Chương II Nghị định 132/2020/NĐ-CP: Phân tích, so sánh, lựa chọn đối tượng so sánh độc lập và các phương pháp xác định giá giao dịch liên kết

Chapter II

COMPARABILITY ANALYSIS, SELECTION OF INDEPENDENT COMPARABLES AND TRANSFER PRICING METHODS

Article 6. Comparability analysis doctrines

1. Transfer pricing analyses shall be carried out according to the substance-over-form doctrine under which a transaction determining tax liability is analyzed to determine the substance of a related party transaction:

a) The substance of a transaction prescribed by a legally binding agreement, a written document or agreement regarding the transaction performed by related parties is compared to the reality of execution of the transaction by these related parties. In case where any taxpayer performs a related party transaction without entering into any agreement in writing or with agreements incompliant with the arm's length doctrine, or the realistic execution of the transaction does not adhere to the doctrine of arm’s length transactions between unrelated parties, the related party transaction must be determined by the very substance of business transactions between independent parties, i.e. the related party receiving revenue or income from the related-party transaction with the taxpayer shall have the right to own and control risks in trading assets, commodities, services and resources, and the right to create economic benefits and the rights to generate income from shares, stocks and other financial instruments while the taxpayer incurring expenses from the transaction with the related party must either directly receive economic benefits or values, or contribute to creating revenue, values added to business activities of the taxpayer in conformity with the arm’s length doctrine;

b) The substance of the transaction is defined by the method of collecting information, evidence and data on transactions or risks posed to related parties in the reality of business activities.

2. Analysis for the purpose of comparison between related party transactions and arm’s length transactions:

a) Data on and the reality of transactions between related parties that constitute the basis for comparing contracts, written credentials, agreements and economic, commercial and financial relationships in taxpayers’ related transactions with business decisions may be accepted by independent parties under the same or similar conditions. According to the principle of comparison applied in the comparability analysis, the substance and reality of business and risks incurred by related parties shall outweigh written agreements;

b) Comparability analysis must ensure the comparability between enterprises performing arm’s length transactions and those performing related party transactions, or between arm’s length transactions and related party transactions, and none of extrinsic factors causing material impacts on levels of price, profit margins or ratios of profit split between parties. In case where there exists any extrinsic factor causing material impacts on the level of price, profit margin or profit split ratio, it shall be obligatory to analyze, determine, correct and eliminate these factors based on the comparison of the factors referred to in Article 7 and 10 herein, and ensure the comparability analysis is conformable to specific transfer pricing methods prescribed in Article 13, 14 and 15 herein.

Article 7. Selection of independent comparables

1. Selection of internal independent comparables is the selection of transactions between taxpayers and unrelated parties, ensuring the comparability that does not cause any difference causing material impacts on the level of price, the profit margin or the ratio of profit split between parties. In case where there is none of the internal independent comparables, the selection of comparables shall be subject to Point b and c of Clause 3 of Article 17 herein. Comparison between related party transactions and arm’s length transactions shall be made on the basis that each transaction is compared with each comparable product. In case where it is unlikely to make a product-based comparison, the aggregation of transactions must be based on the substance and the reality of business activities, and the application of the transfer pricing method under the provisions of Article 12, 13, 14 and 15 herein.

2. Financial and business data of comparables must be reliable so that they may be used for tax declaration and assessment purposes, and must conform to regulations on accounting, statistics and taxation. Time of execution of a transaction performed by an independent comparable must coincide with the time of execution of a related-party transaction by a taxpayer, or must fall within the same financial year as that of taxpayers, except for special cases in which it is necessary to expand the time frame of comparison under the provisions of Article 9 herein. Data must be properly formatted as the basis for comparing or calculating levels of prices at the transaction time or within the same tax period; the comparability analysis data on profit margin or profit distribution rate must be collected in three consecutive tax periods. Taxpayers shall round decimal values of ratios or comparative rates up to the nearest hundredth at their fractional parts. Where relative values derived from data released without associated absolute numbers and this rounding method is not used, the released data of which reference sources have already been cited shall be accepted.

