If you’ve ever felt your firm’s tax bill is either suspiciously light or heavier than your neighbor’s, you’re not alone. A new study in Economic Systems (2024), called “Profit shifting by multinationals in Vietnam: Evidence from 2006 to 2019,” digs into how global companies tweak their internal prices to lower taxes. The findings are worth a look, especially for finance teams that plan taxes across borders.
A Closer Look at the Study
The authors tracked more than a decade of data from multinationals working in Vietnam. They studied transfer pricing-the legal, yet sometimes sharp-elbowed, way subsidiaries price goods or services for one another-to see how profit moved out of Vietnam and into countries with kinder tax rates.
The headline? Vietnam may have served as the showroom, but the cash register rang somewhere else.
Transfer Pricing: The Accounting Markup Game
Transfer pricing itself is legal. In fact, it’s just business as usual for any multinational firm with operations in several countries. But the catch is this: by manipulating internal prices (for example, paying a Vietnamese affiliate an inflated price for raw materials purchased from its Singaporean parent), MNEs can transfer taxable profits from a high-tax to a low-tax country.
The result? Reduced profits, which means a lower tax burden in Vietnam. Convenient, isn’t it?
What This Means for Financial Planning
Well, if you’re a finance executive or tax planner, you might be thinking: “Well, we don’t operate in Vietnam—why should I care?”
Here’s why:
- Transfer Pricing Isn’t Just Vietnam’s Problem
Whether you’re in Jakarta, Johannesburg, or Jacksonville, the principles—and risks—are the same. Governments everywhere are tightening transfer pricing rules, and the OECD’s BEPS (Base Erosion and Profit Shifting) initiative is only gaining momentum.
- Documentation is Your First Line of Defense
In order to sleep well during audit season, ensure transfer pricing guidelines are backed by sound documentation. Benchmark against good data and always be in a position to explain internal pricing choices on the basis of sound rationale.
- Financial Planning Requires Pragmatic Reporting
Artificially deflating profits in a geographies could improve tax benefits but might have long-term reputational and compliance risks. A finance team has to maximize but keep it transparent.
- Local Revenue Authorities are Becoming Smarter
Vietnam, like many governments, is sharpening its game when it comes to data analytics. That’s a polite way of putting it: your numbers better balance. Finance ministries need to be just as sophisticated at being able to anticipate questioning.
- What Can Policymakers Take Away?
For regulators, the report is an analytics-based nudge. It reminds them of the need for:
Enhanced transfer pricing legislation
Practical Takeaways for Finance Teams:
What You Should Do Why It Matters
Regular benchmarking of transfer prices To show your pricing aligns with the market
Keep documentation airtight So you won’t be scrambling when an audit comes along
Model different pricing scenarios Know your tax exposure before the tax authority does
Coordinate on a cross-border basis Align global operational goals with tax strategy
Bottom Line
This research keeps in mind the fact that transfer pricing is not just a tax issue—it’s a finance plan, a reputational risk, and in some cases, a regulatory minefield. As finance professionals, we need to view tax planning as something more than “how low can we go?” Instead, it’s about finding that sweet spot where compliance, optimization, and sustainability meet.
For at the end of the day, when the taxman arrives, the price had better be right.
study source : https://www.sciencedirect.com/science/article/abs/pii/S0939362524001080#preview-section-abstract