Management Services, Advertising Costs, Franchise Fees: Which Transactions Are Most Scrutinized in Transfer Pricing Files?

As Vietnam tightens oversight of transfer pricing and combats base erosion, related-party transactions—particularly management services, advertising costs, and franchise fees—are becoming “hot spots” during tax inspections and audits.

Under Decree 132/2020/ND-CP, any enterprise engaging in related-party transactions must comply with the Arm’s Length Principle and prepare appropriate transfer pricing documentation. However, the nature of these costs makes them difficult to quantify in terms of benefits, often leading to suspicions of “unreasonable expenses” or mechanisms to shift profits abroad.

Below are the three types of transactions most likely to be scrutinized in transfer pricing files, the associated risks, and the safeguards businesses should prepare to defend themselves against tax authorities.

1. Management Service Fees from Parent Companies

Why are they subject to suspicion?

Management fees are payments to a parent or foreign affiliate for strategic management, training, system support, and other services. However, their effectiveness is hard to measure, and in many cases, they are seen as internal transactions with no real economic substance.

Tax authorities are suspicious when:

• There is no detailed service agreement.

• There is no evidence that services were actually delivered (e.g., emails, reports, training sessions).

• Fees are calculated as a percentage of revenue or costs, not reflecting actual value.

• Fees are charged annually despite minimal changes in the services provided.

How can businesses protect themselves?

• Sign a detailed management service agreement outlining scope, content, and timelines.

• Keep supporting evidence: emails, meeting minutes, training materials, financial analysis from the parent company.

• Benchmark fees against independent third-party data or valuation reports.

• Disclose clearly in the Local File and provide detailed explanation under internal management costs.

2. Global Advertising and Marketing Costs Allocated by Parent Company

Why do these trigger questions during audits?

Multinational corporations often run global branding campaigns, then allocate the costs to subsidiaries. In Vietnam, tax authorities will question:

• Did the Vietnamese entity benefit directly from the campaign?

• Why should it pay for markets unrelated to Vietnam?

• Was the cost allocation method reasonable?

These expenses are often deemed irrelevant to Vietnamese revenue generation and disallowed for CIT deduction.

Recommended actions for businesses:

• Request the parent company’s global media plan and confirm Vietnam is within its scope.

• Provide proof of direct business impact in Vietnam: revenue growth, brand awareness, consumer surveys.

• Ensure clear cost allocation criteria (e.g., revenue, output, population) and explain transparently in the transfer pricing file.

• Prove that the Vietnamese entity actually benefited from the campaign to justify the allocation.

3. Franchise or Royalty Fees

Risks associated with these charges:

Franchise fees are payments for the right to use trademarks, formulas, business know-how, software, etc.—common in F&B, retail, and fashion chains. These intangible assets are hard to value fairly, often raising suspicions of profit shifting.

Tax authorities focus on:

• High royalty rates (over 5% of revenue).

• Transactions without tech transfer or technical support.

• No market-based comparables for similar franchising arrangements.

Risk mitigation strategies:

• Have a clear licensing agreement detailing rights granted, duration, and intellectual property scope.

• Include benchmarking reports comparing similar franchise models in Vietnam or the region.

• If revenue doesn't grow despite brand use, explain with long-term strategy rationale.

• Use reasonable, capped royalty rates based on actual brand usage.

What Should Businesses Do to Prepare Their Transfer Pricing Files?

To reduce risks of having intercompany service, advertising, or franchise costs disallowed, businesses should:

• Identify related-party transactions early and prepare Local Files under Decree 132/2020/ND-CP.

• Collect economic evidence for each transaction: contracts, invoices, benefit analysis, benchmarking data.

• Apply arm’s length pricing methods (Comparable Uncontrolled Price, Cost Plus, Resale Price, etc.) and clearly explain them.

• Maintain internal explanation files and proactively engage with tax authorities during audits.

In the eyes of tax authorities, service, advertising, and franchise costs involving affiliates are high-risk for transfer pricing, due to their unverifiable and intangible nature. Merely declaring these costs is not enough—businesses must proactively prove their reasonableness and economic substance. With thorough, transparent preparation, companies can not only pass tax audits but also boost trust with investors, parent companies, and stakeholders.

Viet Australia
Viet Australia Auditing Company is an independent auditing organization licensed and established in 2007 in the Socialist Republic of Vietnam.