Affiliate transactions (transfer pricing) – Part 1: Tax basis and profit transfer

Updated at 18/06/2022 - 02:43 pm

Under the impact of the period globalizationCurrently, countries tend to open their markets and attract foreign investors, especially multinational corporations to develop the domestic economy. However, when entering the market, investors always try to take advantage of many ways to get maximum benefits for themselves, eroding the tax base and shifting profits through the form of price transfer. . So what is tax base erosion? What is transfer pricing? Types of transfer pricing like?

Challenges from tax base erosion and profit shifting #

Base Erosion and Profit Shifting (BEPS) is used by multinational companies to shift profits from high tax rates to low tax rates. BEPS is becoming more and more popular through price transfer, e-commerce, thin capital, tax paradise ... According to financial experts, BEPS is tax evasion of taxpayers.

Many businesses have taken advantage of gaps and restrictions in tax policies in countries where they do business to transfer profits to countries or territories with lower or zero tax rates. .

According to the survey results of the Organization for Economic Cooperation and Development (OECD), the loss of state budget revenue from corporate income tax is about 4% - 10% of the budget revenue from global corporate income tax. equivalent to 100 - 240 billion USD / year. Thereby, BEPS is becoming a worrying popular trend, affecting the investment and business environment significantly, reducing the transparency of the tax system, leading to unequal competition. taxes between countries and increases the taxpayer's risk of complying with tax laws.

Undeniably, BEPS is now a global problem, with reciprocal interactions between countries (between investment countries and host countries), has become a big challenge for governments, especially developing countries. According to the OECD, BEPS is of particular importance for developing countries because taxes are the main source of revenue for the state budget, especially corporate income tax.

However, over the past time, the act of "tax evasion / tax avoidance" is most evident in the "price transfer" behavior of enterprises, focusing mainly on FDI enterprises with cross-border transactions in the commercial sector. In e-commerce, a number of foreign enterprises have e-commerce activities and earn income in Vietnam but have not fully fulfilled their tax obligations.

Government action of Vietnam #

In order to ensure that BEPS solutions are effectively and effectively implemented, and to continue to improve these solutions during implementation, the OECD has established a Joint Cooperation Forum comprising member countries and Not a member of the OECD and the G20 jointly implement the BEPS Joint Cooperation Forum on a global scale, including developing countries. Participation in the Joint Cooperation Forum will give countries the support they need to implement effective BEPS containment solutions that help protect revenue and tax bases.

Recognizing this, in order to proactively prevent BEPS, Vietnam has taken relatively strong measures to deal with the abuse of tax agreements by Vietnam with other countries. Accordingly, since 2015, the Ministry of Finance has coordinated with international experts to preliminarily review the contents of the action program against BEPS and identified the most urgent and high-risk issues. in relation to BEPS for Vietnam.

Vietnam commits to implement at least 4 actions in the overall solution package of 15 actions to prevent BEPS (with time and roadmap depending on conditions required for economic development and international integration of Vietnam. Male). Basically, these standards are consistent with the key tasks that the Ministry of Finance of Vietnam implements in the period 2016-2020. Specifically:

First, In the field of e-commerce: The Ministry of Finance will draft general legal documents on the basis of reference to other countries' practices on management methods and applicable policies, especially for cross-border business translation; Tax rates apply to electronic products and services; consider, study the application of regulations on conditions forming permanent establishments in the field of e-commerce according to international practices.

Monday, in the area of ​​tax agreements: Review, amend and supplement provisions to combat tax abuse / avoidance under the Agreement; Study and apply the dispute settlement mechanism according to bilateral agreements; Proposing to conclude negotiations on a Multilateral Tax Agreement; Report the Government's participation in the International Tax Multilateral Agreement and participation in Multilateral Tax Management and Information Exchange Forums.

Tuesday, In the area of ​​transfer pricing: On November 05, 11, the Government issued Decree 2020/132 / ND-CP on tax administration applicable to enterprises with associated transactions to replace Decree No. 2020 /. 20 / ND-CP provides for tax administration applicable to enterprises with associated transactions on February 2017, 22. The timely issuance of these documents helps tax authorities to have "stronger and more flexible" management tools to improve the efficiency of tax administration for enterprises with associated transactions.

