What is transfer pricing? What are the common transfer pricing methods?

The concept of transfer pricing can become quite familiar in the production and business activities of foreign invested companies and multinational corporations. But this is a concept that is still new to many people who do not fully understand this financial field. So what is transfer pricing? What are the common transfer pricing methods? Let's find out more details with Giaiphapdonggoi.net!

1. What is transfer pricing?

Transfer pricing can be defined as the value attached to goods or services transferred between related parties. In other words, transfer pricing is the price paid for goods or services to be transferred from one unit of an organization to other units of that organization in different countries (with exceptions). For example, if a subsidiary sells goods to a parent company in another jurisdiction, the costs the subsidiary must pay for these items are called the transfer price.

Chuyển giá là gì?

What is transfer pricing?

Transfer pricing is an accounting practice that shows the prices at which one division of a company charges another division for goods and services provided.

Transfer pricing allows the setting of prices for goods and services to be exchanged between subsidiaries, associates or commonly controlled companies of the same larger enterprise. Transfer pricing can lead to tax savings for companies, although tax authorities may object to their claims.

2. Purpose of transfer pricing

The main goals behind the execution of transfer pricing are:

Mục đích của việc chuyển giá

Purpose of transfer pricing

Generates separate profits for each division and allows the performance of each division to be evaluated separately.
Transfer pricing affects not only the reported profits of every hub, but also a company's resource allocation (Costs borne by a hub will be considered the resources they use. ).

3. How Transfer Pricing Works

Transfer pricing is an accounting and tax practice that allows valuation transactions to be carried out within an enterprise and between subsidiaries operating under common control or ownership. Transfer pricing extends to cross-border as well as domestic transactions.

Cách thức chuyển giá hoạt động

How transfer pricing works

Transfer pricing is used to determine how much it charges a division, subsidiary or other parent company for services rendered. Usually, the transfer price reflects the market price of that good or service. Transfer pricing can also be applied to intellectual property such as research, patents, and royalties.

Multinational corporations (MNCs) are legally allowed to use transfer pricing to distribute income among their various subsidiaries and affiliates that are part of the parent organization. However, corporations can also sometimes use (or abuse) this method by altering their taxable income, thereby reducing their overall taxes. The transfer pricing mechanism is one way that companies can transfer tax obligations to low-cost tax jurisdictions.

4. What are the common transfer pricing methods?

Raising the price of fixed assets when contributing capital: Foreign investors contribute capital to domestic enterprises (enterprises with foreign direct investment capital) with outdated machinery and equipment, no depreciation but asset value The declared fixed assets are much higher than the actual value. Through this form, foreign investors artificially contribute capital, causing loss of state budget revenue; at the same time, the corresponding increase in depreciation of fixed assets increases the cost of products, leading to a decrease in profit or loss, so enterprises only need to pay little or no corporate income tax (“CIT”) in Vietnam.

Các phương thức chuyển giá phổ biến là gì?
What are the common transfer pricing methods?

Raising the price of imported materials: FDI enterprises buy materials from related parties at prices higher than market prices, increasing input costs of products, thereby reducing profits or losses.
Receiving transfer of intangible assets / services: Foreign investors when investing in subsidiaries often transfer some intangible assets / provide some services such as: technology transfer, technical know-how , copyright, general management services, purchasing support, quality assurance, technology support information ... FDI enterprises can implement transfer pricing through overvaluing intangible assets/services. assigned image.
Receiving loans with high interest rates: Another common form is that FDI enterprises receive loans from related parties with interest rates exceeding normal regulations.
Reduced selling prices: FDI enterprises can also transfer prices through imposing selling prices of goods to related parties at prices much lower than the selling prices to independent parties, thereby reducing profits and reducing taxes. response.
Remittance of profits (from abroad to Vietnam) of a part of enterprises with foreign direct investment in Vietnam to take advantage of great incentives in terms of CIT rate and CIT exemption and reduction period.
Transfer pricing between domestic affiliates to take advantage of BILLION tax incentives different NDNs.
Transfer pricing of goods and services implements the principles of determining the purchase and sale prices of goods and services between related enterprises. Essentially, the length of ownership principle stipulates that the businesses involved must fix a transfer price that is consistent with the price paid by outsiders for the same good or service.

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