66-10 Providing Guidance on Determination of the Market Price in Business Transactions Between Related Parties

8/6/2019 66-10 Providing Guidance on Determination of the Market Price in Business Transactions Between Related Parties

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MINISTRY OF FINANCE SOCIALIST REPUBLIC OF VIETNAM

Independence Freedom Happiness

No: 66/2010/TT-BTC Hanoi, 22 April 2010

CIRCULARproviding guidelines on determination of market prices

in business transactions between related parties

Pursuant to the Business Income Tax (BIT) Law No.14/2008/QH12 dated 3 June2008;

Pursuant to the Tax Administration Law No. 78/2006/QH11 dated 29 November2006;

Pursuant to Government Decree No.124/2008/ND-CP dated 11 December 2008,stipulating in detail the implementation of a number of Articles of the BIT Law;

Pursuant to Government Decree No.85/2007/ND-CP dated 7 June 2007,stipulating in detail the implementation of a number of Articles of the TaxAdministration Law;

Pursuant to Government Decree No.118/2008/ND-CP dated 27 November 2008,stipulating functions, duties, powers and organizational structure of the Ministry ofFinance;

The Ministry of Finance provides guidelines on implementation of regulations ondetermination of market prices in business transactions between related parties,which serve as the basis for declaration and payment of BIT by businessestablishments as follows:

PART A. GENERAL PROVISIONS

Article 1: Objects of application

Organizations engaged in production of or trade in goods or services (hereinafterreferred to as enterprises) and carrying out business transactions with their relatedparties shall be obliged to declare and determine their BIT obligations in Vietnam.

Article 2: Scope of application

1_________________________________________________________________________"The document represents our unofficial English translation. Please note, we have notreviewed this document. This document does not constitute advice and should not berelied upon for any purpose, other than for general information. No material businessdecision should be made based upon the reading of a ruling or official letter or anyother government guidance without seeking proper professional advice."


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Transactions of purchase, sale, exchange, hiring, leasing, transfer or assignment

of goods or services during the process of business (collectively referred to asbusiness transactions) between related parties, except for business transactionsbetween enterprises in Vietnam and their related parties, which relateto products whose prices are adjusted by the State in accordance with the law onprices.

Article 3: Interpretation of conditions:

1. Market prices mean a phrase referring to prices of products based on anobjective agreement in business transactions in the market between partieshaving no related connections (also called independent parties).

2. Product means a term generally used to indicate goods and serviceswhich are objects of business transactions.

3. Buying price, selling price means the term generally used to indicateprices of products in transactions of purchase, sale, exchange, hiring,leasing, transfer or assignment of products.

4. Parties having related connections (hereinafter referred to as relatedparties) mean a phrase used to refer to parties with connections falling in

one of the cases below:

4.1 A party is directly or indirectly engaged in the administration and control of,or capital contribution to, or investment in all forms in, the other party.

4.2 The parties are together directly or indirectly subject to the administration,control, capital contribution or investment in all forms by another party.

4.3 The parties together participate directly or indirectly in the administrationand control of, or capital contribution to, or investment in all forms in,another party.

In general, if in a tax period, two enterprises have business relations fallingin one of the following cases, they shall be determined as related parties:

a) An enterprise holds directly or indirectly at least 20% of capital investedby the owners of the other enterprise;

b) Both business establishments have at least 20% of capital invested bythe owners, which is directly or indirectly held by a third enterprise or athird party;



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c) Both enterprises hold directly or indirectly at least 20% of capitalinvested by the owners of a third party;

d) An enterprise being the biggest shareholder in terms of capital investedby the owners of the other enterprise, which directly or indirectly holds atleast 10% of capital invested by the owners of the other enterprise;

e) An enterprise guarantees another enterprises loans, or makes loans toanother enterprise in any form on condition that the loans shall at leastequal 20% of the capital invested by the owners of the borrowingenterprise, and account for more than 50% of the total mid-term andlong-term liabilities of the enterprise being a loanee.

f) An enterprise appoints members of the executive board or the controlboard of another enterprise on condition that the number of membersappointed by the first enterprise accounts for more than 50% of the totalmembers of the executive board or the control board of the secondenterprise; or a member appointed by the first enterprise has the right tomake a decision on financial policies or operations of the secondenterprise;

g) Two enterprises together have more than 50% of members in theexecutive board or together have a member in the executive board whohas the right to make a decision on financial policies or operations and isappointed by a third party;

h) Two enterprises are administered or controlled in terms of personnel,finance and operations by individuals who have the following relations:wife and husband; father, mother and children (regardless of naturalchildren, adopted children, daughters-in-law or sons-in-law); brothersand sisters with the same father and mother (regardless of natural fatheror mother, adopted father or mother); paternal grandparents and

grandchildren; maternal grandparents and children: aunts, uncles andnephews and nieces having blood relationship;

i) Two enterprises have the relation between the head office and thepermanent establishment, or are together permanent establishments ofa foreign organization or individual;

j) An enterprise engaged in production of or trade in products usesintangible assets or/and the intellectual property of another enterprise oncondition that expenses paid for the use of intangible assets or/and the



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intellectual property account for more than 50% of the cost (or the

production cost) of products;

k) An enterprise directly or indirectly provides more than 50% of the totalvalue of raw materials, materials or input products (not includingdepreciation cost of fixed assets) used for production of or trade inrelevant output products of another enterprise;

l) An enterprise directly or indirectly controls more than 50% of the outputof products sold by (calculating on each kind of products ) anotherbusiness establishment;

m) Two enterprises agree to business cooperation on a contractual basis.

5. Related transactions mean business transactions between related parties.

6. Independent transactions mean business transactions between partieshaving no related connections.

7. Material differences mean differences in information and/or data whichincrease or decrease by at least 1% of the selling price of traded products,or which increase or decrease by at least 0.5% of the ratio of gross profit or

the profit-making rate.

Example 1: Enterprise V, a 100% foreign owned enterprise in province X ofVietnam, has two transactions:

(i) selling 2,000 products to independent enterprise A at theselling price equal to overall production cost (Z) plus (+) 6% Z; thedelivery conditions are that goods are delivered at enterprise V; and

(ii) selling 2,000 products to its parent company at the sellingprice equal to Z + 6% Z; the delivery conditions are that goods are

delivered in country H (CIF); transportation costs and insurancepremium from province X to country H are 3% Z. The parentcompany agrees to guarantee for enterprise V to make a loan fromthe bank N. In reality, the guarantee for the loan is based on the trust(i.e. the parent company does not have to pay guarantee fee).

In the above transactions, we see that:

The difference in conditions of delivery ofgoods relates to transportation cost and insurance premium from



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province X to country H, which increases by more than 1% of the selling

price, so it is a material difference.

