We have shared with you the story of what transfer pricing is, today, we try to play the role of a tax detective, and we will learn the forms of transfer pricing.

A good detective must have a rich imagination and think realistically hypothesize scenarios that occur in reality. The hypothetical scenario is Company A is the parent of Company B. A's headquarters has a corporate income tax rate of ten percent, and B's headquarters has a corporate income tax rate of twenty percent. In the relationship of group A-B, how to make profit at A as much as possible, and B as little as possible.

The profit is equal revenue minus costs. B will reduce revenue and increase costs so that B's profit is the lowest. The increase and decrease in revenue and cost is to transfer profits to A, as much as possible, to enjoy the tax rate of ten percent where A is located.

B has a way to increase the cost as follows:

• Buy A's raw materials at a price higher than the market price, in order to increase the cost of the product.
• Buy A's fixed assets at a price higher than the market price, in order to increase the depreciation expense of fixed assets.
• B accepts the costs of market exploitation, brand costs, distribution support costs, technical training costs, higher than the normal price from A. This arrangement aims to increase B's business administration costs.
• A invests a little capital in B and A lends capital to B for production and business and force subsidiary B to pay interest expenses to Parent Company A.

B has a way to reduce revenue as follows:

• B sells products to A at a price lower than the market price, in order to reduce sales.
• B sells products to A with promotions for the same products sold at a price higher than the normal price.
• B sells products to A with product support services such as: over warranty, product repair in abnormal conditions, services associated with selling products above normal level. If these agreements are not properly implemented by B, A forces B to reduce the selling price, which means B must reduce sales.

These are common forms of transfer pricing.

This is the specifical hypothetical situation, what do the detectives think about this!

A which is a foreign company sells a batch of machinery to B. B is a domestic company. The market price is one thousand VND (1,000 dong), but the import price is eight thousand VND (8,000 dong). B mortgaged this batch of machinery at bank C and accepted by bank C for a mortgage loan equal to fifty percent of the property value, equivalent to an amount of eight thousand VND multiplied by fifty percent equal to four thousand VND. (8,000 VND x 50% = 4,000 VND). We have:

The value is eight thousand VND minus the actual value of one thousand VND equal to seven thousand VND. This is not the market price, but it is included in the depreciation expense. This has made the erosion of the tax base. The incorrect price is seven thousand VND.

The market price of batch of machinery is one thousand VND, and the bank lends with the value equal to fifty percent of the property's value which is equal to five hundred VND (50% x 1,000 VND = 500 VND). But the bank C has lent four thousand VND, the difference of four thousand VND minus five hundred VND equals to three thousand five hundred VND (4,000 dong - 500 dong = 3,500 dong).

What should we pay attention to?

We should pay attention to:

• The value is not available which is seven thousand VND (7,000 VND) but is included in the depreciation expense.
• The value is not available which is three thousand five hundred VND (3,500 dong) but is included in the interest expense.
• The value is not available which is three thousand five hundred but the bank's risk increases when the business fails to repay this debt.
• the enterprise has solved the thin capital structure thanks to the loan from the bank.