Transfer Pricing Red Flags That Lead to Tax Audits in Vietnam

Transfer pricing audits in Vietnam assess whether pricing arrangements between related parties comply with Vietnam’s transfer pricing framework. Factors that can form part of that assessment include recurring losses despite business expansion, significant payments to overseas related parties, profit allocations that appear inconsistent with the Vietnamese entity’s commercial role, and business restructurings that materially change the allocation of profits within a multinational group.

Persistent losses that do not reflect commercial expansion

Recurring losses may become relevant during a transfer pricing audit when a Vietnamese subsidiary continues to expand its commercial operations while reporting minimal taxable profits or consecutive accounting losses. Revenue growth, increased production capacity, workforce expansion, and additional capital investment can all be considered alongside the company’s financial results when evaluating whether its pricing arrangements appropriately reflect its commercial activities.

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A manufacturer increases annual revenue from VND 900 billion (US$34.3 million) to VND 1.2 trillion (US$45.7 million) over three years while commissioning a new production line and expanding its workforce, yet continues reporting losses. During a transfer pricing audit, tax authorities can assess whether the financial results reported in Vietnam are consistent with the scale of the company’s expanding operations.

Related-party payments that significantly reduce Vietnam’s taxable income

Payments to overseas group companies that reduce the taxable income of the Vietnamese entity form an important part of transfer pricing analyses. These commonly include royalty payments for intellectual property, management and technical service fees, intercompany interest, and regional support service charges.

A Vietnamese subsidiary reports operating profit of VND 120 billion (US$4.6 million) before paying VND 85 billion (US$3.2 million) in royalty and management service fees to related companies overseas. Following those payments, taxable profit falls to VND 35 billion (US$1.3 million). During a transfer pricing audit, tax authorities can assess whether the pricing methodology applied to those payments is supported by the commercial arrangements between the related parties and is consistent with comparable independent transactions.

Profit allocation that does not match the Vietnamese entity’s commercial functions

Under Vietnam’s transfer pricing framework, pricing arrangements are assessed by considering the functions performed, assets employed, and risks assumed by each party to the transaction. This functional analysis helps determine whether the profits retained by the Vietnamese entity are consistent with its commercial role within the multinational group.

A Vietnamese subsidiary operating a manufacturing facility, employing a substantial workforce, managing procurement activities, or assuming inventory and operational risks would generally have a different functional profile from an entity performing only routine processing or support services. Similarly, a distributor responsible for developing the Vietnamese market and managing customer relationships performs different commercial functions from a limited-risk distributor operating under tightly controlled arrangements.

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Where the functional profile of the Vietnamese entity differs significantly from the profits it retains, tax authorities may compare the taxpayer with independent comparable companies as part of the transfer pricing analysis.

Decree 255/2026/ND-CP also establishes an order of priority for benchmarking data sources and permits Vietnam’s tax authorities to publish industry profit indicators by sector, geographical area, or taxpayer group. These measures provide additional benchmarks for evaluating whether a taxpayer’s reported profitability is consistent with the arm’s length principle.

Business restructuring that changes the allocation of profits

Business restructurings may alter the commercial role of a Vietnamese entity by changing the functions it performs, assets it employs, risks it assumes, and the profits allocated within the multinational group. Common examples include converting a full-risk manufacturer into a contract manufacturer, changing a distributor into a limited-risk distributor, transferring intellectual property ownership outside Vietnam, or centralizing procurement and strategic decision-making within another jurisdiction.

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A Vietnamese subsidiary manufactures products for regional markets and historically reports an operating margin of 8 percent. Following an internal restructuring, it becomes a contract manufacturer while procurement decisions, customer contracts, and pricing authority are transferred to a regional principal company. Although production volumes, facilities, and workforce remain largely unchanged, the Vietnamese entity’s operating margin falls to 2 percent. During a transfer pricing audit, tax authorities may assess whether the revised allocation of profits remains consistent with the entity’s revised commercial role.

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If your business has related-party transactions in Vietnam, Dezan Shira & Associates can advise on transfer pricing documentation, audit support, and compliance with Vietnam’s transfer pricing requirements. Contact our Vietnam team to discuss your transfer pricing obligations.

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