FOREIGN TRADE UNIVERSITY
FACULTY OF INTERNATIONAL ECONOMICS
MACROECONOMICS SUBJECT
GROUP ASSIGNMENT
TRANSFER PRICING IN MULTINATIONAL CORPORATIONS IN VIETNAM
TABLE OF CONTENT
INTRODUCTION …………………………………………..CONTENT
I. Overview of transfer pricing in multinational corporations (MNC)……………………….4
1. Concepts ………………………………………………………………………………………………..4 2. Signs
of transfer pricing ……………………………………………………………………………6 3. Motivations
for transfer pricing: ……………………………………………………………….7 4. Scope of transfer
pricing ………………………………………………………………………….9
II. Situation of transfer pricing in
Vietnam ……………………………………………………………….. 10
1. Legal environment in Vietnam ………………………………………………………………..10 2.
Typical types of transfer pricing in Vietnam………………………………………………12 3. Impacts
on Vietnamese economy ……………………………………………………………15
III. Suggested
solutions ……………………………………………………………………………………………… 18
1. Anti transfer pricing experience from other countries ……………………………….18 2.
Suggested solutions for the situation……………………………………………………….20
CONCLUSION ………………………………………………………………………………………………………
.23
REFERENCE …………………………………………………………………………………………………………
.24
INTRODUCTION
In recent years, along with the development of the globalization process, Foreign Direct
Investment (FDI) in Vietnam has increased very sharply, contributing a lot to the
development of Vietnam’s economy, especially in the industry sector. However, besides the
positive results, this kind of investment has also brought equal complex issues. The
number of cross-border commercial transactions between associated companies is on the
rise. Due to the increasingly fierce competition, the problem of profit maximization for the
corporation is always the main concern of foreign investors. In addition to improving the
performance of invested business, transferring pricing is considered one of the most
effective methods that is often applied by the investors with the purpose of avoiding tax,
which eventually increases total benefits of the firms.
The necessity of the topic
While transfer price is a relatively new phenomenon in Vietnam’s trading area, recent
transactions which have foreign elements appear to show increasingly more signs of this
phenomenon. Foreign companies have long been reported to use tortuous tricks to transfer
profits to their “mother companies” without having to pay tax in Vietnam. For example,
global beverage giant Coca-Cola has also been fingered for alleged transfer pricing fraud,
a scandal that created a stir recently after the companies has operated in Viet Nam for
about 10 years without ever reporting a profit.
Transfer price not only causes a variety of damages to the host country’s government,
partners as well as consumers due to tax losses, reduced profit of the investment
contributor of the host country, but also has negative impacts on international trade. The
rules of free market and the fact that the law of supply and demand does not work in multi-
national corporations disturb the international circulation. This leads to the situation of
unfair competition.
This fact is alarming, especially when Vietnamese government’s budget has been
suffering from a huge amount of tax losses due to transferring price of these companies. It
also causes more serious problems negatively affecting the macroeconomic policies, tax
policies, investment environment, the competiveness of the market, inequality between
partner companies
The purposes of the study on this topic
This study aims at helping people to have a deep insight and thorough understanding
about the concepts, the signs, methods, motivation as well as the negative impact of
transferring price. We also investigate the current situation of this issue in Vietnam and
recommend some solutions, suggestions to relieve this situation from continuing, making
equal chances as well as good competitive market, strict legal environment for both the
local and foreign companies to develop in the future.
The scope of study
Multinational companies/brand names have agencies operating in Vietnam.
The applicability of the topic
Studying transfer price activities in MNC in Vietnam helps with the improvement of a
clear and healthy investment environment in Vietnam. It also supports the building of a
more strict enterprise law, foreign investment law and some tax polices of the government.
Additionally, raising the awareness of the authorities about serious consequence of this
problems, from that, having more strict constraints and appropriate punishment methods to
prevent this situation from occurring is also one of the most important applications.
Finally, the management of these kinds of companies might apply some more special
supervision systems, especially, taxes policies, foreign capital investment attraction
policies should be more strict, systematical and synchronized.