The guarantee based on trust requires nopayment from the parent company, therefore it is not a materialdifference.

8. Range of market prices means a set of values regarding the pricelevel, or the ratio of gross profit or the profit-making rate of products,determined from independent transactions selected for comparison.

9. Database of the tax office means information and data related to thedetermination of tax obligations of enterprises, which are collected fromdifferent sources and are analyzed, maintained, updated and managed bythe tax office.

PART B. GUIDELINES ON DETERMINATION OF MARKET PRICES INRELATED TRANSACTIONS

Prices of products in related transactions stipulated in this Circular are determinedin accordance with the market price, based on the comparison of the equivalencebetween related transactions and independent transactions (hereinafter referred to

as comparative comparison) to select the most appropriate method of determiningprices.

Article 4: Comparative analysis

1. Principle

1.1 Comparing related transactions with independent transactions isunderstood as comparison between related transactions and independenttransactions or comparison between enterprises carrying out relatedtransactions and enterprises carrying out independent transactions. The

comparison is made on the basis of selection and analysis of data anddocuments which are reliable and related to independent transactions orrelated transactions taking place in the same period for the purpose ofdeclaration and calculation of tax in accordance with the laws onaccounting, statistics and tax.

Example 2: Enterprise A, a subsidiary company of the multinationalcompany H, and enterprise B, an independent enterprise, together retailmotorbikes bearing the brand name HX in the year 2xxx. The comparisoncan be made in one of the two following ways:



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Comparing the transaction of purchasing and sellingmotorbikes by enterprise A and similar transaction of enterprise B.

Comparing the activity of retailing motorbikes betweenenterprise A and enterprise B,

1.2 The independent transaction selected for comparison means a transactionselected from independent transactions that have transactions nature andbackground (hereinafter referred to as transactions conditions) equivalentto those of the related transaction. Then, the price of products in the

independent transaction selected for comparison shall be the basis fordetermination of the price of products in the related transaction inaccordance with the methods of determining prices stipulated in Article 5,Part B of this Circular.

1.3 When comparing the related transaction with the independent transaction,the transactions conditions between the related transaction and theindependent transaction are not required to be identical, but they must beequivalent and have no disparities that materially affect the price ofproducts. If the conditions of the related transaction and the independenttransaction have material disparities, the enterprise must reflect the

disparities based on the monetary value, which serves as the basis foradjustment or elimination of material disparities. The determination of theequivalence when comparing the related transaction with the independenttransaction, and the elimination of disparities are stipulated in point 2,Article 4, Part B of this Circular.

1.4 The comparison between the related transaction and the independenttransaction is made on the basis of each transaction concerning eachseparate kind of product. However, in the case where transactions cannotbe separated or the separation of each transaction concerning each kind ofproduct is not suitable to the reality of business, the business establishment

may lump the following transactions into one transaction:

1.4.1 Transactions which are closely-related and interdependent like transactionson the basis of a contract for supply of goods and services, in whichservices are an indispensable part of the contract for provision of goods;transactions which have a nature of uninterrupted chain such as provisionor granting of the right to use intangible assets together with provision ofmaterials, semi-finished products for production and processing of finishedproducts.



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1.4.2 Transactions concerning products which have the same process of

production, which use the same main materials, or which are in the samegroup in accordance with standards on dividing into groups of goods orservices stipulated in the statistical list of goods and services issued by thecompetent State management agency.

Example 3: Commercial enterprise A imports three (3) items of goods fromits overseas related parties to distribute them to domestic super markets.These three items of goods are lumped into the group of heating appliancesused for households (in accordance with the Vietnamese statisticalstandard).

Where the separation of each transaction based on each kind of product X,Y and Y is not appropriate to the business reality, enterprise A may lumptogether the import values of these 3 kinds of products to apply the mostappropriate method of determining prices.

1.4.3 Small business transactions of which the lumping together can create acomplete transaction.

1.4.4 The independent transaction and related transaction are carried out by anenterprise but the enterprise cannot allocate reasonably the relevant

turnover or expense to each kind of transaction. In this case, the lumpedtransaction is considered the related transaction and the price of products inthe lumped transaction shall be the highest price of one of relevant products(in the case of a sale transaction) or the lowest price of one of relevantproducts (in the case of a purchase transaction).

Example 4: Enterprise A has two contracts:

(i) Contract 1: provision of the service of supervising quality to a relatedparty being company B; and

(ii) Contract 2: provision of the service of supervising quality andassignment of the right to use the patent to independent company C, inwhich revenue from assignment of the right to use the patent is 5 timeshigher than that from provision of service of supervising quality.

Supposing that services of supervising quality under contract 1 and 2are eligible for being compared with each other:

Analysis and comparison:



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o Where enterprise A cannot separate revenues (or

expenses) related to the performance of these two contracts (including 3separate transactions concerning two kinds of products), the wholerevenues of enterprise A is considered the revenues from the relatedtransaction and, depending on the provisions of each method ofdetermining market prices stipulated in this Circular, the enterprise mustre-determine its revenues corresponding with the highest price ofproducts, that is royalty from the patent.

o Where Enterprise A can separate revenues (or expenses)

related to the performance of these two contracts, the price level of the

service provided under contract 1 shall correspond with the price level ofthe service provided under contract 2.

1.5 When selecting independent transactions for comparison, the enterpriseshall give priority to selection of its own independent transaction oncondition that this independent transaction is neither created nor rearrangedfrom the related transaction.

Example 5: Company M in a foreign country establishes the productionenterprise A in Vietnam. Supposing that enterprise A has two transactions:

(i) Selling 2,000 products to the independent customer A1 at the priceof VND 10,000 /product under the contract directly negotiated andsigned by the enterprise A under its normal business conditions.

(ii) Selling 2,000 products to the independent customer M1 at the priceof USD 0.4/product under the contract directly negotiated by theparent company M with customer, and then the parent company Mrequires enterprise A to deliver goods to customer M1. The paymentfor goods shall be directly made to enterprise A by company M or bycustomer M1.


- Transaction (i) is the independent transaction of enterprise A;

- Transaction (ii) is not considered the independent transaction ofenterprise A because, though products are dispatched fromenterprise A to customer M1 which are two parties having no relatedconnections, there is a participation and control by the parentcompany in the negotiation and signing of the contract and payment.



