In this article
When most goods and materials are bought from the parent company, transfer pricing (giá chuyển giao) determines almost all of an FDI company's profit in Vietnam. Persistent losses while revenue keeps growing is a signal the tax authority tends to notice. This article helps you read your own profit margins, choose a suitable comparison method and keep the right data. It draws on the accounting experience of ACCA Consulting Vietnam.
1. Why do purchases from the parent company carry transfer pricing risk?
The price paid to the parent is not the result of negotiation between two independent parties. The group may set prices according to its global strategy: shifting profit to low-tax locations or to the company that owns the brand. As a result, the Vietnamese subsidiary may be left with a very thin margin, or even a loss.
Vietnamese law requires the prices of transactions with related parties to comply with the arm's length principle. If the company cannot prove this, the tax authority may reassess the price or profit, leading to back-assessed corporate income tax (CIT/TNDN) and late-payment interest of 0.03% per day on the tax paid late.
2. Reading profit margins: a hypothetical distributor case
Company B (illustrative example) imports equipment from its parent for distribution in Vietnam. Annual revenue is VND 50 billion, cost of goods sold VND 47 billion, and selling and administrative expenses VND 2.75 billion. The gross margin is only 6% and the net margin 0.5%.
An independent distributor in the same industry usually has to bear its own marketing, warehousing and sales team costs. It therefore needs a gross margin large enough to cover these costs and still make a profit. If a dataset of comparable independent companies shows clearly higher margins, the purchase price from the parent may be set too high.
Illustrative example. The median figures are assumptions; real data must come from an appropriate comparables database.
View as table
| Company B | Median of independent companies (assumed) | |
|---|---|---|
| Gross margin | 6% | 18% |
| Net margin | 0.5% | 3% |
Warning signs to review yourself
- Losses for several consecutive years while revenue grows and the group remains profitable.
- Purchase prices from the parent rise while selling prices in the market stay the same.
- The Vietnamese company bears large marketing costs to build the group's brand without being compensated.
- Year-end price adjustments without a contract or clear formula.
- A contract manufacturer receives processing fees lower than the costs it actually incurs.
- For the same item, the price paid to the parent is higher than the price paid to independent suppliers.
3. Transfer pricing methods: which one to choose?
The related party transaction regulations set out a group of methods similar to international guidance. The choice depends on the company's functions and the data available.
| Method | Usually suitable when | Data to keep |
|---|---|---|
| Comparable uncontrolled price | The same item is bought/sold with independent parties | Invoices and contracts for the same item bought from independent parties, delivery terms |
| Resale price | A distributor buys from the parent and resells without adding much value | Gross margin, marketing, warehousing and warranty functions |
| Cost plus | Contract processing or manufacturing to the group's orders | Cost sheets, overhead allocation basis, mark-up on cost |
| Comparable profits | No direct price comparables; common for FDI companies | Functional analysis report, set of comparable companies, multi-year net margins |
| Profit split | Both parties contribute significant intangible assets | Analysis of each party's contribution, consolidated profit data |
In practice, the comparable profits method is the most widely used for distributors and contract manufacturers because comparable data is easier to find. Whichever method you choose, you must be able to explain the reason for choosing it in the transfer pricing documentation (if you are required to prepare it).
4. How to prevent transfer pricing risk
- 1Define the functions
Describe clearly whether the company is a limited-risk distributor, a contract manufacturer or a full-fledged manufacturer.
- 2Agree a pricing policy with the group
Ask the group to apply a target margin for the Vietnamese company from the start of the year.
- 3Monitor margins quarterly
Compare actual margins with the target range to spot deviations early.
- 4Adjust prices properly
If an adjustment is needed, have a contract addendum, a calculation formula and valid invoices and documents before closing the books.
- 5Keep the records
Keep contracts, price lists, approval emails and analysis reports with the year's documents.
5. What should the accounting team prepare during the year?
- A list of related parties and transaction types, updated every quarter.
- A purchase ledger that separates related and independent suppliers.
- Profit and loss reports by product line or by function.
- Framework agreements, pricing policies and the group's price adjustment formulas.
- Reconciliation of purchase figures with the related party transaction appendix at CIT finalization.
- Customs declarations and payment documents matching the contract prices.
Accountants do not set transfer prices themselves, but they are the first to see the numbers. A quarterly margin report to the board of directors helps the company negotiate with the group before the financial year ends, rather than having to explain itself after a tax audit.
FAQ
Will a loss-making FDI company definitely face a transfer pricing reassessment?
Not necessarily. Losses may result from the early investment phase, a market downturn or legitimate business reasons. What matters is that the company has documents explaining the cause and proving that its purchase prices comply with the arm's length principle.
Are customs value and transfer pricing related?
Yes. The same purchase price from the parent affects both the dutiable value for import duty and CIT. Adjusting prices after import may require supplementary customs declarations, so the two functions need to coordinate.
Must every FDI company prepare transfer pricing documentation?
Not in every case. Some companies are exempt from preparing documentation under current regulations, but they must still file the related party transaction appendix and comply with the arm's length principle.
Review your margins before the year-end close
ACCA Consulting VN offers a free preliminary review of your related party transaction records. Accounting services based in Ho Chi Minh City, working remotely with FDI companies nationwide.
Free consultationZaloWhatsApp
