CONTENT:

PREFACE
At the press conference in the third quarter of 2015, Mr. Nguyen Dai Tri, the Deputy
Director General of General Department of Taxation, indicated that within 9 months of
2015, the tax industry inspected and found out that 1,600 enterprises had signs of transfer
pricing. This is a big number. For FDI enterprises, Mr. Tri showed that the General
Department of Taxation was conducting checking to make it clear about the query of
signs of transfer pricing towards Metro and Coca Cola.
In discussion session about Vietnamese economy with affiliation at Global
Investment Forum in 2015, the Minister of Ministry of Planning and Investment, Mr. Bui
QuangVinh, didn’t agree with a corporate leader’s opinion blaming Coca Cola for
transfer pricing without any evidence.
Transfer pricing has appeared for a long time, but now it continues to emerge in
Vietnam again. It is likely to say that on the time being, transfer pricing is a hot topic in
Vietnam lately.
So, what is transfer pricing? How does it occur in Vietnam, especially in Coca Cola?
In order to make the problem clearer, our group has decided to choose the subject:
“Transfer pricing in Coca Cola” for our research. However, this problem is quite new in
Vietnam, it is not able to avoid mistakes in our report. Therefore, we hope that you will
help us find out and correct them. Simultaneously, we also send our special thanks to
Mrs. Tran Thi Thu Hien, who guided us enthusiastically so that we can complete this
research well!

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TRANSFER PRICING
1.

Introduction to transfer pricing:

pricing can be based on preferred policies among countries. Income will be moved
from subjects having lower preference to ones having more advantages about
preference.
1.2

Signs:

1.2.1

Suspicious signs:
Company measures and declares inaccurate revenue and costs, shows
ongoing earnings losses for years as well as equity loss. However, they
continue to operate, and even expand investment and producing.
Price of goods and services the company sells to linked trading units is
lower than when they sell to independent ones.
Price of purchasing raw materials, goods and services from foreign parent
company are higher than purchasing from other independent units, which leads
to higher costs.
Goods, services exported to foreign countries (mainly the ones that are
output contracted through parent company) have a phenomenon of which their
selling price and outsourcing price are lower than cost price. This leads to
continuously loss in production and business operations for many years. To
continue to operate, the company needs to use some form of financial aid, or
loans without interest from parent company.
Parent company allocates costs incurred overseas to its subsidiary several
items such as advertising, marketing, researching and expanding market,
interest expenses, copyright and some more, which actually must be paid by
the parent company abroad.

1.2.2

Foreign loans:
After years of continuous losses, to ensure balance of business capital,
the firm decides to sign foreign loans contracts. These contracts are usually
funded by the parent company or individual entrepreneur. Many contracts
do not charge interest, not specify time of the loan. This is to avoid paying
withholding tax on loan interest.

•

Increasing legal capital:
After losing consecutively for years, some enterprises use the form of
increasing legal capital, aim at expanding production scale and balance of

capital on accounts.
• Supporting outsourcing price:
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To ensure balance and cope with management agencies, when parent
companies abroad feel the loss is too big, they usually do not adjust the
outsourcing price, but choose the solution of supporting the price to make
up cost of subsidiary companies.
These are the enterprises specialized in manufacturing, processing
goods to export. Therefore, although the business continuously loses, incurs
negligible tax liability (such as excise tax and personal income tax), but the
tax that state budget must refund to the business (value-added tax of goods
and services purchased) are great.
1.3

Forms:

intermediaries. Venture partners of these MNCs received experts or
managers are forced to pay a very high cost (salary),whichhowever is
resulted in low efficiency.
• In some cases, MNCs make the transfer prices through overseas training
form:
Many firms select employees to study and practice in the parent
company with the high cost.
• Regulating the sale and purchase price of goods:
If import tariffs are high, parent companies will sell materials and
goods with low price to avoid import tax payment. In this case, they will
strengthen the counseling, training, marketing support with high prices to
offset or acquire products with low price. In opposite situation, if imported
goods have low tax rates, the MNCs sign import contracts at high prices in
•

order to increase costs to avoid income tax payment.
Sponsoring business loans of parent companies:
In this way, the subsidiary generate capital structure and unreasonable
capital such as using loans from parent company to finance fixed assets and
long-term invested assets without increasing capital as well as equity to
push costs of financing activities (foreign exchange costs, interest
expenses...) higher. Then, they transfer a part of profits in form of interests,
costs of loan guarantee to avoid tax and foreign exchange losses in the

•

future.
Through Bill Renewable Center:
Bill Renewable Center acts as an intermediary between the parent
company and its subsidiaries. Goods on invoice vouchers are sold from the

Negative:
If MNCs really do transfer pricing and be found out, they will suffer a
big penalty, be dispossessed business license and their fame will be
influenced. Furthermore, they will be administered closely when they
invest in other countries.

