Knocking transfer pricing on the head

Transfer pricing is often associated with foreign-invested firms and multi-nationals. Are local firms immune?

Transfer pricing is the act of products and services transfer between members of the same economic groups or multinationals not conforming to normal transaction prices in the market. Its prime objective is to minimise tax obligations and optimise profits by taking advantage of tax preferences or tax differences among regions and nations. Hence,  transfer pricing may also cover local firms.

Is transfer pricing by local firms a growing trend?

The conclusion will be available after relevant state agencies take drastic measures to fight against the phenomenon. In fact, several big business groups took advantage of state tax incentives to minimise their tax obligations.

For instance, they founded subsidiaries in several locations for profit transfer from areas without tax incentives to areas with tax preferences, or from effectively running units to loss-running ones through products and services provision with prices different from market rates.

Transfer pricing is now critical in mining. A number of mining companies have founded independent businesses, one operating in extraction and the other in distribution. Mining units sold products to distribution units at half prices, causing great losses to state coffers.

What other areas have got involved in transfer pricing besides mining?

Services trading, particularly in hotel, restaurant and entertainment services. Businesses active in these fields usually declare rent rates lower than market rates then transfer the surplus to associated travel firms.

Northeastern coastal Quang Ninh province currently operates almost 80 tourism companies with 500 cruises bringing visitors to tour Halong Bay. One ticket fetches around $100-120 for an overnight tour on ships, however firms just declare ticket prices half of the amount at $40-60 per ticket, according to Quang Ninh Tax Department. This creates a dent on the state budget every year.

Would Quang Ninh authorities consider setting floor ticket rates to abate tax losses in tourism services trading?

Setting floor ticket rates is impossible since visitor ticket prices do not belong to the list of products and services with prices controlled, set and stabilised by the state. Besides, in the market economy the state should not intervene deeply into the trading prices of services.

Close coordination between relevant state agencies in tax, police, finance and market management is crucial to fight against transfer pricing in local firms.

Are motorbike and auto dealers selling products at prices higher than those announced by manufacturers?

This is not a case of transfer pricing, since dealers are not subsidiaries or joint ventures of manufacturers. That is a case of trade fraud. To tackle the situation, the Ministry of Finance enacted Circular 71/2010/TT-BTC on tax fixing towards motorbike and auto trading units with product invoice prices lower than market rates.

Accordingly, when detecting dealers selling products at prices higher that those set in vouchers tax bodies will have the right to deliver a new price rate compatible to market rates to serve as a ground for taxable amount calculations.