Steps to Effectively Prepare Transfer Pricing Documentation Before a Tax Audit

In the context of Vietnam becoming a strategic destination for many multinational corporations, tax authorities are increasingly tightening regulations on related-party transactions. Preparing transfer pricing documentation is not only a legal requirement but also a strong foundation for businesses to defend themselves during tax inspections and audits.

However, many businesses still treat transfer pricing documentation as a mere formality, leading to significant risks such as taxable income reassessments, back taxes amounting to billions of VND, and penalties for incorrect declarations. So how should documentation be prepared to meet the requirements accurately, sufficiently, and on time?

1. Understand Mandatory Obligations Under Current Legal Regulations

According to Decree 132/2020/ND-CP, enterprises with related-party transactions must prepare and maintain the following three sets of transfer pricing documentation:

• Local File – outlines pricing methods and explains profitability in the Vietnam context.
• Master File – describes the value chain, group structure, intangible asset policies, and financial strategies.
• Country-by-Country Report (CbCR) – applicable to ultimate parent companies with global revenue exceeding VND 18,000 billion.

Failure to prepare, provide, or submit these documents on time can result in fines and reassessment of taxable income under Articles 20 and 21 of Decree 125/2020/ND-CP.

Professional recommendation: These documents should be prepared before the deadline for filing the annual corporate income tax return and not retroactively after an audit decision has been issued.

2. Identify High-Risk Related-Party Transactions

Tax authorities are currently focusing on reviewing the following types of related-party transactions:

• Intra-group service fees (Management Fees, IT Support): often scrutinized as having “no real added value.”
• Payments for royalties, trademarks, and intangible assets: if pricing methods are unreasonable or disproportionate to actual usage.
• Profit shifting between countries with different tax rates through internal pricing adjustments for goods or financing (e.g., loans).
• Enterprises with continuous losses but still engaging in significant related-party transactions.

Early risk identification and assessing materiality allow businesses to prioritize resources for building stronger justifications in critical areas of the transfer pricing file.

3. Select Appropriate and Consistent Pricing Methods

According to Decree 132/2020/ND-CP on corporate income tax and transfer pricing management, the selection of a suitable transfer pricing method depends on the specific nature of each transaction. For costs arising from related-party transactions, enterprises may consider the following methods:

• Resale Price Method (RPM)
• Cost Plus Method
• Transactional Net Margin Method (TNMM)
• Profit Split Method

The choice must be based on the transaction’s nature, availability of comparable data, and commercial rationale. Most importantly, the method must be applied consistently across years to avoid raising red flags with tax authorities.

4. Optimize Comparable Data – The Foundation of the Local File

The Local File lacks value without reliable comparable data. Currently accepted data sources include:

• Independent databases (e.g., ORBIS, TP Catalyst, RoyaltyRange...)
• Reasonably adjusted internal data, if market data is not accessible.

5. Prepare Defense Scenarios – Before the Tax Authority “Knocks on the Door”

• Transfer pricing documentation must be provided within 10 working days from the date of request.
• Detailed explanations must be ready for any transactions deemed non-compliant with the arm’s length principle.

Therefore, in addition to documentation, businesses should:

• Train accounting and legal teams on the structure and defense scenarios;
• Prepare technical files, internal emails, and service contracts that may be queried;
• Conduct mock audits to anticipate risky situations.

In today’s increasingly stringent tax environment, preparing transfer pricing documentation is no longer optional—it is a critical requirement for businesses with related-party transactions. A well-organized, logical, and in-depth file serves as a solid legal “shield” to protect businesses in any audit.

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