1.4.2
•

For countries receiving investment:
For economy:
Transfer pricing creates unfair competition environment between
domestic firms and foreign ones. The FDI firms that own dominant position
makes domestic economy depend on foreign firms. It also is one of the
reasons that lead to trade deficit on facilities, materials, technology with

high price while doing exportation with low price.
• For government:
- Reduce revenue from tax.

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-

Transfer pricing will break balance payments and economic plan of
country receiving investment, so that if country receiving investment
doesn’t control well, it will lead to depend on economy of parent

-


Example of transfer pricing: Coca Cola Vietnam

2.1

Vietnamese context:
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Transfer pricing was and is an alarming situation in Vietnam today. While the
developing countries have a lot of experience in fighting transfer pricing in MNCs,
Vietnam still lacks experience in consulting this.
Transfer pricing in Vietnam are controlled by general regulations on tax
inspections, however, general test method lacks necessary depth to identify the
forms of transfer pricing. Acts of transfer pricing violations are often sanctioned
under the general provisions of Vietnam tax administration without separate
regulations.
Currently, the number of tax officials and auditors are very little, while the
number of firms is a lot.
The coordination between inspection, examination agencies and different
levels, branches to exchange information, support professional, multisectoral
coordination in the field of transfer pricing inspection, business losses many
consecutive years is limited.
Trade policy of border residents for enterprises that sell commodities
temporarily imported for re-export are inadequate, and have large loopholes.
MNCs’ information that tax agencies need to specify transfer pricing is
usually a commercial secret or in other country. This makes it difficult and
sometimes impossible to get the information.
Acts of transfer pricing has taken place not only in foreign direct invested
enterprises (FIEs), but also between affiliated parties in inland Vietnam. The


Name: Coca Cola Vietnam
Headquarter: 485 Hanoi Street, LinhTrung Ward, Thu Duc District, Ho Chi

Minh City, Vietnam.
• Investment: 400 million USD in machines and factories
600.000 USD in education and society
• Average revenue per year: 38.5 million USD
• Employees: 1200 people. In this period, Coca Cola used to recruit about
2000 agents. It has more than 16000 workers that are created in related
industries.
• History of Coca Cola Viet Nam:
- 1960: the fist time Coca Cola was introduced in Viet Nam.
- 2/1994: Coca-Cola starts long-term investment in Viet Nam.
- 8/1995: the first joint venture of Coca Cola and Vinafiniex in the
-

North of Viet Nam was established.
9/1995: the next joint venture called “Coca Cola Chuong Duong

-

Beverage Company”.
1/1998: Coca-Cola signed contract with Da Nang Beverage
Company.
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-


year with profit even when their revenue is increasingevery single
year. In 2004, the revenue was 728 billion VNDs and the lost was
110 billion VNDs. In 2006, the revenuejumped up to 1026 billion

-

VNDs but the lost was more than twice the number of 2004.
In 2010, the revenue of Coca-Cola was 2529 billion VNDs but the
total cost was 2717 billion VNDs, so it means that the lost was 188
billion VNDs. Accumulated lost was combined to 3768 billion

-

VNDs, exeed investment which was 2950 billion VNDs.
The least lost was in 2009 with 39 billion VNDs, the highest lost
was in 2006 with 253 billion VNDs.

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•

The losses are declared to due to the price of materials, which are mainly
directedly imported from parent companyat a very high price:
-

Mr Le Duy Minh, the manager of the tax office number 1, the “key”
helped this company to consecutively notify lost is high price for

-

unbelievable number for a foreign company operated in beverage

-

industry.
More than this, Coca-Cola Viet Nam took short-term loans which are
2020 billion VNDs with the parent company while the other loans
are 343 billion VNDs. The debt with the parent company is more
than six times the others loans.

12


In Viet Nam, Coca-Cola has a huge market share with many products. It is a
big company with faith of consumers.
In comparison with Chuong Duong Company, although they had small
marketshare on beverage market, Chuong Duong got revenue at 422 billion VND
but the profit before tax and dividend was 30 billion VNDs, so they spent 7.5
billion VNDs in corporate income tax.
2.4

Process:
•

Raising the price of their exclusive materials which are directedly imported
from parent company:

Here are the components in a Coke.
1.
2.