3. The minimum number of independent comparables shall be selected after completion of the comparability analysis and adjustment of material differences as follows: One comparable which is selected if related-party transactions or taxpayers performing related-party transactions and independent comparables has no difference; three comparables which are selected in the event that there are certain differences existing in independent comparables and there are not sufficient information or data provided as the basis for eliminating all of the material differences, and five comparables which are selected only when there is any information or data used as the basis for eliminating most of the material differences existing in independent comparables.

Article 8. Adjustment of levels of price, profit margins, profit split ratios of taxpayers

1. When successfully finding independent comparables of which levels of reliability comparison are similar, and which do not have difference, or have differences and acquire sufficient information and data used as the basis for eliminating all of material differences:

a) If the level of price, profit margin and profit split ratio of a taxpayer fall within the arm’s length range of arm’s length transactions performed by similar independent comparables, the taxpayer shall not be required to adjust their level of price, profit margin and profit split ratio to determine the transfer price;

b) Unless the price, profit margin and profit split ratio of the taxpayer fall within the arm’s length range of unrelated transactions performed by similar independent comparables, the taxpayer shall be obliged to determine values falling within the arm’s length range that reflect the highest level of comparability to a related party transaction in order to make adjustment to the price, profit rate and profit distribution ratio of the related party transaction in order to adjust the level of price, profit margin and profit split ratio of the related party transaction, but avoid any reduction in taxable income and tax obligations to the state budget of the taxpayer.

2. In case where there is only information or data used as the basis for eliminating most of the material differences of independent comparables, the selection of at least five independent comparables and the application of the standard arm’s length range must follow the instructions given in Appendix V hereto. The selection of values falling within the arm’s length range for the adjustment and redetermination of the level of price, profit margin or profit split ratio of a taxpayer shall be subject to the following requirements:

a) If the level of price, profit margin or profit split ratio of the taxpayer is the value falling within the standard range of arm’s length transactions of similar independent comparables, the taxpayer shall be exempted from the requirement for adjustment of their level of price, profit margin and profit split ratio for the transfer pricing purpose;

b) Unless the level of price, profit margin and profit split ratio of the taxpayer fall within the standard range of arm’s length transactions of similar independent comparables, the taxpayer shall be obliged to determine values falling within the standard arm’s length range that reflect the highest level of comparability to related party transactions in order to make adjustment to the level of price, profit margin and profit split ratio of a related party transaction, and determine taxable income and tax amount payable but avoid any reduction in tax obligations to the state budget;

c) In case where the tax authority adjusts or fixes the level of price, profit margin or profit split ratio of a taxpayer, the adjusted or fixed value is the median falling within the standard arm’s length range.

3. On the basis of the transfer pricing method and independent comparables which are selected, the adjustment in the level of price, profit margin or profit ratio rate of a taxpayer shall be made in order to determine their corporate income tax obligations without causing any reduction in tax obligations to the state budget.

Article 9. Expansion of the comparability analysis scope

1. With respect to particular or sole related party transactions, if it is unlikely to find independent comparables, the scope of comparability analysis in terms of business industries, geographical markets and comparison time should be expanded so as to search for independent comparables. The expansion of the comparability analysis scope shall be carried out in the following manner:

a) Selecting independent comparables by using the industry classification highly comparable to the classification of sectors wherein a taxpayer operates in the same local market, local jurisdiction or country;

b) Expanding the comparison scope to other regional countries where the conditions of the industry and the economic growth level are comparable.

2. In case where the scope of comparability analysis is expanded to cover the aforesaid areas, it is obligatory to make the quantitative and qualitative analysis of comparability and material differences under the provisions of clause 6 of Article 10 and 14 herein, or use figures or data obtained from independent comparables in the previous year as well as adjust material differences resulting from any time-related factor.

Time of expansion of the scope within which figures or data are collected from independent comparables shall be restricted to one financial year in comparison with the financial year of a taxpayer if the transfer pricing method stipulated in Article 14 herein is used.