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1.6 The minimum number of independent transactions selected for comparison

after analyzing, comparing and adjusting material disparities shall be asfollows:

1.6.1 01 transaction In the case where the independent transaction and therelated transaction have no material disparity;

1.6.2 03 transactions in case where the independent transaction and the relatedtransaction have disparities but the enterprise has enough information ordata which serve as the basis for elimination of all material disparities;

1.6.3 04 transactions in case where the independent and related transactionshave disparities but the enterprise only has information or data which serveas the basis for elimination of most material disparities. In this case, thecontinued elimination of material disparities shall be made in accordancewith the guidelines on the standard range of market prices in Item 1.2, Point1, Article 5, Part B of this Circular.

This provision shall not be applied in case where the enterprise applies themethod of profit-split, the first way of calculation guided in Sub-Item 2.5.2.1,Item 2.5, Point 1, Article 5, Part B of this Circular.

1.7 In case where the enterprise cannot select independent transactions forcomparison in accordance with the principles stated from Item 1.1 to Item1.6, Point 1, Article 5, Part B of this Circular due to the unique and particularnature of the related transaction, the enterprise must explain the reasonsand comply with the guidelines in Article 6, Part B of this Circular.

2. Analysis, comparison and elimination of disparities

2.1 When comparing the independent transaction selected for comparison withthe related transaction, the enterprise must analyze and evaluate the

affecting criteria and adjust material disparities (if any) to clarify theequivalence based on the four following standards (hereinafter referred toas 4 affecting criteria):

2.1.1 Characteristics of products: including characteristics which affect the priceof products. The factors reflecting characteristics of products mainly include:

a) Kind of product (describing the nature of product: whether it is tangiblegoods, copyright, technology secret or service) and material



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characteristics of the product (materials constituting product,

mechanical, physical or chemical property,);

b) Quality, trade mark of the product;

c) Nature of the transfer of products (example: whether the purchase orsale of products is accompanied with conditions such as exclusivedistribution, licence, transfer of trade name)

Example 6: Enterprise A is an independent enterprise specializing inproduction of towel of various kinds (100% cotton yarn), in which its grade-A towel has sizes of 120 cm x 60 cm.

Company M is a subsidiary company in Vietnam with 100% foreign ownedcapital, specializing in production of towel of various kinds (100% cottonyarn), in which its grade-A towel has sizes of 121 cm x 60 cm and is usedfor sale to its overseas parent company.

Supposing that other characteristics of the towel products of Company Aand Company M are equivalent.


The towels of enterprise A and company M are considered products havingequivalent characteristics (the difference of 1cm in the towels length isconsidered immaterial).

2.1.2 Operational functions of enterprises include factors reflecting the capabilityof making profits from operations performed by the enterprise, associatedwith the use of relevant assets, capital and expenses. When analyzing theoperational functions (hereinafter referred to as functions), the enterprisemust reflect main functions in the relation between the use of assets, capitalor expenses and the risks associated with the use of those assets, capital

or expenses, and the capability of making profits by the enterprise, relatedto the business transaction. Main functions of the enterprise shall include:

a) Research and development;

b) Designing, setting samples of products;

c) Production, manufacture, processing;

d) Processing, assembly, installation of equipment;



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e) Distribution, circulation, marketing, advertising;

f) Management and supply of materials;

g) Transportation, forwarding, provision of warehouses and yards;

h) Provision of services such as brokerage, consultancy, training,accounting, auditing, human resource management, provision of labour,collection of information.

Example 7(a): In the year 200x, Company N (a related party in Vietnam ofthe multinational company X) performs the following tasks:

- Producing medicines on the production line invested by the company;medicines are produced under copyright provided by a company ingroup X;

- Selling (exporting) its products to Company X under contracts signedstably from the early year.

- Not carrying out activities of research on and development of any

product.

When comparing the related transaction (between Company N andCompany X) with an independent transaction, Company N must select anindependent enterprise with similar functions to eliminate disparities. As theproduction of medicines is usually associated with activities of research onor development of new products, where the selected independententerprise carries out the research and development functions, Company Nmust eliminate these disparities

Example 7(b): Following to example 7(a) mentioned above, supposing that

company N, in addition to its activities of production of and trade inmedicines, acts as an agent to import medicines from its parent company Xand distribute such medicines in Vietnam.

The activity of acting as an agent is an additional function carried out byCompany N. Company N has incurred expenses for and risks of the agentactivity. This activity is a related transaction of Company N. In this case,company N must determine and declare the agent commission inaccordance with the methods of determining market prices stipulated inPoint 2, Article 5, Part B of this Circular.



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Example 8: Company M, a multinational company in a foreign country, hasa transaction of wholesale trade in mobile phones T with internationalquality having been registered in Vietnam with company A being a relatedparty and company B being an independent company.

Company A distributes and retails mobile phone T, grants maintenancecard to each phone sold, and directly provides the maintenance service.

Company B distributes and retails mobile phone T, grants maintenancecard to each phone sold but does not provide the maintenance service.Company B agrees to pay 5 dollars to company A for each phone repairedby company A during the maintenance period.

When comparing the related transaction (between A and M) with theindependent transaction (between B and M), Company A must analyze andcompare functions of Company A and Company B and eliminate disparities.

- The operational functions of the two companies have a difference, thatis the provision of maintenance service, and company A performs morefunctions and uses more resources and is able to get more profits thancompany B.

- Company A must adjust the function of maintenance of products byeliminating actual expenses and revenues related to the provision ofmaintenance service by company A.

- Where the function of maintenance is performed in a few times and thevalue of expense and revenue is insignificant (that is immaterial), theadjustment needs not to be made.

2.1.3 Contractual conditions upon performance of the transaction includeregulations or agreement on responsibilities, rights of the parties when they

participate in the transaction. Contractual conditions upon performance ofthe transaction (hereinafter referred to as contractual conditions) mainlyinclude:

a) Quantity, conditions of delivery and distribution of products;

b) Time limit, conditions and mode of payment

c) Conditions of maintenance, replacement, improvement, repair oradjustment of products;



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d) Conditions on business privileges, distribution of products.

e) Conditions which have other economic effects (example: support orconsultancy service; service of inspecting quality; service of providingguidance on use of products; assistance in advertisement; promotion)

In all cases (whether there is a written contract or not), the bases used todetermine contractual conditions are the actual facts or the financial oreconomic data that reflect the nature of the transaction.

2.1.4 Economic conditions upon occurrence of the transaction include economicfactors in the market at the time of occurrence of the transaction, whichaffect the price of products. Economic conditions upon occurrence of thetransaction (hereinafter referred to as economic conditions) mainlyinclude:

a) Size and geographical location of the market for production orconsumption of products;

b) Time and operational nature of the transaction in the market (forexample: wholesale, retail, or exclusive distribution, segmentation of the

product consumer market);

c) Competitive capacity of products in the market;

d) Economic factors affecting business or production costs at the placewhere the transaction occurs (example: taxes, fees, financial incentives);

e) The States policy on regulation of the market.