0.4$/kg

When Coca Cola Vietnam buys those materials from parent company,
they have much higher price than the price on the market. Explain for this,
Coca Viet Nam said that: “The reason why the raw materials are so high is
because this is a long-standing formula. It includes not only the cost of grey
matter, but also cultural”.
•

Sellingproducts at a low price:
In spite of “the high price of raw materials”, the price of a Coke is
quite cheap. Coca Viet Nam declared losses for nearly 20 years (1994 –
2012). And the reason for this situation is because the revenue can’t cover
the cost of raw materials. This table below will show you the revenues and
losses of Coca Cola Viet Nam from 2004 to 2010.

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According to the report in 2011, the total loss of Coca Cola Viet Nam
is 3.268 billion VNDs. This number far exceeds the initial investment –
2950 billion dongs. Coca Cola Viet Nam loses 100 billion VNDs each year.
The big question here is why Coca Cola still invests in Viet Nam?
Because of losing for many years, in spite of working in Viet Nam
market more than a decade, Coca Cola Vietnam doesn’t have to pay any
taxes except value – added tax and business tax.
•

Transferring the profit to parent company in form of materials cost:
Mr. Le Duy Minh – Provincial Tax Department representative said


It is very difficult for domestic company to compete with Coca
Cola if they really make transfer pricing. Fox example, if Coca Cola
Viet Nam uses transfer pricing to maximize profit for parent
company while declaring loss in Viet Nam to avoid tax duty, Coca
Cola Viet Nam will have more financial resource to invest in
marketing and advertising. Meanwhile domestic companies have to
do tax duty so they will have less advantage to compete with Coca
•

Cola.
For Coca Cola Viet Nam:
Transfer pricing not only causes a negative impact on the economy,
but also directly affects the company:
-

Suffering a big penalty:
If Coca Cola Viet Nam really does transfer pricing, they will
have to restore all taxes that they have owed government for many
years. Furthermore, they have to be accused of cheating and face
with law for that. It is ashamed that Coca Cola uses Vietnamese
employees and land, but not paying any taxes. We need to punish

-

Coca Cola as an example to others.
Dispossessing business license:
Dispossessing business license is the highest punish for Coca
Cola. We need to consider about Coca Cola case to make right


incurred are reasonable when MNCs trade with foreign
•

partners.
Resale Price Method – RPM:
This method is about using purchase prices to determine sale
prices. Especially, this method is suitable for the commercial
sector. The main principle is determination about the rate of return
on average revenue used to calculate logical deduction. The tax

agencies can realize the real profit of FDI companies.
• Cost Plus Method - CPM:
This method is suitable for manufacturing or service
providing enterprises. The transaction price is determined by
adding the cost for manufacturing or service providing to raise the
price. The tax agencies must concern about the allocation of costs
is appropriate for transferring sales or not.

Improving information and data system:

3.2.
•

One way to expand source of information is by improving professional
activities of tax agencies, especially forming a tax intelligence agency. The
Government should establish an agency within the Ministry of Finance,
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which have mission to monitor business activities, earnings, and trading

detect timely as well as handle strictly the behaviors of breaching laws in
the linking transaction activities and transfer pricing of FDI enterprises.
Thus, the tax management organ has rights to apply measures of pausing
refunding the VAT to the enterprises that report their business results
getting loss until the enterprises overcome the statute of enumerating loss
continually. This is both suitable for the international routine and

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synchronous with the Vietnamese Civil Law that defines conditions of the
existence of economic legal personality.
In order to manage tax towards the transfer pricing, the tax
management Law needs to be added with the trend of stronger legal frame
like applying APA towards the enterprises. This is a tool helping resist the
transfer pricing in Vietnam. This will be mentioned in details following.
In the long run, the government needsto set up a law of resisting
transfer pricing, and edit the related legal document such as Enterprise Law,
Investment Law, Trading Law, Competition Law, Income Tax Law, and
Civil Law. The government also needsto establish the specialized and
responsible organsagainst transfer pricing in the central, provincial and
urban class in order to supply concrete guidance in practice. The period of
inspection towards the transfer pricing must be set longer compared to the
normal ones so that it can guarantee quality and efficiency of the
inspection. These specialized and responsible organs have to assure the
work is done strictly in the inspecting and controlling business activities of
the corporation, especially importation and exportation activities.
Besides issuing and adding the law inside the country, linking other
countries about resisting transfer pricing is also very important. It comes
from the basic reason that corporations having parent company abroad and