Article 10. Criteria for comparability analyses, adjustments for material differences

1. Comparability analysis shall be made by using the method of collating, reviewing and correcting material differences affecting comparability factors for the purpose of selecting independent comparables, including specifications of commodities, services and assets (hereinafter referred to as product specification); functions and assets, business risks; contractual terms and economic conditions in case of transactions occurring.

2. Product specifications are defined as properties affecting the product price, i.e. in the case of a tangible property, including the physical features, product type, quality, trademark, reliability, availability and the volume of supply; in the case of a service, including the nature, complexity, expertise and extent; in the case of an intangible property, including the form of transfer, type and form of property, duration and degree of protection, transfer time, transferred rights, anticipated benefits from use of the property.

a) Analysis of intangible property and possibility of distributing profit to parties must not depend solely on legal ownership but take into account all of risk control activities and financial capacity for controlling risks to the entire process of further development, enhancement, maintenance, protection and exploitation of intangible property that involves related parties. The comparability analysis shall be based on certain characteristics of intangible property, e.g. exclusivity, extent and duration of legal protection, rights created by patents, licenses and assignments, geographical extent of intangible property rights, life cycle, growth phase, rights for promotion of value, improvement and update of intangible property, estimated level of profit expectedly obtained from such intangible property;

b) The analysis of characteristics of intangible property aims to determine intangible property used or assigned during the transaction process and specific or material economic risks related to development, development, enhancement, maintenance, protection and exploitation of intangible property; contractual agreements on legal ownership of intangible property, terms and conditions of legally binding agreements, registration, agreements on license and other related contracts, associated risks; the party performing the function of operating and using intangible property, managing risks associated with development, enhancement, maintenance, protection and operation of intangible property; contractual terms and conditions and practical reality of execution by contracting parties; the related party transactions actually connected with development, enhancement, maintenance, protection and operation of intangible property upon examination of the legal ownership of intangible property and other related contractual relationships or rights and process of execution of these transactions by the parties; and price of the transactions appropriate to contribution made and the functions performed, assets employed and risks assumed by the parties.

3. Operational functions, operating assets and risks arising from business activities of each contracting party, and operating assets and risks in relation to opportunity costs, economic conditions, and conditions of the whole industries or sectors, business lines and geographical positions of taxpayers, shall be analyzed to determine factors measuring the capability of gaining profit from business activities and practical situation of those business activities which these taxpayers have performed in connection with their functions and use of associated assets, capital, costs and expenses.

Comparability analysis results must reflect main functions in the relationship between, the use of assets, capital and opportunity costs as well as risks associated with the use of these assets, capital and opportunity costs for investment purposes, and the capability of gaining profit, which are performed by taxpayers in relation to their business transactions, specifically as follows:

a) Certain main functions of the subsidiary in the entire value chain of a multinational enterprise group including the research and development function, e.g. contract-based research and development services, in-house research and development, technical and technological development and product design activities; the manufacturing function, e.g. in-house manufacturing, licensing manufacturing, contract manufacturing, toll manufacturing, assembling and installation of equipment; sale, purchase and management of raw materials and other activities; distribution, e.g. distribution on its own, limited risk distribution, commission agent, wholesale distribution, retail distribution; provision of support services, e.g. legal, accounting and finance, credit and collection, training and personnel management services; provision of transportation and warehousing services; brand development activities, e.g. marketing, advertising, publicity, market research and other functions within the value chain in the industry;

b) Certain key financial assets of a subsidiary including intangible property, e.g. technical know-how, copyright, trade secrets, secret formulas, patents, intangible assets related to commercial and marketing activities, e.g. brands, brand building and identity systems, lists, figures and relationships with customers; tangible assets, e.g. plant, machinery and equipment; financial assets, rights and economic benefits created by these assets during the process of exploitation, use and transfer thereof;

c) Certain major business risks including strategic risks or market risks arising from implementation of business strategies, e.g. market penetration, expansion or maintenance; risks associated with infrastructure or goods inventory; financial risks, e.g. credit risks, bad debt risks, foreign exchange risks; risks associated with transactions, e.g. risks arising from factors such as price and payment terms in commercial transactions; product risks arising from design, development and manufacturing of product, product quality management and after sales services; business risks associated with capital investments, the number of customers and force majeure risks.