2.2 The priority order when analyzing and comparing 4 affecting criteriamentioned above at the sub-items from 2.1.1 to 2.1.4, item 2.1, point 2,

Article 4, Part B of this Circular is stipulated specifically for each method ofdetermining prices stated in Article 5, Part B of this Circular. During theprocess of comparison, priority criteria must be analyzed in detail;supplementary criteria may not be analyzed in detail but the basic nature ofthose criteria must be reflected fully.

Example 9: Supposing that company M in Vietnam (which is a subsidiarycompany of the international company M) specializes in trade in product Xwith grade-I quality, which has been registered in Vietnam. In the year200x, the company selects an independent transaction A (between



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company M in Vietnam and an independent party) to compare with the

related transaction B (between company M in Vietnam and the internationalcompany M), and the selling price of products in these two transactions isUSD 3/unit.

In this case, the analysis of 4 affecting criteria may be as follows:

(i) Characteristics of product: the same (as it is the productmanufactured by company M in Vietnam);

(ii) Operational function: the same (as it is the operationalfunction of company M in Vietnam);

(iii) Contractual conditions: Supposing that this criterion of the twotransactions is the same except that the condition of delivery ofgoods in transaction A is at the warehouse of company M in Vietnamand in transaction B is at port X of country Y, and the transportationfee from Vietnam to country Y is USD 0.5/product, and company Min Vietnam is responsible for paying the transportation fee. .

(iv) Economic conditions : Supposing that this criterion does notaffect the price of product (for example, country Y has no price

control policy in respect of the trade in product X, the condition ofselling product is wholesale, the purchaser incurs import duty onproduct X and carries out procedures for importing product X intocountry Y).

Thus, the comparison of prices shows that price in transaction B hasnot yet been equivalent to price in transaction A (there is a differenceof USD 0.5/unit).

In this case, company M in Vietnam shall select the most appropriatemethod of determining price to ensure that the price of product X in

transaction B is equivalent to USD 3.5/product ( which substitutes forthe old price of USD 3/unit).

2.3 After analyzing and comparing, the enterprise shall determine materialdisparities in transaction conditions between the related transaction and theindependent transaction. Where there are no material disparities, theenterprise needs not to implement the provisions in item 2.4, point 2, Article4, Part B of this Circular.



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2.4 Where there are material disparities, the enterprise must determine the

monetary value of those material disparities for adjustment. Depending oneach specific case, the enterprise may increase or decrease the monetaryvalue in order to eliminate the material disparities.

Where there is a material disparity in operational functions of enterprises,the adjustment shall be made as follows:

a) If the expense or revenue related to the material disparity in functions isaccounted for separately, the adjustment is made on the basis of eachitem of revenue or expense related to that material disparity.

b) If the expense or revenue related to the material disparity in functions isaccounted for generally, the adjustment shall be made on the basis ofallocation to determine the corresponding expense or revenue related tothat material disparity.

Example 10: Supposing that company A and company B all provide theservice of processing garments; company A processes garments anddelivers products at its warehouse A and company B processes garmentsand effects formalities for exporting products abroad.

Thus, when comparing the processing function of company A and companyB, we see that company B further carries out the function of effectingformalities for export. This disparity shall be separated by way ofaccounting for export expense or revenue separately, or allocating on thebasis of the proportion of export expense or revenue to the total cost orturnover, in order to ensure that the processing function of company A andcompany B is equivalent.

Where company B only carries out the function of effecting formalities forexport in a few times at the request of the customer with an insignificantexpense or revenue (that means immaterial), this disparity needs not to be

adjusted.

Article 5: Methods of determining market prices

Methods of determining market prices of products in the related transactionstipulated specifically in point 2, Article 5, Part B of this Circular shallinclude:

Method of comparable uncontrolled price;

Method of resale price;



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Method of cost-plus;

Method of comparable profit;

Method of profit-split.

Depending on each specific method mentioned above, the market price ofproduct may be used for direct calculation of the selling price of product, orindirect calculation of the selling price of product through the ratio of grossprofit or the profit-making rate of product. However, in respect of the methodof calculating the selling price indirectly, when determining the operatingresult for the purpose of declaration and calculation of BIT, the enterprise isnot necessarily required to calculate the specific selling price.

1. Principles of applying the method of determining market prices

1.1The most appropriate method of determining prices is the methodselected from 5 methods mentioned above, which is suitable to transactionconditions and has the fullest and most reliable source of information anddata for analysis and comparison.

1.2 The enterprise itself shall select a most suitable value from the values inthe standard range of market prices to use it as the basis for adjustment ofthe corresponding value of the related transaction. Where the price of

product in the related transaction differs from the most suitable value butdoes not decreases the income subject to BIT, the enterprise shall not berequired to make the adjustment.

1.2.1 The most suitable value is the value reflecting the highestequivalence level regarding transaction conditions of the independenttransaction selected to compare with the related transaction.

1.2.2 The standard range of market prices means:

a) The values in the range of values calculated from independent

transactions selected for comparison as stated in sub-items 1.6.1 and1.6.2, item 1.6, point 1, Article 4, Part B of this Circular.

b) The values lying in the extent from the first quartile to the third quartile ofthe statistical calculus of quartile, or the values lying in the extent fromthe 25th percentile to the 75th percentile of the statistical calculus ofpercentile, calculated from the range of market prices of independenttransactions selected for comparison as stated in sub-item 1.6.3, item1.6, point 1, Article 4, Part B of this Circular (See Appendix 2-GCN/CC Part C regarding the way of calculating quartile and percentile).



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Example 11: Enterprise V in Vietnam has the following information:

- It is a subsidiary company specializing in production and processing ofproducts for the parent company, and has to pay royalty to anothersubsidiary company in the group with the annual expense of N%/yearcalculated on the net revenue; the payment is made on the periodicalbasis of every four years.

- Enterprise V has selected 13 independent transactions for comparison,and the data on the percentage (%) of royalty on net revenue of theseindependent transactions are: 1, 1.25; 1.25; 1.5; 1.5; 1.75; 2; 2; 2; 2.25;2.5; 2.75; 3.

- The analysis and comparison show that material disparities have beeneliminated; in particular, there is a disparity in the term of payment,which may affects the value of royalty but the enterprise does not haveenough information to determine the monetary value of that disparity foradjustment.

- The enterprise applies the statistical function of quartile, selecting thefirst quartile and the third quartile to determine the standard range

varying from 1.5 to 2.25; the median is the second quartile of thestandard range, having its value equal to 2.

Adjustment of the declared data:

- Where the percentage of royalty calculated on net revenue of enterpriseV is 2.1%, the enterprise V is not required to readjust the deductibleroyalty upon calculation of BIT.

