Transfer Pricing in Parent-Subsidiary Companies in Vietnam

1. What is Transfer Pricing?

Transfer pricing refers to the practice of setting prices for transactions involving goods, services, or assets between related enterprises, particularly within parent-subsidiary structures or multinational corporations, in a manner that deviates from market value. The primary objectives of transfer pricing are often to optimize profits, minimize corporate income tax obligations, or shift profits abroad, thereby circumventing Vietnam’s tax regulations. This practice is strictly regulated under Decree 132/2020/NĐ-CP on tax administration for enterprises with related-party transactions and Decree 20/2025/NĐ-CP, which amends Decree 132/2020/NĐ-CP.

Transfer pricing is not merely a technical accounting issue but also poses significant legal challenges, particularly as Vietnam intensifies oversight of foreign investment activities and related-party transactions to ensure financial transparency.

2. Indicators of Transfer Pricing

Based on practical observations and legal regulations in Vietnam, transfer pricing can be identified through the following indicators:

• Abnormal Pricing in Related-Party Transactions: Foreign-invested enterprises (FDI) often set inflated prices when importing machinery, equipment, or raw materials from their parent company or related entities abroad. Conversely, export prices are set below market value, resulting in reported losses or low profits in Vietnam, while the parent company enjoys high profits. Example: A subsidiary in Vietnam imports equipment from its parent company at a price significantly above market value, inflating depreciation costs and reducing taxable profits.

• Use of Interest Expenses to Shift Profits: The parent company supplies raw materials or components on deferred payment terms, then charges high interest rates on these loans. Profits from the subsidiary’s operations in Vietnam are transferred abroad as interest expenses, reducing tax liabilities.
• Unusual Advertising and Promotional Expenses: Some FDI enterprises exploit Vietnam’s tax incentives, such as deductions for advertising expenses, to fund global brand promotion campaigns for the parent company rather than activities specific to the Vietnamese market. This increases the subsidiary’s costs, lowering taxable profits.
• Misrepresentation of Investment Value: In economic-technical feasibility studies, FDI enterprises may overstate the value of machinery, equipment, or proprietary technology, creating inflated investment capital. This allows faster repatriation of capital through related-party transactions.
• Profits Inconsistent with Industry Norms: Compared to peers in the same industry, FDI enterprises engaging in transfer pricing often report unusually high costs or low profits, sometimes incurring continuous losses over multiple years despite stable business operations.

3. Legal Risks of Transfer Pricing

Transfer pricing carries significant legal risks, particularly as Vietnam strengthens its regulatory framework for related-party transactions. Key risks include:

• Tax Arrears and Administrative Penalties: Pursuant to Article 16 of Decree 132/2020/NĐ-CP, tax authorities may apply market-based pricing methods to adjust related-party transaction prices if transfer pricing is detected. Violating enterprises may face corporate income tax arrears, administrative fines ranging from 20% to 50% of the underpaid tax, and interest on late payments.
• International Legal and Reputational Risks: Related-party transactions that violate Vietnam’s commitments under double taxation avoidance agreements may lead to international legal disputes. Such violations can damage an enterprise’s global reputation and strain contractual and partnership relations.
• Negative Impact on Vietnam’s Economy: Transfer pricing results in tax revenue losses, reducing financial resources for economic and social development. It also creates unfair competition between domestic and FDI enterprises, undermining the transparency of Vietnam’s investment environment.
• Risk of Dissolution or Bankruptcy: Some FDI enterprises use transfer pricing to repatriate capital quickly, after which they may cease operations, sell the business, or declare bankruptcy, causing losses to partners, employees, and the local economy.

4. Solutions to Mitigate Transfer Pricing Risks

To minimize legal risks and ensure compliance, enterprises should adopt the following measures:

• Strengthen Internal Control Capabilities: Establish a team of experts in international tax and market pricing to monitor related-party transactions. This team should be trained in tax law, analytical skills, and global market trends.
• Engage Professional Consulting Services: Hire reputable audit or tax consulting firms to ensure related-party transactions comply with legal requirements and align with market prices, reducing the risk of tax adjustments.
• Establish Transparent Pricing Policies: Develop clear pricing policies for related-party transactions based on legally recognized pricing methods, as outlined in Article 7 of Decree 132/2020/NĐ-CP, to avoid suspicions of transfer pricing.
• Enhance Regulatory Oversight: Tax authorities should intensify inspections and audits of FDI enterprises showing signs of transfer pricing, leveraging digital technologies and international databases to detect irregular transactions effectively.

Transfer pricing in parent-subsidiary companies poses a significant challenge for both enterprises and regulatory authorities in Vietnam. This practice not only leads to tax revenue losses but also exposes enterprises to substantial legal risks, including tax arrears, administrative penalties, and international disputes. Enterprises must strictly comply with Decree 132/2020/NĐ-CP and Decree 20/2025/NĐ-CP, proactively prepare related-party transaction documentation, and cooperate closely with tax authorities to ensure transparency. Concurrently, regulatory authorities should continue refining the legal framework, strengthening oversight, and adopting technology to foster a fair and transparent business environment, thereby promoting sustainable foreign investment in Vietnam.

Disclaimer:

This article is intended for informational purposes only and does not constitute legal advice from HTH & Partners. The content represents the views of HTH & Partners and is subject to change without prior notice.

The legal provisions referenced in this article were valid at the time of publication but may have been amended or repealed by the time of reading. We strongly recommend consulting a qualified legal professional before applying any information contained herein.