Analysis of the taxpayer’s business risks in the entire value chain of the multinational group aims to determine material risks to the entire value chain of the industry, capability of controlling risks such as capability of making decisions on risk management and dealing with risks likely to arise in the reality, e.g. identification of major economic risks, assessment of degree of allocation and arrangement of risks specified in legally binding agreements or documents or arrangements of the taxpayers; analysis of functions of controlling and minimizing risks in legally binding agreements or documents or arrangements; examination and review of performance of these functions, bearing and allocation of risks of the taxpayer in reality. In case where there is any difference between the allocation of risks in legally binding agreements, documents or arrangements and that carried out in the reality, based on the results of risk analysis, tax authorities shall be accorded the authority to decide to re-allocate risks and adjust levels of price, profit margins and profit split ratios of taxpayers.

4. Contractual terms of transactions include certain terms regarding volumes and conditions of the transaction or product distribution; duration, conditions and methods of payment; terms and conditions of warranty, replacement, improvement, update, correction or adjustment of product; terms and conditions of exclusive rights to trade and distribute products; certain other terms and conditions having economic effects such as support and advisory services for quality control, user’s instruction, advertising and promotional activities.

a) In cases where terms and conditions of a legally binding agreement, credential or written agreement do not adequately reflect the reality of execution of such transactions between related parties, the comparability analysis shall be conducted on the basis of carrying out review of events occurring in the reality or financial data in order to identify economic characteristics, nature and risks associated with the practical reality of business of these parties;

b) Unless related parties enter into a legally binding agreement, document or arrangement in order not to recognize sales or expenses derived from technical assistance, synergies in the multinational group, sharing of business know-how or utilization of seconded or dual-contract staff, the comparability analysis is carried out to determine the nature, value of transaction, income generated from these transactions and contribution made by each related party. This is used as the basis for comparison with business decisions that may be accepted by independent parties under the same or similar conditions.

5. Economic conditions of transactions and market conditions at the date and time of execution of these transactions may determine the levels of price, profit margins and profit split ratios of parties.

a) Several economic conditions under which these transactions are carried out, e.g. scale and size, geographic locations of the product manufacturing and consumption market, levels of market such as ordinary wholesale and retail, exclusive distribution; extent of competition of products sold on the market and relative competitive position of the buyer and seller; availability of substitute goods; levels of general supply and demand or location-specific supply and demand; consumer purchasing power; economic factors that may influence costs of production arising at the location of transaction, e.g. tax incentive policies; government regulations of the market; cost of production, land, labor and capital; business cycle and factors having positive influence upon the price, profit rate and profit distribution ratio of the taxpayer, e.g. features of positions, advantages and cost savings achieved depending on locations, local markets, labor forces and synergy and specialization functions centralized on the basis of contributions made by related parties involved in the creation of value;

b) In case where taxpayers and comparables neither reside within the same country, territory nor supply goods and services for the same geographic market, the analysis of economic conditions includes analysis of comparability of markets where the taxpayer and comparables are residing with respect to comparative advantages, location-specific advantages influencing competitive factors such as costs of labor, raw materials, transportation, rent, training, subsidies, financial, tax incentive policies, infrastructure costs, market growth levels and advantageous features of market such as the large population and customer base with increased spending capacity and other comparative advantage features.

6. The comparability analysis for elimination of material differences is an analysis aimed at eliminating quantitative and qualitative differences that may exist in financial information or data materially influencing factors used as the benchmarks for determining prices of related-party transactions according to specific transfer pricing methods referred to in Article 13, 14 and 15 herein. The quantitative difference is defined as the difference determined by absolute numbers in business cycle, number of years of establishment and operation of an enterprise or relative numbers representing differences in financial indicators according to particular investment sectors or operational functions, differences in current capital, while the qualitative difference is defined as information identified based on the specific transfer pricing methods stipulated in Article 13, 14 and 15 herein.

a) Factors causing differences which are considered material, including: Differences in product specifications, contractual terms, functions, assets and risks and business sectors or activities and economic conditions of taxpayers and independent comparables; the differences in investment policies, environment and impacts of input costs in local, domestic and overseas areas;

b) Quantitative and qualitative differences need to be reviewed to adapt to comparability factors causing material impacts on the transfer pricing methods referred to in Article 13, 14 and 15 herein.