Wednesday, in the tax sector: Review regulations on incentives, exemption and reduction, consider and supplement regulations on interest rates on equity that are included in deductible expenses when calculating corporate income tax and include into the proposed program to amend the Law on Corporate Income Tax.

What is transfer pricing? #

Transfer pricing is the fact that business entities (mainly multinational companies - MNCs) and companies with interrelated relationships implement price policies in order to change exchange value. Goods, services and assets in relation to parties within the corporation or affiliated group are not subject to market prices for the purpose of minimizing the amount of tax payable by the group as a whole. There are also a number of other purposes such as: dominating the market, quickly recovering capital in investment-receiving countries ...

Price transfer activities erode tax bases and transfer profits (Base Erosion and Profit Shifting - BEPS) to countries with lower tax rates.

Starbuck the typical example of transfer pricing #

Starbucks is one of the leading coffee brands in the world. Starbucks is present in many countries and brings in billions of dollars in revenue. In addition to the "motherland" which is the US, the UK is the largest market for Starbucks. The UK market alone is enough to bring Starbucks less than $ 1 billion a year.

At the end of September 9, Starbucks had 2012 stores. But after a year, the number of stores fell to 593 stores. Despite the decline, the number of Starbucks stores in the UK is still a huge number for any coffee brand.

However, sometimes the size of the operation and the revenue do not go together with the profit. High revenue, not necessarily big profits. Even the profit may be negative. Starbucks operations in the UK market are the second case.

In 2012, Starbucks announced revenue of 413 million pounds (equivalent to 658 million USD) in the UK market, up 4% from the previous year. The sky-high sales brought Starbucks a loss of 30 million pounds. This is unusual, but for those who care about Starbucks, this unusual thing turns out to be normal because of the high revenue and heavy losses of Starbucks happening over the past 15 years. 

The cause of the loss has been clearly explained by Starbucks. Although Starbucks in the UK is doing well, revenue cannot cover costs because Starbucks has to pay "royalties" a lot to its parent company. But this "royalty fee" depends on the parent company, not by the market. The same thing happened with Coca Cola in Vietnam, when Coca Cola had to pay towering monopolies for its raw materials to its parent company.

To achieve that goal, they set up a network of parent and child companies that are tied together, following the motto as complex and tangled as possible. The parent company is headquartered in a place where the tax is low.

Subsidiaries where the tax is high often do not have financial and accounting autonomy, pay very high royalties and buy brands, and even pay interest to the parent company applies to the transfer. profits out of a country with a high tax rate, eroding the tax base.

What is the cause of the transfer pricing? #

Objective reasons

  • First, the price transfer activity derives from the right to freely decide (the right to buy and sell products and services at the desired price) of economic entities in the business lines and commodities that are allowed by law. . 
  • Strong globalization forced governments to open their economies. This has created favorable opportunities for MNCs to expand their business by establishing subsidiaries, branches in foreign countries ... creating a "link" for the price transfer.
  • Objective reasons come from differences in tax policies, accounting and auditing regimes, strategies to attract foreign direct investment (FDI) of countries, etc. Multinational companies develop transfer pricing strategies.
  • Control of multinationals is beyond the control of one country.

Subjective reasons

  • The legal framework as well as policy mechanisms related to the control of price transfer activities in many countries (especially in developing and underdeveloped countries) still has many shortcomings and imperfections. 
  • Multinational companies have strong economic potentials, high level of corporate governance and financial management. Meanwhile, the countries receiving investment, the qualifications of tax managers, finance, customs ... still have many limitations. Because of this difference, MNCs will find it easy to "cover up" their price movements,

Some signs of transfer pricing #

Some of the key indicators of price shifting include:

  • Businesses reporting losses for 2 or more consecutive years since its establishment;
  • Enterprises have abnormal situation of profit or loss or arising loss situation;
  • Businesses transfer transactions with businesses in low tax countries;
  • Enterprises with much lower profit margins than other businesses in the same industry or businesses in the same group;
  • Enterprises have production costs lower or higher than the general market level;
  • The enterprise has major purchase and sale transactions, accounting for a high proportion with associated companies;
  • FDI enterprises are subject to the control of input and output prices of the parent company.

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