In a globalized business environment, related-party transactions have become an essential part of multinational corporations and domestic enterprises with related-party relationships. However, alongside the advantage of optimizing resources and profit allocation, there are significant legal risks associated with transfer pricing. Incorrectly declaring related-party transaction prices or intentionally adjusting prices to reduce tax liabilities can lead to intense audits, tax reassessments, and heavy penalties from tax authorities.

So, what is transfer pricing? Why should enterprises exercise particular caution when engaging in related-party transactions? This article will help you understand the nature of transfer pricing, current regulations, and common mistakes that can place an enterprise in the spotlight of tax authorities.

1. What are related-party transactions and transfer pricing?

Related-party transactions are generally understood as economic, financial, and commercial transactions that occur between parties with a close relationship, including parent companies and subsidiaries, companies with common controlling shareholders, or enterprises with mutual ownership and management. These transactions may include the sale of goods, the provision of services, lending, the transfer of intangible assets, or other financial dealings.

Transactions between companies with a related-party relationship are understood as related-party transactions. These may include various transactions such as buying, selling, exchanging, leasing, lending, borrowing, transferring, or assigning goods, as well as providing services; agreements to purchase, sell, and use resources such as assets, capital, labor, or cost-sharing between related parties—excluding business transactions involving goods or services regulated by the state’s pricing regulations in accordance with the law on prices. Determining whether parties have a related-party relationship depends on the specific case and involves several criteria, not solely the parent-subsidiary relationship. For example:

• An enterprise directly or indirectly holds at least 25% of the capital contribution of the owner of another enterprise;
• Both enterprises have at least 25% of their capital contributed by the owner, who is directly or indirectly held by a third party;
• One enterprise is the largest shareholder in terms of capital contribution and holds at least 10% of the total shares of another enterprise, either directly or indirectly;
• Two enterprises have more than 50% of the members of their management board, or share at least one management board member with the authority to decide on financial policies or business operations, who is appointed by a third party;
• Two business establishments have a relationship as the headquarters and a permanent establishment, or both are permanent establishments of a foreign organization or individual, and other similar cases.

Transfer pricing is the practice of adjusting prices in related-party transactions to optimize an enterprise’s profits, often with the goal of reducing tax liabilities. By pricing transactions in a way that deviates from market principles, an enterprise can shift profits from high-tax jurisdictions to low-tax jurisdictions, thereby reducing its overall tax burden. This not only affects government tax revenues but also creates an imbalance in the business environment.

A practical example of transfer pricing can be seen in multinational corporations, where a subsidiary in high-tax country purchases goods from its parent company in a low-tax country at prices higher than the market rate. This reduces taxable profits in the high-tax country and increases profits in the low-tax country, thereby lowering the group’s overall tax liabilities. Another common form involves the transfer of intangible assets (such as trademarks, patents, and technology) between related companies at inflated prices to optimize tax obligations.

Thus, while related-party transactions are normal economic activities, they can be exploited for transfer pricing, which undermines the transparency of the tax system. As a result, tax authorities are tightening regulations and requiring enterprises to declare transactions transparently and comply with arm’s length principles.

2. The risks enterprises may face when engaging in transfer pricing

Transfer pricing is one of the issues that tax authorities are particularly concerned about, as it can lead to tax revenue loss and create unfairness in the business environment. As a result, enterprises engaged in transfer pricing may face significant risks, ranging from tax audits and reassessments to penalties and negative impacts on brand reputation.

Tax audits and tax reassessments 

Tax authorities have the right to inspect and audit related-party transactions of enterprises to determine whether transfer pricing is being practiced. If signs of price manipulation to reduce tax liabilities are found, tax authorities will adjust the transaction prices according to the arm’s length principle. This can lead to enterprises being reassessed for underreported taxes, and they may even face fines if there are signs of serious violations.

Additionally, being audited by tax authorities can result in significant time and resource costs for enterprises to provide documentation, evidence, and engage in discussions with the authorities. If the enterprise does not have valid records to support the transfer pricing or fails to prove that the transactions comply with regulations, there is a risk that the enterprise may be subject to higher tax rates or face tax assessments based on the tax authority’s evaluation.

Penalties and Sanctions

Incorrectly declaring transfer prices not only leads to tax reassessments but can also result in administrative penalties as stipulated by law. Specifically:

• Penalty for incorrect or incomplete declaration of related-party transactions: If an enterprise fails to fully declare or intentionally conceals related-party transactions, the penalty can reach hundreds of millions of VND.
• Late payment penalties: If an enterprise is subject to tax reassessment due to transfer pricing, it will also incur additional late payment penalties, calculated based on the tax amount reassessed.
• Tax assessments: In serious cases, tax authorities may apply tax assessments, which means determining the tax the enterprise must pay based on available data without reviewing the company’s financial reports. This could lead to the enterprise having to pay higher taxes than if it had declared correctly.
• Tax fraud penalties: If it is determined that the enterprise intentionally underreported or falsified information to evade taxes, it may face criminal charges with heavier penalties, including suspension of operations or the revocation of its operating license.

Impact on Enterprise Reputation

In addition to financial penalties, being discovered for transfer pricing can cause significant harm to a company’s reputation and credibility. In the age of information transparency, enterprises penalized by tax authorities for transfer pricing practices may face negative media coverage, diminishing trust from customers, partners, and investors. This can manifest in the following ways:

Loss of trust from customers and partners: Partners may be reluctant to collaborate with an enterprise that has a history of violating tax laws.

Difficulty in raising capital: Financial institutions and investors may reconsider funding or investment decisions due to the legal risks associated with the enterprise.

Limited development opportunities: Companies under transfer pricing investigation may be added to watchlists or face restrictions in dealings with large corporations or international organizations.

While transfer pricing may help an enterprise optimize profits in the short term, it violates legal regulations and can lead to serious financial, branding, and sustainability consequences. Therefore, enterprises must be cautious when declaring related-party transactions and ensure compliance with legal regulations to avoid unnecessary risks.

Time of writing: 11/02/2025

The article contains general information which is of reference value, in case you want to receive legal opinions on issues you need clarification on, please get in touch with our Lawyer  at  info@cdlaf.vn

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