7. The results of the comparability analysis shall be considered the basis for selection of independent comparables relevant to specific transfer pricing methods referred to Article 13, 14 and 15 herein. In the event that any taxpayer refuses to make any adjustment for the level of price, profit margin and profit split ratio based on independent comparables by reason of quantitative and qualitative differences causing material impacts, they shall be obliged to search and reselect independent comparables in order to determine the standard arm’s length range in order to ensure the high degree of reliability and similarity, and make an adjustment for the transfer prices under the provisions of this Decree.

Article 11. Steps of the comparability analysis process

1. Identifying the substance of a related-party transaction before analyzing it to find out its comparability with independent comparables.

2. Analyzing, comparing, finding and selecting independent comparables on the basis of identifying comparison time, product specifications and contractual terms and conditions; analyzing the industry, market and economic conditions wherein transactions arise; analyzing related-party transactions and taxpayers performing related-party transactions; databases; transfer pricing methods and adjustments for any potential material difference, specifically as follows:

a) Identifying the comparability extent, subject matters and factors, e.g. comparison time and date, information used for analysis of the taxpayer with respect to comparability factors relating to functions, assets and risks; product specifications; contractual requirements; economic conditions under which transactions occur, analysis of the industry, market, context of business activities and transaction of goods, services and assets of parties, for the purpose of selecting the related party that requires the determination of prices of their related party transactions in accordance with this Decree;

b) Evaluating and searching comparables, e.g. prioritizing examination of internal independent comparables on the basis of verification of the level of their reliability and independence in order to ensure that these transactions are not those arranged in breach of the arm’s length doctrine; setting out criteria for searching and determining database that may be relied on, as referred to in Article 17 herein, in order to search similar independent comparables. On the basis of information that has been subject to the analysis and examination of availability of data of independent comparables, the transfer pricing method appropriate for the substance of business, commercial, financial activities and risks incurred by each related party that requires the determination of the transfer prices must be selected;

c) Analyzing the level of the similarity and reliability of independent comparables that have been selected on the basis of examination and screening of qualitative and quantitative criteria; analyzing information about the economy, industry and financial figures of selected comparables in order to verify the level of similarity; determining and correcting material differences. On the basis of the selection of similar independent comparables, it shall be necessary to use financial data and figures of selected independent comparables to determine bases for adjustment in the levels of price, profit margins and profit split ratios of taxpayers under the provisions of Article 8 herein.

3. Identifying the level of price, profit margin or profit split ratio, based on the results of the analysis of independent comparables, as the basis for the comparison or application thereof for the determination of corporate income tax obligations of taxpayers and avoidance of any reduction in tax obligations to the state budget. Calculation method must be identically applied in the operating and business cycle or stage in agreement with functions and business models as prescribed in Article 12, 13, 14 and 15 herein.

Article 12. Selection of transfer pricing methods

Comparison method for determination of prices of related-party transactions (for the purpose of this Decree, shortly referred to as transfer pricing method) shall be applied according to the arm's length principle, transaction nature and functions of taxpayers to the extent that this method is assessed and applied in a consistent manner in the entire business cycle or stage; based on financial data obtained from independent comparables, shall be selected according to comparability analysis principles referred to in Article 6, 7, 8, 9 and 10 herein. The transfer pricing method shall be selected amongst the methods prescribed in Article 13, 14 and 15 herein, based on features of related-party transactions and available information.

