Transfer Pricing Inspections have become a significant concern for businesses, especially in the aftermath of the COVID-19 pandemic. The prolonged outbreak in Vietnam, lasting from July until now, has led to social distancing measures being implemented in the Southeastern provinces, the Mekong Delta, and Hanoi, which have affected the country's overall economic growth. As a result, the GDP for the third quarter of 2021 is estimated to have decreased by 6.17% compared to the same period last year, marking the sharpest decline since Vietnam began reporting quarterly GDP figures in 2000. In this article, RSM Vietnam will help businesses find answers to the question, "How can you minimize risks in transfer pricing inspections in the context of a pandemic?"
Table of contents:
Risk when explaining losses or low profits to tax authorities
4 ways to minimize the impact of the Covid-19 pandemic before a transfer pricing inspection
How can RSM Vietnam help businesses?
1. Risk when explaining losses or low profits to tax authorities
During the COVID-19 pandemic, many businesses had to temporarily suspend their operations as required by the government. It is inevitable that businesses may incur losses due to force majeure events. The occurrence of losses creates significant risks for businesses that have transactions with related parties. Businesses will have to explain the losses or low profits to tax authorities. Demonstrating the impact of the pandemic on business operations is crucial to show tax authorities that the losses or low profits are not due to transfer pricing manipulation.
Furthermore, in 2020, the Vietnamese government issued Decree 132/2020/NĐ-CP, which includes provisions narrowing the range of the interquartile range (specifically raising it from the 35th percentile to the 75th percentile of the statistical probability function). This has made it more challenging for businesses to demonstrate that prices in related-party transactions comply with the arm's length principle. Therefore, based on RSM Vietnam's experience, companies should prepare in advance for the reasons to explain in transfer pricing documentation, taking into account the impact of the COVID-19 pandemic on their business, and gather relevant evidence.
2. 4 ways to minimize the impact of the Covid-19 pandemic before a transfer pricing inspection
Generally, RSM Vietnam suggests some actions that businesses can take to minimize the impact of the Covid-19 pandemic before the transfer pricing inspection, such as
Conduct an internal risk assessment of transfer pricing within the group
The spread of the Covid-19 pandemic in each country and the government policies implemented to address the disease vary. It is necessary to exchange information on the pandemic's impact in each country among affiliated companies and assess the risks accordingly.
Therefore, enterprises need to take several steps, such as: Reevaluate the allocation of profit-generating activities throughout the entire value chain within the group; Restructure intercompany agreements within the group; Assess the economic benefits, functions, and risks of companies within the supply chain; Optimize operational models and reduce risks (including tax risks) for post-Covid-19 business operations.
Reassess legal compliance with transfer pricing
The main message from the Government and the tax authorities in 2021 is to enhance tax audits and examinations, focusing on transfer pricing activities, and increasing the detection and prevention of transfer pricing practices to achieve the goal of enhancing taxpayer compliance. Therefore, to avoid queries related to related-party transactions, conglomerates with subsidiary companies in Vietnam, as well as domestic businesses engaging in transactions with related parties subject to different tax rates, need to assess their internal pricing policies and compliance strategies.
Additionally, businesses should adjust their pricing policies to ensure profitability for entities with low risks and analyze profit fluctuations to demonstrate compliance with tax management regulations for entities engaged in related-party transactions.
To demonstrate and explain that the losses incurred are entirely due to the impact of COVID-19 and not related to improper related-party pricing practices, businesses need to analyze and quantify the causes stemming from commercial, financial, economic, and pandemic-related activities.
Some of the reasons could include: a decrease in orders, disruptions in revenue sources, supply chain interruptions, cost increases due to decreased productivity, costs associated with difficult debt recovery, costs incurred due to temporary or permanent employee layoffs, maintenance costs for unused physical assets, or other unusual expenses. Recording and quantifying losses related to these causes should be done appropriately and consistently.
If possible, businesses should proactively engage with tax authorities regarding appropriate approaches related to transfer pricing policies during the pandemic. Additionally, seeking the tax authority's opinion on a proper approach is advisable. These exchanges will help tax authorities update their understanding of business operations, enabling them to formulate policies that align with the business and regulatory landscape in Vietnam.
Thoroughly prepare the transfer pricing documentation
Preparing comprehensive transfer pricing documentation with complete information is one of the crucial steps to ensure a business's compliance. Each company's national documentation should provide detailed information on the impact of the Covid-19 pandemic on low business performance, such as production volume, production capacity, capital injection, and extraordinary expenses. In addition to analyzing the impact on the company, careful preparation is also needed to analyze the future impact of the pandemic on the industry and supply chain.
Have a plan for audits, transfer pricing inspections, and safeguarding pricing policies
Companies should review their intra-group agreements and, based on the national documentation, prepare responses to potential questions that tax authorities may raise. Depending on the agreements with affiliated parties, the participating parties may need to share corresponding risks with companies in the group. Fees for providing intra-group services from abroad may need to be adjusted downwards, as the benefits provided may be lower than in previous years before the pandemic.
For force majeure clauses, companies should collaborate with the legal department of the group to review these clauses in agreements with suppliers who are related parties. Additionally, it's possible to consider activating compensation clauses due to the impact of COVID-19, such as late delivery or delayed payments. Furthermore, the company can quantify significant impacts and analyze them in the transfer pricing documentation for the company in Vietnam, supported by specific statistical evidence.
In addition to the documentation mentioned above, company personnel should also be prepared to address potential questions that tax authorities may require explanations for during audits. This is to ensure consistency, accuracy, and proactive risk management during the audit process.
3. How can RSM Vietnam help businesses?
The COVID-19 pandemic is still ongoing, and Vietnamese businesses continue to grapple with its unpredictable impacts. Most Vietnamese businesses have resumed operations and are facing various business risks. RSM Vietnam remains committed to monitoring the effects of COVID-19 on Vietnamese businesses and proactively identifying risks to assist clients in minimizing the impacts when determining transfer prices.
With our experience in assisting businesses in preparing over 300 transfer pricing documentation packages, backed by a team of highly experienced consultants, we are ready to accompany businesses in the following areas:
Supporting businesses in compliance with tax regulations and transfer pricing determination.
Providing businesses with essential tools to save time and effort when addressing tax authority inquiries during tax audits or transfer pricing audits.
Assisting businesses in reducing potential penalties that may be imposed in cases where tax authorities adjust transfer prices that the business has determined.
Enhancing the internal control of businesses in adhering to transfer pricing principles, including early identification of necessary adjustments and tax planning opportunities.
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