- Where the percentage of royalty calculated on net revenue of enterpriseV is 4%, concurrently enterprise V sees that the transaction with the

percentage of royalty equal to 2% is the closest to the transaction of theenterprise, the enterprise V readjusts the deductible royalty uponcalculation of BIT at the percentage of 2% of the net revenue.

1.3 Where an enterprise has applied methods of determining market prices inaccordance with the provisions of this Circular, but in the year there areforce majeure events such as natural disasters, fire and explosion whichaffect the business or production situation, or the buying or selling price isaffected by the adjustment policies of the State, the enterprise shall beallowed to adjust prices for affected products based on the real situation.



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2. Methods of determining market prices

2.1Method of comparable uncontrolled price

2.1.1 The method of comparable uncontrolled price shall base on theselling price of product in the independent transaction to determine theselling price of product in the related transaction when these transactionshave equivalent transaction conditions.

2.1.2 The selling price of product in the related transaction is comparedwith the most suitable value included in the standard range of market pricesfor adjustment in conformity with the principles stipulated in item 1.2, point1, Article 5, Part B of this Circular.

2.1.3 In respect of this method, when analyzing and comparing 4 affectingcriteria in accordance with the guidelines in Article 4, Part B of this Circular,the priority criteria are characteristics of product and contractual conditions,supplementary criteria are economic conditions and functions of theenterprise.

2.1.4 The method of comparable uncontrolled price is applied where there

is one of the following conditions:

a) When comparing the independent transaction with the relatedtransaction, there are no disparities in transaction conditions whichmaterially affect the price of product;

b) Where there are disparities which materially affect the price of product,these disparities are eliminated in accordance with the guidelines inArticle 4, Part B of this Circular.

2.1.5 Factors that materially affect the price of product such as:

a) Material characteristics, quality and trade mark of products;

b) Contractual conditions in supply and transfer of products, such asvolume (if it affects the price), time limit for transfer of products, term ofpayment;

c) The right to distribution or sale of product, which affects the economicvalue;



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d) The market where the transaction occurs.

2.1.6 The method of comparable uncontrolled price is usually applied tocases:

a) Individual transactions concerning each kind of goods circulated in themarket;

b) Individual transactions concerning each type of service, copyright, loancontract;

c) The business establishment carries out both independent transactionand related transaction concerning the same kind of product.

Example 12: Company V is a 100% foreign owned company in Vietnam ofCompany S, operating in the sector of processing garments. In the year200x, company V has two transactions concerning processing of trouserswith cat.347 as follows:

Transaction 1: Processing 1,000 dozens of trousers for the parentcompany S at the price of USD 60/dozen provided that goods aredelivered at port X, Vietnam (company S shall be responsible for

exporting).

Transaction 2: Processing 1,000 dozens of trousers for company M ofcountry N at the price of USD 100/dozen provided that goods aredelivered in city Y of country N.

Supposing that:

- Company M is a company having no related connections with companyV and company S.

- The two transactions mentioned above have equivalent transactionconditions except that they have a material disparity in the place ofdelivery of goods, and the transportation cost and insurance premiumfor transportation of goods from port X to city Y is USD 3/dozen.


- When comparing transaction 1 (the related transaction) with transaction2 (the independent transaction), we see that transaction 1 has not yet



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reflected fully the market price. In this case, the revenue from the

transaction with company S shall be re-determined as follows:

(USD 100 USD 3) x 1,000 = USD 97,000.

- Company V must declare that the processing revenue received fromcompany S is USD 97,000 instead of USD 60,000.

2.2Method of resale price

2.2.1 The method of resale price bases on the resale price (or sellingprice) of the product sold by the enterprise to an independent party todetermine the purchase price of that product from the related party.

2.2.2 The purchase price of product from the related party is determinedon the basis of the selling price of product in independent transactions less(-) gross profit less (-) other costs calculated in the price of purchasedproduct (if any) (example: import duty, customs fee, insurance premium,international transportation cost).

2.2.2.1 The gross profit is calculated based on the ratio of gross profit to theselling price (net revenue) and the selling price (net revenue). The gross

profit reflects the enterprises reasonable profit which is equal to revenuecollected by the enterprise less its operating expenses.

The ratio of gross profit to the selling price (net revenue) shall equal thedifference between the selling price (net revenue) and the cost of productdivided by (:) the selling price (net profit).

2.2.2.2Where an enterprise acts as distribution agent which has no right toown products and gets agent commission equal to a percentage (%) on theselling price of product, such percentage is considered the ratio of grossprofit to the selling price (net revenue).

(See Appendix 2-GCN/CC Part B.1 regarding the formula used fordetermination of market prices under the resale price method)

2.2.3 The ratio of gross profit to the selling price (net revenue) of therelated transaction is compared with the most appropriate value included inthe standard range of market prices for adjustment in accordance with theprinciples stipulated in item 1.2, point 1, Article 5, Part B of this Circular.



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2.2.4 In respect of this method, when analyzing and comparing 4 affecting

criteria in accordance with the guidelines in Article 4, Part B of this Circular,the priority criteria are operational functions of the enterprise, thesupplementary criteria are contractual conditions, characteristics of productand economic conditions.

2.2.5 The method of resale price is applied where there is one of thefollowing conditions:

a) Upon comparison between the independent transaction and the relatedtransaction, there is no disparity in transaction conditions that materiallyaffects the ratio of gross profit to the selling price (net revenue);

b) In case where there are disparities that materially affect the ratio ofgross profit to the selling price (net revenue), these disparities havebeen eliminated in accordance with the guidelines in Article 4, Part B ofthis Circular.

2.2.6 Factors that materially affect the ratio of gross profit to the sellingprice (net revenue) such as:

a) Expenses reflecting functions of the enterprise (example: acting as an

exclusive distribution agent; carrying out advertising, promotional,maintenance .programs);

b) Kinds, scale, volume, rotation period of products purchased for resaleand nature of the transaction in the market (example: wholesale, retail,);

c) Method of accounting treatment (that is, the enterprise must ensure thatfactors constituting gross profit and revenue of the related transactionand the independent transaction are equivalent, or the relatedtransaction and the independent transaction are subject to the same

accounting standards).

2.2.7 The method of resale price is usually applied to transactions such asprovision of simple services or trade in products which have a short rotationperiod between the time of purchasing them and the time of selling them,and which are less likely to endure seasonal fluctuations. Moreover, prior tobeing sold, products have not undergone the processing or assembly whichmakes their nature changed, have not been associated with a trademark tomake their value increase significantly.