Article 13. Method of comparison between the transfer price and the arm's length price

1. Cases of application of the method for comparing the transfer price and the arm’s length price (hereinafter referred to as arm’s length price comparison method):

Taxpayers perform related party transactions in specifically classified products, tangible assets or specified services subject to trading conditions, commonly sold on the market or assigned prices quoted on the domestic and international exchanges of commodities or services; in making payment of royalties on use of intangible assets; payment of loan interest when performing lending and borrowing activities; or perform independent and related-party transactions in products that similar in product specifications and contractual requirements.

2. Principles of application:

a) The arm’s length price comparison method is implemented according to the rule of non-discrimination regarding product specifications and contractual requirements when comparing arm’s length prices with transfer prices which cause material impacts on product prices. In case where there is any difference causing material impacts on product prices, these material differences must be eliminated;

b) Such factors as product specifications and contractual requirements have material impacts on product prices, including characteristics, quality, brands and trademarks of products, and transaction scale and volume; requirements set out under agreements on supply and transfer of products, e.g. amounts, durations of transfer of products, payment deadlines and others; rights to distribute or consume commodities, services or assets, impact economic values and markets where transactions occur and other factors affecting product prices, such as economic conditions and operational functions of taxpayers.

3. Calculation method:

a) The transfer price of a product is adjusted to the arm’s length price of the product or the value within the standard arm's length range of independent comparables as prescribed in this Decree;

b) In case where the product price is publicly announced on the domestic and international exchange of commodities or services, the transfer price of a product shall be determined according to the product price quoted at the comparable time and under the same or similar conditions;

c) Taxpayers purchasing machinery or equipment from foreign related parties must provide records or documents evidencing purchase prices thereof in accordance with the arm’s length principle at the purchase time. For new machinery or equipment, the price used for comparison purposes is the price on the invoice demonstrating that the related party has purchased such machinery or equipment from an unrelated party. For used machinery or equipment of which the invoice or original document evidencing purchase is issued on the purchase date, revaluation thereof shall be subject to applicable legislation on guidance on management, use and depreciation of fixed assets.

4. Transfer pricing results are the taxable prices used for declaring and determining the corporate income tax amounts payable on condition that they do not cause any reduction in taxpayers’ tax obligations to the state budget.

Article 14. Method for comparing profit margins of taxpayers with those of independent comparables

1. When to apply the method:

Taxpayers do not have database and information in order to apply the arm’s length price comparison method referred to in Article 13 herein; taxpayers are unable to compare product-based transactions on the basis of specific transactions in specific comparable products to the extent that these transactions are aggregated according to the business nature and reality, and then successfully select profit margins of appropriate independent comparables; or taxpayers fail to exercise their autonomy over the entire business and production chain, or fail to participate in the execution of related-party transactions prescribed in Article 15 herein, specifically including:

a) The method for comparison of gross profit to sales (resale price method) shall be applied when the taxpayer sells or distributes products purchased from its related party to unrelated customers and does not create intangible property associated with products sold; does not participate in the process of development, enhancement, maintenance and protection of intangible property under the ownership of its related parties associated with the products sold, carry out processing, manufacturing or installation activities that may lead to any change in the nature and characteristics of these products, or attach trademarks to these products to increase their value. The resale price method shall not be applied to taxpayers acting as distributors that own intra-group valuable product intangibles with respect to brand names, trademarks and other marketing-related intangibles such as customer lists, distribution channels, logos, images and other brand identity elements for market research, marketing or trade promotion, or incurs expenses from establishment, design of distribution channels, brand identities or after-sale costs;

b) The method for comparing the ratio of gross profit to cost of goods sold (cost plus method) shall be applied when taxpayers that do not own its product intangibles and incurs little risk perform their functions of contract manufacturing, make-to-order manufacturing or toll manufacturing, assembly, processing of products, installation of equipment; procurement and supply of products; supply of services or rendering of research and development services agreed upon with related parties. The cost plus method shall not be applied to taxpayers that are independent manufacturing companies, or perform various functions like product research, development, building and creation of product brands, trade names, market strategies and product warranty and customer care services;

c) Net profit margin comparison method: The method for comparing the net profit margin shall be used in the cases where taxpayers do not have information necessary for the application of the arm’s length price comparison method; do not have data and information about the accounting method of independent comparables or, because of failure to search comparables with similar functions and products, do not have sufficient grounds for application of the resale price method or the cost plus method; taxpayers performing distribution or manufacturing functions do not own product intangibles or do not engage in development, enhancement, maintenance, protection and exploitation of product intangibles, or does not fall within the scope of application of the method for distribution of profit between related parties in accordance with clause 1 of Article 15 herein.

