Other BriefingsSelecting the Right Transfer Pricing Method in Vietnam: TNMM, CUP, or Cost-Plus
Choosing a transfer pricing method in Vietnam affects whether your profits may be adjusted during a tax audit, not just whether your paperwork is in order. Vietnam’s corporate income tax rate is 20 percent, and tax authorities can review related-party transactions for up to 10 years. If they decide your margins are too low, they can increase your taxable profit, charge additional tax, apply late payment interest of 0.03 percent per day, and impose penalties. For example, if profits are adjusted upward by US$2 million over several years, the additional tax alone could exceed US$600,000, excluding penalties.
Companies reporting margins well below comparable businesses are more likely to attract review. The method you choose directly affects both the likelihood of audit scrutiny and the size of potential tax exposure.
Profit entitlement follows control, not contract
Vietnamese tax authorities look at who makes the key business decisions. They examine who sets prices, chooses suppliers, manages inventory, and deals with customers. Profits are expected to follow whoever controls these activities, not just what the contracts say. If the Vietnam subsidiary is making real business decisions, it cannot justify earning only a small routine profit.
When the level of control does not match the level of profit reported, the risk of a tax adjustment increases.
CUP depends on transaction-level transparency
The Comparable Uncontrolled Price, or CUP, method works only when you can show that the same product or service is sold to an independent customer under very similar terms. Using your own internal sales to third parties is usually stronger than relying on external databases, especially when the product details, volumes, and contract terms are closely matched. In Vietnam, reliable public pricing data is often limited in many industries, which makes external comparisons harder to defend. If you need to make major adjustments just to make the transactions look comparable, the method becomes weaker, and tax authorities are more likely to push for a margin-based approach instead.
Cost-plus concentrates risk in markup determination
Cost-Plus is usually used when the Vietnamese company only carries out routine work, such as basic manufacturing or support services, and does not make major business decisions. The key issue is the markup applied to its costs. For example, if the company has US$30 million in costs and adds a 5 percent markup, it reports US$1.5 million in profit and pays US$300,000 in corporate income tax.
If the tax authorities decide that similar routine companies earn an 8 percent markup instead, profit would increase to US$2.4 million, and tax would rise to US$480,000. If this adjustment applies to several years, the additional tax adds up quickly. Cost-Plus is difficult to defend if the Vietnam company sets prices or takes on inventory risk, because that suggests it is doing more than routine work.
TNMM relies on benchmark integrity
The Transactional Net Margin Method, or TNMM, does not compare individual transaction prices. Instead, it compares the company’s overall profit margin to similar independent companies. In Vietnam, TNMM is often used because it is difficult to find reliable price comparisons for the CUP method.
The main risk with TNMM is whether the benchmark study can be defended. Tax authorities look closely at how comparable companies were chosen, whether loss-making companies were excluded, whether the financial years match, and whether the selected companies perform similar functions. If the Vietnam company’s margin falls outside the normal range of comparable companies, the authorities may adjust it to a higher level. Under TNMM, the focus shifts from matching transaction prices to defending the quality and consistency of the benchmark data.
The financing structure interacts with the margin allocation
In Vietnam, companies can only deduct related-party interest expenses up to 30 percent of their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). If a company reports low operating profit but still has high intercompany loan interest, part of that interest may not be deductible. This increases the amount of tax the company has to pay.
Because of this rule, transfer pricing decisions affect more than just profit margins. They also affect how much debt the company can safely carry. If the company has high leverage and low reported profit at the same time, it faces two risks: its profit margin may be adjusted upward, and part of its interest expense may be disallowed.
Withholding taxes shape repatriation outcomes
Dividend distributions from Vietnam are generally subject to 0 percent withholding tax. Interest payments typically attract 5 percent withholding tax, and royalties commonly attract 10 percent withholding tax, subject to treaty relief.
A method that concentrates profit in Vietnam may simplify repatriation through dividends, while margin suppression combined with significant royalty or interest flows introduces cross-border withholding exposure. Profit allocation affects both the domestic tax burden and the outbound cash leakage.
Documentation integrity determines replacement risk
Vietnam requires contemporaneous transfer pricing documentation supported by financial statements, intercompany agreements, and evidence of actual decision-making authority.
Inconsistencies between declared functions, accounting treatment, and operational conduct increase the likelihood that authorities substitute their own margin determination. Weak execution elevates the probability of imposed normalization rather than negotiated adjustment.
Industry structure constrains practical choice
Export-focused contract manufacturers that only carry out routine production work can often use the Cost-Plus method if they do not take on significant business risks. Trading and distribution companies usually rely on TNMM because it is hard to find reliable price comparisons for individual transactions.
Companies dealing with intellectual property or intercompany financing may try to use price-based methods, but it can be difficult to defend them in Vietnam, where transparent market data for royalties or loan pricing is limited. In practice, the industry the company operates in often determines which transfer pricing method can realistically be used.
Structural consequence of method misalignment
The transfer pricing method you choose decides how much profit is reported in Vietnam before any audit takes place. If the profit level does not match what the Vietnam company controls and manages, tax authorities can increase it during an audit. When that happens, the change is imposed by the authorities, not agreed through negotiation. The result is usually a higher taxable income, more tax to pay, and added interest. This is not just a paperwork decision. It determines whether your profit position holds or is adjusted by the government.
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