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Example 13: Enterprise V is a related party in Vietnam of foreign company

H, doing business in distributing watches provided by company H.Company V has information as follows:

- In the year 200x, company H delivered 1,000 watches to enterprise Vand requested enterprise V to pay an amount of USD 330,000(including CIF + import duty, import fees already paid by company H).

- At the year end, the net revenue collected by enterprise V from saleof the total watches to Vietnamese consumers is converted to USD400,000.

- Enterprise T is an independent enterprise, also doing business indistributing watches. In the year 200x, the ratio of gross profitachieved by enterprise V is 20%.

Supposing that enterprise T is qualified for its gross profit ratio to becompared with that of enterprise V, then enterprise V shall have to declareand calculate deductible expenses for purchase of watches from companyH as follows:

[USD 400,000 (400,000 x 20%)] = USD 320,000

Enterprise V shall only be entitled to deduct the cost of sales equal to USD320,000 instead of USD 330,000.

Where company H provides consultancy on sales and requests enterpriseV to pay for this service (the payment is included in sale expenses), thistransaction shall be separated, and one of the methods of determiningtransaction prices stipulated in this Circular shall be applied to calculatedeductible expenses for the consultancy on sales.

2.3Method of cost-plus

2.3.1 The method of cost-plus bases on the historical cost (or productioncost) of the product purchased by the enterprise from an independent partyto determine the selling price of that product sold to the related party.

2.3.2 The selling price of product sold to the related party is determined bytaking the historical cost (or the production cost) plus (+) gross profit.

2.3.2.1 The gross profit is calculated based on the ratio of gross profit to thehistorical cost (or production cost) of products sold and the historical cost



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(or production cost) of products sold. The gross profit reflects the

reasonable profit corresponding with operational functions of the enterpriseand market conditions.

The ratio of gross profit to the historical cost (or production cost) equals thedifference between net revenue and historical cost (or production cost) ofproducts divided by (:) the historical cost (or production cost). The historicalcost (or production cost) of products sold comprises direct or indirectproduction expense and does not consist of expense from financialoperations such as cost of copyright, loan interest,).

Where the enterprise cannot separate the historical cost (or productioncost) of products sold from the sale expense and overhead expense, thehistorical cost (or production cost) of sold products which serves as thebasis for calculation of gross profit shall include all these expenses.

2.3.2.2Where the enterprise acts as a purchase agent which has no right toown products and gets agent commission equal to a percentage (%) onexpenses for purchasing products, such percentage shall be considered theratio of gross profit to the historical cost.

(See Appendix 2-GCN/CC, Part B.2 regarding the formula used for

determination of market prices under the method of cost-plus)

2.3.3 The ratio of gross profit to the historical cost (or production cost) ofthe related transaction is compared with the most suitable value included inthe standard range of market prices for adjustment in accordance with theprinciples stipulated in item 1.2, point 1, Article 5, Part B of this Circular.

2.3.4 In respect of this method, when analyzing and comparing 4 affectingcriteria in accordance with the guidelines in Article 4, Part B of this Circular,the priority criteria are operational functions of the enterprise, thesupplementary criteria are contractual conditions, characteristics of product

and economic conditions.

2.3.5 The method of cost-plus is applied where there is one of thefollowing conditions:

a) Upon comparison between the independent transaction and the relatedtransaction, there is no disparity in transaction conditions whichmaterially affects the ratio of gross profit to the historical cost (orproduction cost);



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b) Where disparities materially affect the ratio of gross profit to the

historical cost (or production cost), these disparities have beeneliminated in accordance with the guidelines in Article 4, Part B of thisCircular.

2.3.6 Factors that materially affect the ratio of gross profit to the historicalcost (or production cost) usually comprise:

a) Expenses reflecting operational functions of the enterprise (example:production under contract, research on and development of newproducts; proportion of added value of product to the investment scale);

b) Obligations to perform the contract (example: time limit for transfer ofproducts, expenses on supervision of quality, or for keeping in storageor open ground, terms of payment);

c) Method of accounting treatment (that is, the enterprise must ensure thatthe factors constituting the historical cost (or production cost) of therelated transaction and the independent transaction are equivalent, orthe related transaction and the independent transaction are subject tothe same accounting standards).

2.3.7 The method of cost-plus is usually applied in cases:

a) Transactions concerning production, assembly, manufacture, processingof products for sale to related parties;

b) Transactions between related parties which perform joint venturecontracts or business cooperation contracts to produce, assemble,manufacture or process products, or which work out their agreement onprovision of input products and consumption of output products.

c) Transactions concerning provision of services to related parties.

Example 14: Enterprise A in Vietnam is a subsidiary company of the parentcompany T (Italy), processing shoes for export based on samples deliveredby company T. The parent company is responsible for providing input rawmaterials and materials, quality inspecting technicians, international freightcharges and insurance premium. Enterprise A is paid processing fees bythe product and incurs expenses arising in the process of processingshoes. In the year 200x, the information about enterprise As processingactivities is as follows:



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- Net turnover (processing fees): VND 15 billion

- Historical cost of goods sold: VND 13 billion- Sale expenses and overhead expenses: VND 1.8 billion

Supposing that:

- Some other independent enterprises are also engaged in productionand processing of shoes for foreign organizations or individuals, andthe processing fee is calculated on the basis: processing fee = theoverall production cost (= historical cost of goods sold + overheadexpenses + sale expenses) plus (+) 7% of the total production cost.

- Independent transactions of these enterprises are eligible to beselected for comparison with enterprise As transactions.

In this case, turnover from activities of processing shoes shall be re-determined as follows: (13 billion + 1.8 billion) + [7% x (13 billion + 1.8billion)] = VND 15.836 billion.

Enterprise A must declare the turnover of VND 15,836 billion (whichsubstitutes for the old data of VND 15 billion).

2.3.8 The method of cost-plus can be applied to re-determine the historicalcost (or production cost) of product in the related transaction of theenterprise, based on the price of product sold at the market price and theratio of gross profit to the historical cost (or production cost).

Example 15: Enterprise V in Vietnam is a subsidiary company with 100%capital of the multinational company P, specializing in production of family-used detergents. Input materials (soap chips and other detergentchemicals) are provided by the member-company Y. The output sold in theyear 200x by enterprise V is 100 tons, in which:

- Transaction 1: 60 tons are sold to another member company in group Pat the FOB price of USD 650/ton.

- Transaction 2: 40 tons are sold to domestic supermarkets at the pricewithout VAT of USD 700/ton.

Books of account in the period of enterprise V have the following data:

- Net turnover: USD 67,000



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- Overall production cost: USD 65,000

Supposing that:

- Transactions 1 and 2 are eligible for enterprise V to apply the method ofcomparable uncontrolled price.

