On June 22nd 2020, Mr. Jack Nguyen, Partner at Mazars in Vietnam, offered his views about transfer pricing practice by foreign companies operating in Vietnam and suggestions on what the Vietnamese authorities can do to limit transfer pricing transgression. The article looked at Starbucks' transfer pricing practice as an example, which taken as a whole is not necessarily a bad thing.
June 22nd, 2020
According to Mr. Jack Nguyen, "Regarding the Starbucks case, it’s probably not surprising that Korean tax authorities are looking at the coffee chain’s Transfer Pricing (TP) practice as its believed that there are a lot of inter-company royalty charges and goods purchased between Starbucks in Korea and Starbucks in other jurisdictions. Whether the claims against Starbucks in Korea are legitimate is another matter as Starbucks may be employing standard tax planning practice."
Regarding TP in general, this is common practice for multi-national companies operating in multiple countries and it’s not necessarily a bad thing. Companies in general are cognizant that their TPs will be scrutinized thus they generally don’t abuse this practice. TP practice of a company should be assessed by the type of transactions and whether these transactions are reasonable and at market price.
If we look at Starbucks business model as an example, there are some common transactions such as royalty/ franchising fee, management service fee, purchase of raw materials, etc. For licensing fees, the charged percentages rate over revenue are recommended to be tested against other similar franchise contracts of the food and beverage industries, which are called Comparable Uncontrolled Price (“CUP”) Method. Other transactions such as support services or material purchases, the transactions are looked at on a case by case basis to decide the optimal method for testing the transacted prices or profit ratios. For example, the independent prices of coffee beans sourced from local coffee farms and the value disclosed under the Group’s compulsory TP Master File can be a starting point for considering if input expenses are excessively overpriced or not. In case it is not possible to test the arm’s length nature on a transactional basis, then the Company’s profitability ratios can be tested against those of other “comparable companies”. If the arm’s length test produces material variances with market prices, then there may be justification for further review of the company’s TP practice, which normally occurs when companies show continuous losses whereas other companies in similar industry are profitable.
Vietnam has normally used OECD developed methodology to question or challenge companies’ TP practice, including the above mentioned TP Master File under three-tiered TP documentation. Yet, the overriding concern that both advisors and taxpayers have is the database employed by the tax authority. There are known cases where the tax authorities use “secret database” that is not transparent or lacking any market basis, which results in further appeals from the taxpayers. In the most recent draft revision to Decree 20/2017/ND-CP, there is a movement by the government towards a broader and more efficient database. Once the government moves toward a “commercial database” as mentioned in the draft, that can be accessed by both the tax payers and the tax authorities, then there will be less disputes and more acceptance between the two parties.
In addition, based on our observation of recent high profile TP audits in Vietnam, such as Big C and Metro cases, it appears the essence of the government’s TP challenges are still Corporate Income Tax-based, meaning the tax authorities prefer to focus on areas such as whether the incurred expenses have the required supporting documents (fox example whether franchising contract are registered with the Ministry of Industry and Commerce) rather than using standard TP methodology. Therefore, the government need to use “commercial database” that is transparent, efficient and widely available and employ TP tools for market benchmarking to review companies’ TP practice. Once these are applied and there are still signs of irregularities, then there is a basis to question whether the companies are evading taxes.
On 18 June 2021, the Ministry of Finance issued Circular 45/2021/TT-BTC (“Circular 45”) providing guidance on the implementation of Article 41 of Decree 126/2020/ND-CP (“Decree 126”) dated 19 October 2020 of the Government on the application of the Advance Pricing Agreement (“APA”) on tax administration for companies having transactions with their related parties.