The general structure of this study
Our study contains 3 main parts:
I. Overview of transfer pricing in multinational corporations (MNC)
II. Situation of transfer pricing in Vietnam
III. Suggested solutions
I. Overview of transfer pricing in multinational corporations (MNC)
1. Concepts
a. Multinational corporation
– Definition:
A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation
that is registered in more than one country or that has operations in more than one country.
It is a large corporation which both produces and sells goods or services in various
countries. Such companies have offices and/or factories in different countries and usually
have a centralized head office where they co-ordinate global management. Very large
multinationals have budgets that exceed those of many small countries.
– Categories:
There are four categories of multinational corporations:
A multinational, decentralized corporation with strong home country presence
A global, centralized corporation that acquires cost advantage through centralized
production wherever cheaper resources are available
An international company that builds on the parent corporation’s technology or R&D
A transnational enterprise that combines the previous three approaches
– Characteristics:
Large size
Multinational companies have huge resources in terms of capital, technology, people
and information.
Multi-country operations
Multinational companies operate in several countries. They can have production,
marketing and service type of operations. They cover large geographical areas. They have
assets and activities in two or more countries.
Various objectives
Multinational companies pursue various objectives like:
+ Access to new market opportunities to expand market size.
+ Access to cheap raw materials to reduce costs and increase competitive capacity
+ Access to cheap source of labor to reduce costs of labor and energy.
Various environments
Multinational companies operate in various environments. The political, legal, economic,
social, cultural and technological forces differ from country to country.
Centralized ownership and control
The ownership and control of multinational company is centralized in the home country.
They provide share ownership to local people in host countries.
Multiple currencies
Multinational companies deal in currencies of several countries. The risk is high because
of changing values of currencies in host countries.
High efficiency
Multinational companies are highly efficient due to:
– Mass production leading to economic of scale
– Use of advanced technology to increase speed of production
– Professional management and marketing skills to use resources effectively.
b. Transfer pricing in MNCs
A “transfer price” is the price at which one company buys and sells goods or services or
shares resources with a related affiliate in its supply chain. Aggressive transfer prices may
inflate profits in low-tax jurisdictions and depress profits in high-tax countries. Thus,
“transfer pricing” is the system of laws and practices used by countries to ensure that
goods, services and intellectual property transferred between related companies are
appropriately
priced, based on market conditions, such that profits are correctly reflected in each
jurisdiction. In other words, transfer pricing is a profit allocation method used to attribute a
corporation’s net profit or loss before tax to tax jurisdictions.
Transfer pricing is generally considered to be the major international taxation issue face
d byMNCs today. It is an enormously important issue for many countries, developing and
developed
Whenever goods cross national borders within the channels of a multinational
corporation (MNC), a transfer price must be calculated for tax purposes. When corporate
tax rates differ on the two sides of the border, the MNC has an incentive to set its transfer
prices in a way that reduces its tax burden by reporting higher profits in the country where
corporate profits are taxed more lightly. The purpose of this activity is to manipulate prices
between the headquarter and the subsidiaries so that profits are highest in the low tax
country.
2. Signs of transfer pricing
The most common sign of transfer pricing is that firms declare losses for many
consecutive years while still expanding their investments in one country and conducting
significant business transactions in other countries. There firms may have intentional loss
for 3 years, then the nest 1 or 2 years with little profit, so it has accumulated losses. In
order to turn profits into losses or set up a low profit rate, FDI enterprises can not work
alone, they usually coordinate with those in the same organizations or groups. These
enterprises arrange the price through coordinating trade. Also through this transaction, the
companies in the group can reduce the total tax liability on a global scale, the profit after
tax is then increased.
Another common phenomenon of transfer pricing is that the enterprises under
production process business declare a high price level of inputs, and find ways to increase
other costs (advertising, promotion cost) in order to eliminate the profit. Compared with
other enterprises in the same industries, it can be easily seen that the cost of FDI
enterprises is often irregularly higher; also, some companies take advantage of the host
country’s preference for the reduction in advertising, promotion costs to advertise for the
parent company.
Using interest expense is also another measure of FDI businesses. When the parent
