To avoid tax audits and penalties, the Ho Chi Minh City Tax Department advises businesses with tax violations in related-party transactions not to evade taxes through the following transfer pricing practices:
- Transfer pricing through input factors: Specifically, this involves artificially inflating input costs beyond market prices through foreign investment in assets, machinery, equipment, or technology transfer, when the company sets its own prices too high or the cost of raw materials is too high, resulting in the cost of goods sold exceeding the selling price, leading to negative or very low profits. Examples include purchasing raw materials from the same group, importing components for automobiles, computers, and electronic components for domestic production and sale…
- Transfer pricing through output factors: This means setting the selling price of products, goods, or services to the parent company lower than the market price. Examples include processing fees, products in the garment and footwear industries, software products, electronics, etc.
- Expenses allocated by the parent company to its subsidiaries, and payments made on behalf of others within the group, are often opaque and lack proof of the services provided.
- Transfer pricing occurs through the provision of services such as marketing, advertising, management consulting, and support, even though no services are actually performed.
- Payments for trademarks, royalties, and training costs cannot be justified.
- Paying interest to related parties at a rate higher than commercial bank interest rates, or providing interest-free loans to transfer profits to loss-making related parties, or receiving tax incentives (tax exemptions, reductions, low corporate income tax rates).
- Deal with companies that have preferential tax rates or companies located in "tax havens".
In the coming period, the Ho Chi Minh City Tax Department will continue to strengthen inspection and auditing of businesses with related-party transactions belonging to the following groups:
- The company suffered losses for many years, losing all its equity capital, yet it continued to operate, expand its investments, and achieve increasing revenue growth.
- Companies have high earnings during the incentive period but their earnings gradually decrease after the incentive period ends.
- The company consistently has lower profit margins than the industry average in the area.
