Newsletter No. 93 (EN)

Synopsis on Transfer Pricing in Hong Kong,
Thailand and Vietnam


(November 2018, reading time approx.: 3 minutes)


I.  Introduction

Transfer Pricing becomes highly important as soon as a business entity decides to ex­pand its operations across international bor­ders. Transfer Pricing deals with structur­ing the price of transactions be­tween related parties within a group of com­panies.

Every Multi National Enterprise (“MNE”) wishes to minimise its tax obliga­tions in order to maximise its over­all profits. In principal, multi-corporate busi­nesses have to pay tax in their host countries, based on the profit share which arises in (or is allotted to) the respective business in such host country (e.g. Thai­land, Hong Kong or Vietnam). These host countries can differ in various re­spects, e.g. tax systems, customs duties, cur­rency exchange rates, legislation etc. As a result, Transfer Pricing also affects reve­nue and customs authorities, investors, creditors and the like.

The obligation to comply with national and international tax regulations regularly conflicts with the goal of a tax-efficient allo­cation of profits within MNEs. This is primarily because while the enterprise will take a global perspective, the respective tax legislation is usually nationally focused.

Thus, anticipatory business and corporate tax planning which takes both concerns into consideration is vital.

II.  Different Methods of Price Calculation

In most countries, Transfer Pricing regula­tions are built around the core concept of the Arm’s Length Principle. According to this principle, the transaction (or transfer) price charged between affiliated companies must be the same as the price which would have been charged to an independent company.

There are six generally accepted methods by which to compute the transfer price so that it accords with the Arm’s Length Principle. These six methods can be separated into two categories:

  • Traditional methods (Transaction Methods) focus on the facts of the actual trans­action in question in order to compute an appropriate transfer price (bottom-up method).
  • Other methods (Profit-based Meth­ods) utilise the profit generated by compara­ble companies when undertaking similar trans­actions in order to determine the price of the intercompany transaction in question (top-down method).

Transaction Methods are gen­erally considered to be more accurate and appropriate.

  1. Transaction Methods (TM)

       a) Comparable Uncontrolled Price Method (CUP) and  Comparable Uncontrolled Trans­action Method (CUT)

Both CUP and CUT compare the price of the intercompany transaction with the price of an identical or suffi­ciently similar independent transaction (e.g. the price charged in transactions be­tween independent parties).

     b) Cost Plus Method

This method summarises all the original costs of the unfinished product and then adds the customary net profit for such trans­actions for calculating the applicable trans­fer price.

    c) Resale Minus Method

Under this method, the transfer price is com­puted by deducting the customary profit margin from the respective resale price. The customary profit margin is calcu­lated on a partial cost basis.

Profit-based Methods (PBM)a) Comparable Profit Method (CPM)

This method is based on the operating profit gained from the intercompany trans­action and the allocation of this profit to the respective business segment which is then defined and subdivided as precisely as possible. In order to com­pare these profits, the profit margins of comparable independent businesses are used for each business segment. A target operating result can be computed by ap­plying this method to the total profit of the multi-national organisation. By com­paring this result with the individual enti­ties’ actual financial statements, it can be assessed whether the correct transfer price was used.

b) Profit Split Method (PSM)

PSM is based on the total profit an MNE gains from an intercompany transac­tion. This profit is divided accord­ing to the functions and risks which each related party adopted, just as it would be in the case of a transaction between non-related parties.

c) Transactional Net Margin Method (TNMM)

The net profit gained from the intercom­pany transaction is analysed in relation to an appropriate basis (cost, turnover, assets etc.) and the resulting profit margin is checked against compa­rable independent transactions. (This method is similar to Resale Mi­nus or Cost Plus, thus strictly-speaking it is a bottom-up method as well.)