The new instrument to combat transfer pricing

Associate Professor, Doctor. Le Xuan Truong, the Dean of the Faculty of Continuing Education and Senior Lecturer of Taxation, the Academy of Finance replied to the interview of the Customs Newspaper on this issue.

Taking advantage of transfer pricing policy to cause loss of tax revenue to the State budget. In your opinion, what is the meaning of the Ministry of Finance Draft Decree guiding on combating transfer pricing at the moment ?

-The Ministry of Finance has proposed to supplement the legality of the legal normative documents on transfer pricing control in the Circular of the Ministry of Finance which is upgraded to the Government’s Decree. This is the effort of the Ministry to combat transfer pricing. 19 years ago, the Ministry of Finance took the first action to control transfer pricing and issued Circular 74/1997/TT/BTC guiding on tax for foreign investors, and Circular 89/1999/TT-BTC, Circular 13/2001/TT-BTC and Circular 117/2005/TT-BTC. The documents above have shown the spirit of transfer pricing is defined under the principle of the Arm’s length price. However, the regulations of the legal documents are only applied for foreign direct investment enterprises and not applicable to domestic enterprises, meaning that focus on combatting international transfer pricing and there is no solution for domestic transfer pricing.

Circular 66/2010/TT-BTC has been issued which is the first legal document on control of transfer pricing which is applied for all types of enterprises, including foreign direct investment enterprises and other business. Furthermore, the limitations and shortcomings of Circular 117/2005/TT/BTC have been over come. Basically, the provisions and the market price determination methods of Circular 66/2010/TT-BTC were in line with international practice. Thanks to Circular 66/2010/TT-BTC we have the legal framework to prove and handle the violations on control transfer pricing of Metro, Keangnam, etc.

However, in the implementation of Circular 66/2010/TT-BTC compared to actual tax administration, there are some shortcomings in the legal documents on transfer pricing which need to be amended, supplemented and upgraded. Hence, the Decree issued on transfer pricing administration in controlled transactions to combat transfer pricing in this time will create solid legislation and enhance the effect of combating transfer pricing and losing tax revenue to the State budget.

In your opinion, what is the meaning of the draft which requires many ministries, agencies to joint in combating transfer pricing?

- Management of tax in general and transfer pricing administration in particular is not the responsibility of only the Finance sector. The Law on Tax administration also stipulates the responsibility of ministries, agencies, localities and organizations, individuals in the society on Tax administration. Transfer pricing administration is not an exception. In order to control transfer pricing requires full information of the associated parties and controlled transactions. In addition, there are many problems of the determinations of the controlled transactions valuation and the nature of transactions in the market economy which require professional knowledge in many fields. Therefore, the Draft Decree has required ministries, agencies to join in combating transfer pricing. This is an indispensable requirement as well as the responsibility of ministries, and agencies in the implementation the function of their State management. So it can improve the efficiency and effectiveness control of transfer pricing, because this is a difficult and complex field which demands expertise in many areas.

Do you have any additional idea for the Draft Decree?

- Basically, the contents stipulated in the Draft Decree are quite full, comprehensive and in line with actual requirements. In order to further be consistent with the real situation on the transfer pricing administration, I have some proposals as follow:

firstly, the Draft Decree needs to be supplemented with the definition of the associated parties in the case of transactions between enterprises with an individual not only a transaction between enterprises. Accordingly, not only in the case of two enterprises managed or controlled in personnel, financial and business affairs by individuals being members of a family who have relations between husband and wife, parent and child (regardless of natural, adopted children or children-in-law); siblings of the same parent (regardless of natural or adoptive parent); grandparent and grandchild of the same blood line; aunt or uncle and niece or nephew of the same blood line are all considered as associated parties but also the relations as mentioned above between enterprises and the individual is considered as an associated party. This additional regulation prevents transfer pricing and fraud of the Enterprise Income Tax and Personal Income Tax.

secondly, a number of terms in the Draft Decree which are referred from the international documents that need to be amended for easy understanding, and more authentic.

thirdly, the Draft Decree needs to be supplemented by the sanctions of handling the violations on transfer pricing.

Thank you!