2. Principles of application:

a) Profit margin comparison method shall be applied according to the principle of non-discrimination concerning operational functions, assets and risks; economic conditions and accounting and bookkeeping methods taken into consideration in a comparison thereof between taxpayers and independent comparables have material effects on the profit margin. If there is any difference causing material impacts on profit margins, then these material differences must be eliminated;

Factors having material impacts on the profit margin encompass: Assets, capital, costs and expenses; rights to control and make decisions in reality to serve the purpose of performing main functions of taxpayers; nature of business industry and market for production and consumption of products; accounting and bookkeeping method and cost structure of products; economic conditions in which transactions occur; commercial or financial relationships of multinational groups; technical assistance, sharing of trade secrets, know-how, utilization of employees working under single or dual employment regime and economic conditions of business industries or sectors in which taxpayers are operating, product specifications and contractual terms and conditions or requirements.

b) Cases of application of the resale price method: The resale price method is applied to certain differences that may have material impacts upon the ratio of gross profit to price of goods sold (net sales) such as costs reflecting functions of the enterprise that is a sales agent, exclusive distributor or distributor performing marketing functions; growth and development levels of product consumption markets; functions performed by taxpayers within the supply chain such as retailing, wholesale supply and accounting methods of parties;

c) Cases of application of the cost plus method: The cost plus method is applied to certain differences that may have material impacts upon the ratio of gross profit to cost of goods, including costs reflecting functions performed by enterprises such as those functioning as contract manufacturers designated by parent companies or intra-group service suppliers; contractual obligations such as durations for delivery of products, costs of quality control, warehousing, terms of payment, and methods for accounting for cost components of products sold, of taxpayers and independent comparables;

d) The net profit margin comparison method shall be applied in such cases as: The method for comparison of the net profit margin shall be applied to certain differences that may have material impacts upon net profit margins, e.g. differences in functions, assets, risks; economic conditions; contractual terms, conditions or requirements and product specifications referred to in Article 10 herein.

Taxpayers doing business by performing their routine functions, without performing strategic decision-making functions and engaging in transactions of low added value comprise production or distribution enterprises which are not exposed to inventory risk or market risk and do not have sales revenue or costs arising from uses of intangible assets, shall not have to incur operating losses arising from these risks.

3. Calculation method:

The profit-comparison method shall use the gross or net profit margins of selected arm’s length comparables for comparison for identifying the corresponding gross or net profit margins of taxpayers. Selection of profit margins, including gross profit margins or net profit margins based on sales, costs or assets shall depend on the nature and economic conditions of transactions; functions of taxpayers and accounting or bookkeeping methods of related parties. The bases for determination of the profit margin, including accounting data of taxpayers on sales, costs or assets shall not be controlled or decided by related parties.

a) Method for comparing the gross profit to sales (the resale price method):

The purchase price (cost) of a good, service or asset sold by a related party equals (=) the resale price (net sales) of that good, service or asset resold to an unrelated party minus (-) the gross profit divided by the selling price (net sales) of a taxpayer less (-) certain other costs included in the purchase price, such as import duties, customs dues, insurance costs or international transit costs (if any).

The gross profit to the selling price (net sales) of a taxpayer determined by comparing it with that of independent comparables shall equal (=) the selling price (net sales) of the taxpayer multiplied (x) by the gross profit relative to the selling price (net sales) of the selected independent comparables.

The gross profit to the selling price (net sales) of independent comparables shall be calculated as the value falling within the standard arm’s length range of the ratio of the gross profit to the selling price (net sales) of the independent comparables which are selected for adjustments made according to the principles herein stipulated.