market price according to Circular 66/2010, if tax organs find out the
difference between the price enterprises enumerate and the market price, at
the same time enterprises don’t demonstrate the relevant reasons for this
difference, it can apply level of punishment from 20% to 40% of the money
of tax evasion or levels of confinement. This depends on the level of
difference, much or little.
The sanction for tax evasion must be strong enough to guarantee the
strictness for case of breaching law in purpose. The levels of punishment
can raise the period of penalty up to 10 – year confinement or fine 5 times
as much as the money of tax evasion. After inspecting, if the tax organs find
out that the agreement price doesn’t follow the market price, it will
implement collecting tax retrospectively within 10 years (from the time of
conducting inspection). Especially, tax officers who breach law in purpose
and combine with enterprises to help them do transfer pricing must be
punished seriously. For this crime, the period of punishment could be up to
20


7 or 10 – year confinement, together with confiscating personal assets.
Besides strict punishment, there need to be clear regulars to commend and
reward those who do well their jobs, especially people who figure out
negative signs.
•

Tax rate:
One of the reasons promoting motivation of transfer pricing of FDI
enterprises is the difference of corporate income tax (CIT) rate which helps
corporations reach their goal of maximizing profits. Thus, this asks the
government to adjust the CIT rate for FDI enterprises so that the distance of
levels of CIT rate in countries is shortened. Vietnamese government

between the taxpayer and one or more foreign tax administrations under the
authority of the mutual agreement procedure (MAP) specified in income
tax treaties. Unilateral APAs involve only the taxpayer and the tax
authorities. In this case, the two parties negotiate an appropriate TPM for
tax purposes.
The APA program allows the taxpayer and the tax authority to avoid
future transfer pricing disputes by entering into a prospective agreement,
generally covering at least five tax years, on the taxpayer's transfer
prices.Each APA is handled by an APA team. One of the APA Program's
designated team leaders is responsible for assembling the team, and it will
generally consist of an economist, an international examiner, Large and
Mid-size business (LMSB) field counsel.
• Vietnam in applying the APA:
Advance Pricing Agreement mechanism was applied in Vietnam,
according to modified law on tax management. From July 1st 2013,
Vietnamese tax agencies applied APA to resolve potential transfer pricing
dispute.
The Ministry of finance promulgated circular 201/2013/TT-BTC to
guide the enterprises about implementation process when applying APA,
including: legal framework, process, roles, responsibilities and expectations
of taxpayers and tax authorities about submission and negotiating to sign
APA. That circular was effective from February 5th 2014.
APAs are negotiated in cooperation when Vietnamese tax authorities
and taxpayers have consensus about method of determining the Vietnam’s
market price, then obtain an independent transaction price.
There are 4 stages to apply APA:
1. Consultation phase
2. Official APA submission
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In order to have agreement between tax authorities and MNCs
about applying transaction prices in the future, both of them spend a
lot of resources, time. Meanwhile, the tax agencies have limited
resources, and there are so many small and medium enterprises
operating in Vietnam.
Despite earning profit or not, the enterprises still pay the tax
was agreed. However, if the enterprises get more registered profit,
the tax agencies will collect the income tax base on the excess over.
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Identifying transactions of goods and services with prices
closer to market or not, there must be audit information. However,
getting that information from foreign tax agencies is not easy.
Because they need more time to search the information, and another
reason isthat they will protect their MNCs from tax investigation.
3.5.

Advancing the professional knowledge for the tax
management department:
To follow all regulations of the government as well as assure the work
efficiency, the most basic and important thing is human, especially tax
officer, customs, other Vietnamese officers working in FDI enterprises. Tax
industry need advance the quality of human resources from the process of
recruitment.Applicants have to meet all standards the recruiters offer like
professional knowledge, understanding international laws, qualification of
foreign language and computing… In addition, the tax industry also holds
training courses including economic knowledge, create conditions for
officers to travel to other countries having experience in resisting the
transfer pricing. Practice waves should be opened for officers to experience

countries:
•

In America:
Multination corporations indicate that their profit in the US is taxed
too high (40%) or their costs are not examined completely. In that case,
they will try to minimize their taxable profit in America by moving their
profit out of the US and declare the increase in costs of activities there.
Another popular way of transfer pricing is that they invest in
pharmaceutical or electric companies which have their branches in
developing countries. Then, they transfer their most valuable assets such as
patent, trade secret…to activities in developing countries. By that way, they
can report that a large part of their profit that they earn is created in
developing countries, so they can avoid income tax they have to pay.
IRS Sec.482 is the most basic and sufficient law against transfer
pricing in the US. It defines basic regulars that the market price is
foundation to conduct setting transaction price among multination

corporations.
• In China:
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