropriation (income retained for a specific purpose that cannot beused for issuing dividends) will be one of the aspects of related transactionsthat will be dealt with by the decree. PricewaterhouseCoopers (PwC) Vietnam’s Tax Partner Nguyen Huong Giang saidthat Decree 20 was the most important legal procedure on related-partytransactions that Vietnam has initiated in decades. "This shows that the authorities andcompanies are becoming more and more committed to building a set of taxpolicies in accordance with global tax frameworks, in an effort to createtransparency and fight tax avoidance. “The Ministry of Finance is showing great zeal in setting clearer rules thatare closer to world standards,” Giang said in a PwC’s press release in March. The GDT said that it has collected records andprecedents from international taxation institutions to construct the legalfoundation for Decree 20, and they expect it to facilitate an effective taxmonitoring system for associated firms, while minimising calculation andevaluation risks. With the rise of globalisation and dominance ofmultinational companies, transfer pricing among affiliates that fall underdifferent countries’ jurisdictions has become common practice. However, it has often been a means for tax avoidance that unfairly exploitslower tax rates in other countries. This has created a need for more effectiveregulations to deal with this practice. Vietnamese authorities have been working hard tomonitor transfer pricing within foreign companies, chiefly by inspecting booksand tax details. Cao Anh Tuan, deputy head of the GDT, said atthe conference that tax avoidance through transfer pricing is posing achallenge for many countries in the world, and Vietnam is no exception. Tougher regulations on related-partytransactions are a must for the country to move towards fair competition and amarket economy, he added. Lan Anh said the GDT has conducted price adjustment inspections on 130 firmssince 2010, retrieving 724 billion VND (32.3 million USD), adjusting lossreduction by 2.96 trillion VND (132.1 million USD) and increasing taxableincome by 3.43 trillion VND (153.1 million USD). Decree 20 regulates that total amount of abated borrowing costs (abatement costis borne by businesses for removing or reducing an undesirable item they havecreated, like effluents in a factory) must not exceed 20 percent of thecompany’s earnings before tax depreciation and amortisation. This requires the taxpaying company to file adetailed report on earnings and independent transactions, and proving theeconomic benefits wrought by these transactions. The new decree also deals with other types of relationship wherein anindividual or entity has controlling power over a firm based on capitalcontributed, or directly manages its operations. It also deals with cases whereenterprises are subject to the management and control of operational decisionstaken by another enterprise. Any mother company whose main office is in Vietnam and whose totalinternational annual profit surpasses 18 trillion VND (803.4 million USD) mustcomplete a multinational earnings report and submit it to the tax authority inVietnam. In many other countries, this figure is 750 million EUR (846.1 millionUSD). In addition, the thresholds for some types ofrelationship have been revised. For instance, the threshold on directly orindirectly contributed capital ratio increases from 20 percent to 25 percent;and that on the debt to equity ratio increases from 20 to 25 percent if anenterprise guarantees loans or grants them directly to a related company. Higher audit activity is expected in the comingyears as part of the tax administration’s fiscal management initiative to bringdown the nation’s budget deficit to a sustainable level, at 3.5 percent of GDPby 2020, said Resolution 25/2016/QH14. “Taxpayers must take the initiative to researchand evaluate the effects that Decree 20 may have on their operations in orderto comply with Vietnamese tax regulations in the near future,” said Giang. Some experts have pointed out that there a fewproblems remain when trying to implement international standards in Vietnam,like a lack of data at local levels. Furthermore, the decree does not providedetailed instructions on related-party transactions and price adjustments, andits impact on other kinds of tax, including value added tax and retention tax. A report released last year by audit companyKPMG in Vietnam said that multinationals investing in the country as well asVietnamese corporations investing abroad should be much more prudent abouttheir transfer pricing arrangements and prepare for reforms that will focus onwhere the economic activities are undertaken and values created.-VNA