New Circular regulating transfer pricing between affiliated parties

The Ministry of Finance promulgated Circular 66/2010/TT-BTC on 22 April 2010 providing guidelines on calculation on market prices in business transactions between affiliated parties. This Circular supersedes the former Circular 117/2005/TT-BTC dated 19 December 2005.

According to Circular 66, price of a product in a related transaction shall be determined in accordance with market prices by comparing the equivalence between the related transaction and an arm-length transaction to select the most appropriate method of calculating a price.

Circular 66 provides for 13 types of business transaction that are considered as related transactions. Enterprises and competent authorities shall base on the definition of "significant difference" stipulated by Circular 66 to determine whether there is any transfer of price in business transactions between affiliated parties. Accordingly, "significant difference" means the difference concerning information or data causing the increase or decrease of at least 1% of unit price of products or difference concerning information or data causing the increase or decrease of at least 0,5% of gross profit ratio or profitability of products. This definition is indeed more specific and stricter than the one defined in Circular 117.

The enterprise may determine market prices of products in related transactions via the following 5 primary methods: method of comparison of prices in independent transactions; method of reselling prices; method of prime cost plus profits; method of profit comparison; and method of profit division.

Subject to each specific method mentioned above, the market price of products may be directly calculated on the basis of the unit price of products or indirectly via gross profit ratio or profitability ratio of products. However, in respect of methods of indirect calculation of prices, it is not necessary to calculate a specific unit price when calculating business results for the purpose of declaration and payment of corporate income tax.

The enterprise shall itself select the most appropriate value amongst values of the standard market price margin to use as the basis for adjustment of the relevant value of the related transactions. Where the price of products in the affiliated transaction is different from such most appropriate value as stipulated therein without reducing the corporate taxable income, then the enterprise shall not be obliged to make adjustment.

Where the enterprise has applied methods of calculation of market prices in accordance with the provisions of Circular 66 but there has been an occurrence of force majeure in the year such as natural calamities, fire or explosion adversely affecting its production process or business, or where the purchase or selling price has been affected by State policies or regulations, the enterprise will be allowed to adjust prices of the affected products accordingly.

Circular 66 shall take effect after 45 days from the date of its issuance.