- The ratio of gross profit to the overall production cost of independententerprises operating in the family-used detergent industry is 15%.

Enterprise V shall declare its turnover and expenses to calculate BIT asfollows:

- Readjust the selling price in the related transaction based on the sellingprice in the independent transaction:

USD 700 x 60 tons = USD 42,000

- Re-determine net turnover:

USD 42,000 + USD 700 x 40 tons = USD 70,000

- Readjust the overall production cost:

[USD 42,000 + (USD 700 x 40 tons)] / (1 + 0.15) = USD 60,870

Thus, enterprise V shall have to declare and pay tax based on its netturnover of USD 70,000 instead of the old data of USD 67,000, and on itsoverall production cost of USD 60,870 instead of the old data of USD65,000.

2.4Method of comparable profit

2.4.1 The method of comparable profit bases on the profit-making rate ofproducts in an independent transaction selected for comparison, whichserves as the basis for determining the profit-making rate of products in arelated transaction when these transactions have equivalent transactionconditions.

2.4.2 The profit-making rate is calculated as a percentage of the pre-BITnet profit (income) on net turnover, on expenses or on assets of thebusiness and production activity in accordance with the provisions of theregime of accounting and financial statements. The loan interest cost or the



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depreciation cost of fixed assets may be added to the pre-BIT net profit

(income) to determine the production or operating result s before paymentof such costs. The profit-making rates usually used comprise:

2.4.2.1 The ratio of pre-BIT net income to the net turnover frombusiness and production activity.

Example 16: Company L operates in the sector of production and assemblyof 4-seat automobiles bearing trademarks N and S, in which:

- Automobiles with the trademark N are sold to independent parties.

- Automobiles with the trademark S are totally sold to company L1 whichis wholly owned by company L.

- All purchase transactions serving the production or assembly of the twokinds of automobiles mentioned above are independent transactions.

In the year 200x, the data on books of account of company L are as follows:

Net turnover from sale of automobiles with the trademark N: USD18,000 (independent transaction).

Pre-tax net profit from sale of automobiles with the trademark N: USD2,000

Net turnover from sale of automobiles with the trademark S: USD25,000 (related transactions)

Pre-tax net profit from sale of automobiles with the trademark S: USD1,800

Company L1 makes a loan to Company L, and the loan interest value

calculated at the market interest rate is USD 100.

The ratio of pre-BIT net profit to net turnover from sale of automobiles withthe trademark N: 2,000/18,000 x 100% = 11.1%

The ratio of pre-BIT net profit to net turnover from sale of automobiles withthe trademark S: 1,800/25,000 x 100% = 7.2%

Supposing that material disparities between the two transactions of sellingautomobiles N and S have been adjusted so that the transaction with



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company L1 obtains a ratio of pre-BIT net profit equal to 11.1% before

payment of loan interest. In this case, the data on the transaction of sellingautomobiles with the trademark S shall be re-determined as follows:

The overall production cost: 25,000 1,800 -100 = USD 23,100.

Net turnover: 23,100 / (1 0.111) = USD 25,984.

Pre-BIT net profit before payment of loan interest: 25,984 -23,100 = USD2,884.

Pre-BIT net profit: 2,884 100 = USD 2,784.

In respect of the transaction of selling automobiles with the trademark S,Company L must declare the pre-BIT net profit of USD 2,784 instead of theold data of USD 1,800 stated in the book of account.

2.4.2.2 Ratio of pre-BIT net income to total expenses from business andproduction activity.

The ratio of pre-BIT net income to total expenses shall not be used whereexpenses arise from the related transaction because expenses arising from

the related transaction are subject to an adjustment for determination ofmarket prices.

Example 17: Enterprise A is a subsidiary company of company B, acting asthe forwarding agent for B; enterprise C is an independent enterprisespecializing in providing forwarding service (to many independentcustomers). The data on turnover and expenses of A and C are as follows:

Unit: USD 1,000

A C

Total expenses 1,500 2,000

Total turnover 1,650 2.500

Supposing that C is eligible to be compared with A in terms of the ratio ofpre-BIT net income to total expenses, then:

- The ratio of pre-BIT net income to total expenses of A = (1,650 1,500) : 1,500 = 10%

- The ratio of pre-BIT net income to total expenses of C = (2,500 2,000) : 2,000 = 25%



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Enterprise A must declare its pre-BIT net income from the relatedtransaction at the ratio of pre-BIT net income to total expenses,corresponding with the rate of 25% of enterprise C.

2.4.2.3 The ratio of pre-BIT net income to assets used for business andproduction activity.

This ratio shall only be used in case where the enterprises fixed assetsaccount for a significant proportion in the total investment capital (example:enterprises in the production industry, the mining industry)

The value of assets is the average value of the balance of assets at theopening of the period and at the closing of the period, including fixed assetsand current assets, not including assets used for other activities ofinvestment or capital contribution (example: purchasing government bonds,purchasing shares).

Example 18:

N is a subsidiary company in Vietnam of group P, specializing inproduction of rice alcohol. The parent company provides most input

materials and ensures consumption of the total output products. In theyear 200x, enterprise N has a ratio of pre-BIT net income to assetsequal to 3%.

V is an independent company specializing in production of beverages ofvarious kinds, which has factories producing rice alcohol, beer and othercarbonated drinks. In the year 200x, the ratio of pre-BIT net profit toassets of the whole company V is 7%, in which the ratio of pre-BIT netprofit to assets of the rice alcohol factory is 7.5%.

Supposing that V is eligible to be compared with N in terms of the ratio

of pre-BIT net income to assets, enterprise N shall be required to adjustits taxable income based on the ratio of pre-BIT net income to assets,which equals 7.5%.

2.4.3 The enterprise selects one of the profit-making rates mentionedabove to compare the profit-making rate of the related transaction with thatof the independent transaction and may use one or many other profit-making rates provided for in accordance with the regime of financialstatements to assist in examination of the accuracy of the selected profit-making rate. Whether the profit-making rate is calculated on net revenue,



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expenses or assets depends on the economic nature of the transaction.

(See Appendix 2-GCN/CC, Part B.3 regarding formulas used for calculationof the profit-making rate to apply the profit comparison approach).

Example 19:

- Supposing that an enterprise has the related transaction when sellingproducts, it shall not use the ratio of pre-BIT net income to net revenuebecause the revenue from the related transaction is subject to anadjustment for determination of the market price.

- Supposing that an enterprise provides services, it shall not use the ratioof pre-BIT net income to assets.

2.4.4 The profit-making rate of the related transaction is compared with themost suitable profit-making rate included in the standard range of marketprices for adjustment in accordance with the principles stipulated in item1.2, point 1, Article 5, Part B of this Circular.

