Notable points on transfer pricing matters in 2023

To cope with the challenges of the economy in 2023, multinational enterprises shall actively review their business activities, especially transfer pricing matters.

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After the consequences of COVID-19, such as disruptions in the supply chain, and increased material costs, enterprises also face an economic recession, inflation, prolonged tension between Russia and Ukraine, and severe climate change in 2023.

Especially, in terms of transfer pricing matters, multinational enterprises are directly affected by increases in input prices, while the current pricing policy may not be appropriate, which might cause an adverse impact on business performance, resulting in a shrinking profit and loss within a year. In addition, the short-term adjustment of interest rates also affects interest expenses, and causes financial hardship for enterprises.

Accordingly, enterprises need to be aware of such current difficulties and prepare in advance for solutions to challenges  in the upcoming years.

Revisit of intercompany agreement    

In conventional supply chains, the groups typically have low-risk entities, such as limit  ed-risk distributors and contract manufacturers. These entities will normally have a stable level of profitability. Thus, the negative business performance in the current recession situation may require adjustments to the pricing policy to ensure that these entities maintain a suitable level of profitability under normal conditions. Such adjustments will help avoid unwanted queries and challenges from stakeholders (such as suppliers, customers, shareholders, and especially tax authorities).

Quantitative impact of the economic recession

To demonstrate that fluctuations in profits or losses are due solely to the special context of the current economic situation but not transfer pricing issues, enterprises should recognize, analyze, report, and quantify the commercial, financial, and economic factors that have a negative impact on the company’s business performance. The recognition and quantification of such losses related to the above causes should be carried out in a reasonable and consistent manner.

Especially, given that the CIT finalization return for the financial year 2022 is coming, enterprises need to actively review and prepare transfer pricing documentation reports as evidence of the company’s tax compliance. Transfer pricing documentation reports, in particular, must keep records of the effects of loss or a downturn on profit, as well as benchmarking studies to demonstrate that the decrease in the company's operating profit completely reflects current economic circumstances and is comparable to other companies in similar industries.

Review of interest rates applied

Given the fact that increasing interest rates have not been fully managed in the short run, enterprises should actively review and determine interest rates that exceed the capped amount as prescribed in transfer pricing regulation and calculate the amount of CIT overpaid or underpaid. In the meantime, enterprises also need to update and standardize the method of determining deductible interest expenses to declare CIT finalization.

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In addition, enterprises also need to consider appropriate strategies related to setting up or restructuring financial transactions; allocating internal group capital or loans to optimize the compensation mechanism and roll forward mechanism; and considering the strategy for optimizing tax expenses for the group on different levels (i.e. restructuring the value chain, internal financial transactions; restructuring funds and cash flow; reviewing and re-establishing internal borrowings, lending policies, and other transactions) to optimize the mechanism of compensation/bring forward of interest expenses over the years.

Mrs. Dinh Mai Hanh, Tax Partner, National Transfer Pricing Leader - Deloitte Vietnam

Group restructuring

Multinational enterprises must reconsider group restructuring and related party transactions when deciding whether to close or transition manufacturing or distribution facilities. Whether these restructuring decisions are temporary or permanent, related party transactions will either be incurred for the first time, or some existing related party transactions will have material changes or cease to exist. As a result, when considering restructuring activities, the group must consider the functions of each entity as well as the actual conditions that each entity is facing, and review and adjust the pricing policy to allow for the reallocation of functions, assets, and risks among the Group's entities.

In "danger" lies "opportunity," and in any unstable circumstance, there would be opportunities that enterprises could take advantage of as long as they were well prepared. If businesses fully implement the aforementioned measures, they will not only overcome the recession in the short term, but will also be well prepared for the long term.