APA – an effective remedy against transfer pricing

At a recent seminar in Hanoi, Dang Tuan Hiep, a General Department of Taxation official, noted since 2000 MNC transactions have accounted for more than 70% of the global economic operations, with their annual revenue of approximately US$6,000 billion.

Transfer pricing is a hot issue that has garnered the great attention of taxation agencies throughout the world, because MNCs can directly affect the allocation of profits to individual countries by increasing or decreasing the price they charge each other, even though the profits of the group as a whole remain unchanged.

Many countries including the US, Japan and the Republic of Korea have formulated APAs as a special instrument for dealing with tax disputes for tax agencies and between tax agencies and MNCs. 

In late 2013 the Vietnamese Ministry of Finance issued a circular, guiding APA implementation, creating an important legal corridor for preventing tax evasion and minimizing disputes about market price evaluation in related-party transactions.

Colin Clavey, a senior consultant on APA of the International Financial Corporation, and Sabine Wahl, an independent consultant, shared experience in reaching viable APA deals, saying both tax agencies and tax payers must prepare necessary conditions before negotiations.

Businesses should have meetings and consultations before submitting an APA dossier to the tax agency. Receiving the dossier, it is the tax agency’s task to study the payers’ economic, trading and tax payment reports in order to come up with proper negotiation plans.

When the two sides agree on price levels, provisions, and payment methods, they can then proceed to enter into agreements to apply the APA, Clavey and Wahl concluded.

Arcotia Hasidimitris, a World Bank expert, said to realize APAs, the General Department of Taxation should build databases, gain experience in transfer pricing, and train officials to better understand about the field and methods to negotiate with tax payers.

Hasidimitris suggested Vietnam consider Australia’s 3-tiered approach to APA (Simplified, Standard and Complex APA), making it easier for taxpayers to sign deals.

However, Yoshiyuki Nakagawa, a Japan International Cooperation Agency (JICA) expert, advised Vietnam to apply bilateral APAs, explaining these bilateral deals will bring benefits for both tax agencies and businesses when investing in the country.