2.4.5 In respect of this method, when analyzing and comparing 4 affectingcriteria in accordance with the guidelines in Article 4, Part B of this Circular,the priority criteria are operational functions of the enterprise, the

supplementary criteria are contractual conditions, characteristics of productand economic conditions.

2.4.6 The method of comparable profit is applied where there is one of thefollowing conditions:

a) Upon comparison between the independent transaction and the relatedtransaction, there is no disparity in transaction conditions whichmaterially affects the profit-making rate;

b) Where there are disparities that materially affect the profit-making rate,

these disparities have been eliminated in accordance with the guidelinesin Article 4, Part B of this Circular.

2.4.7 Factors that materially affect the profit-making rate such as:

a) Factors concerning assets, capital and expenses used for carrying outthe main function of the enterprise (example: production or processingon the basis of using machinery invested by the enterprise shall be likelyto get higher profit than production or processing on the basis of usingmachinery borrowed from another business establishment);



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b) Nature of the lines of business, group of products and the stage ofproduction or consumption (example: finished products are made fromraw materials or from semi-finished products);

c) Method of accounting and structure of expense of products (example:products are in the stage of accelerated depreciation compared withnormal depreciation).

2.4.8 The profit comparison approach is the expanding method of themethod of resale price and the method of cost-plus. Therefore, the profitcomparison approach is usually applied extensively in cases as mentionedin sub-item 2.2.7, item 2.2, and sub-item 2.3.7, item 2.3, Point 2, Article 5,Part B of this Circular.

2.5Method of profit-split

2.5.1 The method of profit-split bases on profits derived from aconsolidated related transaction carried out by many related enterprises todetermine the suitable profit for each of those related enterprises in thesame way as that independent parties share profits in equivalentindependent transactions.

The consolidated related transaction carried out by many relatedenterprises is a transaction with specific and unique nature, which includesrelated transactions closely related to one another in terms of exclusiveproducts, or closed related transactions between relevant related parties.

2.5.2 The method of profit-split shall have two ways of calculating:

2.5.2.1 The first way of calculating : Distributing profits to each related partyon the basis of expense contribution, under which the profit distributed toeach related enterprise participating in the transaction shall be determined

by distributing the total profit collected from the consolidated relatedtransaction based on the ratio of expense actually contributed in the relatedtransaction by that business establishment to the total actual expense usedto create the final product..(See Appendix 2-GCN/CC, Part B.4 regardingthe formula used for distribution of profits according to the ratio of capitalcontribution)

Example 20: Enterprise A in Vietnam and enterprise B located abroad havethe information as follows:



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- Both companies are member companies of Group T producing

electronic products.

- Both companies are engaged in production of a new products -televisions with liquid crystal display.

- Enterprise A is responsible for designing and producing the cover andpicture tube, and then passing them to enterprise B for the latter toinstall other components (loops, electronic chips,.) that it invents andmanufactures. After that the finished product shall be sold at the priceof USD 550 to C which is an independent distributor.

- The total production cost of the product delivered by A to B is USD 300,the expense spent by B on the following stage of production is USD150.

Profit distributed to A is calculated as follows: [(550 (300 + 150)): 450] x300 = USD 66.66

2.5.2.2 The second way of calculating : Distributing the profit through twosteps as follows:

2.5.2.2.1 The first step: Distributing basic profits : Each enterprise engaged in therelated transaction shall receive a portion of basic profit corresponding withits operational functions. The basic profit reflects the profit of theconsolidated related transaction that the enterprise gets from carrying outits operation functions without calculating specific and unique factors(example: exclusive ownership or use of intangible assets or intellectualproperty).

The basic profit is calculated in accordance with the ratio of gross profit orthe profit-making rate corresponding with the most suitable value includedin the standard range of market prices guided in items 2.2, 2.3 and 2.4,

point 2, Article 5, Part B of this Circular.

2.5.2.2.2 The second step: Distributing extra profits : Each enterprise engaged inthe related transaction shall continue to receive a portion of extra profitcorresponding with its proportion of contribution generating the total of extraprofit (the total of collected profit less (-) the total of basic profit distributed inthe first step) of the consolidated related transaction. The extra profitreflects the profit of the consolidated related transaction that the enterprisegets in addition to the basic profit, thanks to specific and unique factors.



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The extra profit of each enterprise equals the total of extra profit derived

from the consolidated related transaction multiplied by (x) the rate ofcontribution of expenses or assets below by each enterprise:

a) Expenses for research on and development of products;

b) Value (after deduction of depreciation cost) of intangible assets orintellectual property used for production of or trade in products.

Research and development expenses, value of intangible assets orintellectual property must be determined on the basis of market prices (inaccordance with methods stipulated in this Circular) or actual expensescontributed by each party in conformity with the principles of accounting forexpenses or assets.

Example 21: H and M are two companies in the same group, producingmobile phones. Company M manufactures components and company Massembles them and installs complete software, and then they sell productsto independent distributors. The accounting data of companies H and Mrelated to the production of mobile phones are as follows:

Unit: USD 1,000

Description H M Net turnover 200

500

Cost of sales, including:

Expenses for purchase of inputmaterials

100

200

Production costs 50 15 0

Research & Development expenses 30 50

Sale expenses and overhead expenses 10 50

Profits 10 50

Way of calculating profits of H and M based on the method of profit-split:

Step 1: Distributing basic profits:

- Recalculating the profit/loss account:

Unit USD 1,000



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Description

Turnover 500Cost of sales 300

R & D expenses 80

Sale expenses and overhead expenses 60

Profits 60

- Supposing that the ratio of profit to the production cost of Hbased on the market price is 10% and of M is 8% in accordance withthe guidelines in item 2.3, Section II, part B of this Circular:

- Calculating profit of H and M according to the formula:

Profit = profit-making rate x overall production costTotal expenses = cost of sales + R & D expenses + sale expensesand overhead expenses

+ Profit of H = 10% x (100 + 50 + 30 + 10) = USD 19,000+ Profit of M = 8% x (300 + 80 + 60 190) = USD 20,000

Extra profit remains after distributing basic profits: 60 19 20 = 21

Step 2: Distributing the extra profit based on the ratio of contribution tothe R & D expenses

- Calculating the ratio of contribution to R & D expenses by eachparty:

+ by H: 30/80 x 100% = 37.5%;

+ by M = 62.5%

- Calculating the extra profit of H and M:

+ H: 21 x 37.5% = USD 8,870

+ M: 21 8.87 = USD 12,130

Conclusions:


8/6/2019 66-10 Providing G

66-10 Providing Guidance on Determination of the Market Price in Business Transactions Between Related Parties

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