The purchase price (or cost) which is adjusted to independent comparables is the taxable price or the cost for tax declaration for determination of corporate income tax obligations of taxpayers.

b) Method for comparing the gross profit to sales (the resale price method):

The selling price (or net sales) of a good, service or asset sold to a related party shall be calculated as the arm’s length cost thereof plus (+) the gross profit to the cost of a taxpayer.

The gross profit to the cost of a taxpayer which is determined based on independent comparables equals (=) the cost paid by a taxpayer multiplied (x) by the ratio of the gross profit to the cost of the selected independent comparables.

The ratio of the gross profit to the cost of the selected independent comparables is defined as the value falling within the standard arm’s length range of the ratio of the gross profit to the cost of the independent comparables which are selected for adjustments made according to the principles herein stipulated.

The selling price to a related party (or net sales) which is adjusted to independent comparables is the taxable price or the cost for tax declaration for determination of corporate income tax obligations of taxpayers.

c) Net profit margin comparison method:

The net profit margin existing before the interest and corporate income tax to sales, costs or assets of a taxpayer engaged in the transfer pricing are deducted shall be adjusted to the ratio of net profit existing before the interest is taken away to sales, costs or assets of the selected independent comparables, based on which tax obligations of a taxpayer is adjusted or determined.

Net profit excludes the difference between sales and costs of financial activities.

The selected net profit margin is the value within the standard arm’s length range of the net profit margin of independent comparables which are selected for adjustment to or determination of taxable income and tax obligations of a taxpayer according to the principles herein stipulated.

Indicators of the net profit margin existing before the loan interest and corporate income tax are taken away shall be computed under the provisions of legislation on accounting, tax administration and corporate income tax.

4. The results of determination of the adjusted profit margin of a taxpayer are the basis for the determination of the taxable income and the corporate income tax payable without causing any reduction in the taxpayer’s corporate income tax obligations to the state budget.

Article 15. Method for splitting or allocating the profits between related parties

1. When to apply the method:

a) A taxpayer engages in a related transaction which is specific, integrated or closed in an enterprise group, or activities related to the development of new products, use of proprietary technologies, takes part in the group’s unique value chain or the process of developing, increasing, maintaining, protecting and utilizing proprietary intangible assets without any basis for determination of prices of transactions between related parties or transactions closely linked or simultaneously performed, or complicated financial transactions related to multiple financial markets across the globe;

b) A taxpayer engages in the digital transfer pricing in the absence of any basis for determination of prices of transactions between related party or participates in the creation of the added value obtained from synergies of resources available within the group;

c) A taxpayer performs its functions to exercise autonomy over their entire production and business process, and is not governed under the provisions of clause 1 of Article 13, clause 1 of Article 14 herein.

2. Principles of application:

This method is defined as the method for splitting or allocating total profit generated from related-party transactions in order to determine the profit of a taxpayer engaged in the value chain. This method shall be applied to total actual and potential profit of related-party transactions referred to in Point a of this Clause which is calculated by using financial data obtained on such bases as reasonable and valid evidencing documents; values and profits of transactions must be determined by using the same accounting method during the whole time length of application of this method.

3. Calculation method:

The adjusted profit of a taxpayer shall be allocated to total profit gained, including actual or potential profits of parties engaged in the transaction chain.

The adjusted profit of a taxpayer is defined as the summation of the primary profit and the extra profit. The primary profit is calculated according to the profit margin comparison method referred to in Article 14 herein. The extra profit is calculated according to the allocation proportion based on one or certain factors such as sales, costs, assets or personnel of related parties engaging in transactions and in conformity with the arm's length principle.

In case of lack of information or data for apportionment of the adjusted profit stipulated above, such allocation can be based on one or certain factors such as sales, costs, assets or personnel of related parties engaged in the transfer pricing and must conform to the arm's length principle.

4. The results of determination of the adjusted profit of a taxpayer are the basis for the determination of the taxable income and the corporate income tax payable without causing any reduction in the taxpayer’s corporate income tax obligations to the state budget.