Risk management of transfer pricing in tax inspection, tax audit in 2024

In recent years, tax authorities have intensified their efforts to mitigate tax erosion by focusing on high-risk tax areas. Key areas of scrutiny include capital transfer, e-commerce, digital business, value-added tax refund, e-invoice fraud, etc. and especially the related party transactions. In a recent interview, Ms. Dinh Mai Hanh, Tax Partner, National Transfer Pricing Leader at Deloitte Vietnam, provided her professional insights on managing transfer pricing risks in the 2024 tax inspection and tax audit.

What is your assessment of the recent trend in conducting tax inspection and tax audit at the enterprises engaged in related party transactions?

Reflecting on the landscape of 2023, we observed a big gap in tax arrears between a normal tax inspection and a transfer pricing inspection. The average tax collection in the normal tax inspections recorded at a modest VND 0.63 billion, while the transfer pricing inspection recorded a substantially higher average collection of VND 2.21 billion – marking a 3.5-fold increase. This disparity not only impacts businesses financially, including increased non-deductible expenses for corporate income tax, minimized losses carried forward, altered tax incentive scheme, and increased tax liabilities, but also poses non-financial risks affecting the reputation of the enterprise and the Group as a whole. Moreover, the adjustment of related party transaction may prompt a comprehensive review and potential adjustment of the Group's business strategy and internal pricing policies between affiliate entities in the future. Hence, it is imperative for enterprises to devote special attention and develop detailed and appropriate transfer pricing risk management plan to ensure optimal preparation for upcoming tax inspection and tax audit.
Insights from Deloitte Vietnam highlight a fundamental reason behind the higher tax arrears recorded in a transfer pricing inspection compared to a normal tax inspection. This discrepancy often arises from differences in interpretation and application of transfer pricing guidance by different stakeholders from different viewpoints. Regulations governing tax administration for enterprises with related party transactions in Vietnam draw upon esteemed reference to the OECD Guidelines for determining the pricing of related party transactions for Multinational Enterprises and Tax Administration. Consequently, varying interpretations and assessments between enterprises and tax authorities may lead to cases of deeming and/or adjusting related party transaction value with significant amount.

Could you please provide insights into the tax authority's plan in conducting the transfer pricing inspection and audit in this fiscal year?

The assessment of tax administration for enterprises involved in related party transactions has emerged as a pivotal concern, prompting proactive measures from both the Government and the Ministry of Finance were issued at the close of 2023 to reinforce tax inspection and tax audit of related party transactions in 2024.

Notably, the General Department of Taxation issued Official Letter No. 5127/TCT-TTKT on November 16, 2023, delineating the tax inspection and audit plan for the upcoming year. Subsequently, Official Letter No. 5654/TCT-TTKT, dated December 13, 2023, provided comprehensive guidance to tax departments, emphasizing the necessity to intensify tax inspection for enterprises engaged in related party transactions, identify and analyze enterprises exhibiting signals of transfer pricing risks such as substantial value of related party transactions, companies reporting consecutive years of significant losses while expanding operations, and those demonstrating revenue growth but proportionally low tax contribution to the State budget.

Moreover, the guidance stressed the importance of fostering collaboration among local departments and agencies. Additionally, initiatives such as training sessions, knowledge exchange forums, and advocacy campaigns were endorsed to equip tax officers with the requisite expertise and to enhance legal awareness within the business community.

Apart from challenges related to interpretation and application of transfer pricing regulation, what are the common queries that enterprises frequently face during tax inspection and tax audit?

In February 2024, Deloitte Vietnam successfully hosted the webinar titled “Transfer Pricing Risk Management in the 2024 Tax Audit – Context, Trends, and Common Practices”, attracting over 1,000 esteemed representatives from enterprises nationwide. Leveraging insights from seminar discussions and our extensive advisory expertise, we have distilled three primary categories of common queries regarding related party transaction prices encountered during the tax inspection and tax audit.

Compliance Obligations Queries: Tax authorities frequently inquire about the timeliness of transfer pricing documentation package, the completeness and accuracy of documentation, and the correctness of self-assessment of exemption from documentation requirements.

Comparability Analysis Queries: Queries often revolve around the selection of the most appropriate transfer pricing method, the process for selecting comparable businesses, and adjustments made by taxpayers to account for non-transfer pricing factors impacting profit margins or material differences during the comparability analysis. These aspects typically require thorough explanation and clarification during tax inspection and tax audit.

Queries related to each related party transaction: Transactions with significant value and specific nature, such as purchasing fixed assets, procurement and sale of materials, royalty payments, intra-group service fee payments, or financial transactions, usually undergo comprehensive scrutiny by tax authorities. For instance, inquiries may focus on whether the enterprise actually receives assistance from the related party, the economic benefits derived from such services, the capacity of related party to provide such services, and whether the service fees adhere to the arm’s length principle.

As the peak period for tax inspection and tax audit of related party transactions approaches, do you have any recommendations and advice for businesses to navigate this critical phase effectively?

To ensure enterprises are fully prepared to manage the complexities of tax inspection and tax audit in relation to transfer pricing matter, it's crucial to establish a comprehensive plan that covers various stages of the process:

Prepare for tax inspection and tax audit: enterprises should fully comply with the transfer pricing documentation requirement, pay meticulous attention to the accuracy and completeness of documentation as well as the supporting document for each transaction. Moreover, proactive measures, such as ongoing monitoring and adjustment of transactions to align with arm’s length principles, can help mitigate potential risks. Regularly reviewing past inspection outcomes and staying informed about emerging inspection trends provide valuable insights for making necessary adjustments and enhancements to compliance strategies.

During tax inspection and tax audit: enterprises must be prepared to navigate through the rigorous scrutiny of tax authorities. This requires meticulous preparation, including thorough reviews of all relevant documentation and prompt submission of requested materials. Additionally, developing a detailed explanation strategy is essential. This involves considering all aspects of the business operations and transaction processes to provide comprehensive and persuasive explanations to tax authorities.

After tax inspection and tax audit: enterprises must carefully assess the outcomes and determine the appropriate course of action. If the inspection results are favorable and align with the enterprise's assessments, they can leverage these findings as reference points for future transaction pricing matter. However, if there are disagreements with the inspection outcomes, it's crucial to document the taxpayer’s opinion in the inspection minutes and prepare for the appeal process in later stage.