THE MILLION-DOLLAR TRANSFER PRICING DISPUTE IN THE U.S.: THE TRAP OF INCONSISTENT DATA AND LESSONS IN GLOBAL TAX COMPLIANCE

1. Summary of the Real-Life Case

Mr. M and Mr. K are two founders and have been close neighbors for many years in An Cựu residential area, Huế City, Vietnam. In 2024, the two invested their capital to establish TechTax Digital Solutions Joint Stock Company. The company established a subsidiary in the United States to distribute warehouse management software in the local market. Mr. M served as Chief Executive Officer (CEO), responsible for financial strategy, external relations, and accounting. Mr. K served as Chief Technology Officer (CTO), responsible for the technology infrastructure. Out of their long-standing neighborly relationship, Mr. K entrusted Mr. M with full authority over the pricing of related-party transactions.

In early 2026, in an attempt to optimize profits and create an attractive financial profile for fundraising, Mr. M made a serious mistake. He unilaterally ordered the preparation of an internal transfer-pricing matrix on a quarterly basis. He pressured the company to reduce the software licensing price charged by the Vietnamese parent company to its U.S. subsidiary to the minimum level in order to avoid U.S. corporate income tax. More seriously, Mr. M acted carelessly and arbitrarily, completely neglecting the process of preparing Transfer Pricing Documentation based on the arm’s length principle. In September 2026, the U.S. Internal Revenue Service (IRS) conducted an urgent audit. The IRS rejected the accounting figures in their entirety and accused TechTax of tax evasion through improper transfer pricing practices. The IRS issued a notice demanding millions of dollars in additional taxes and penalties. The company’s working capital in the United States was frozen, and its entire fundraising process collapsed.

The company faced the risk of insolvency and corporate collapse. Believing that Mr. M’s fraudulent and administratively negligent conduct had destroyed his family’s financial assets, Mr. K became extremely angry. He demanded that Mr. M compensate for all economic losses using his personal assets. Their long-standing neighborly relationship immediately deteriorated. The two families engaged in heated arguments and exchanged serious insults in the An Cựu neighborhood. They threw dirt and waste into each other’s homes, causing public-order disturbances and forcing local police to intervene.

2. Legal Perspective – “A Strong Shield”

From the perspective of civil law, corporate governance, and international tax administration, deliberately obscuring transfer prices between related parties in order to avoid taxes constitutes a serious violation of applicable regulations. A CEO’s unilateral decision to disregard required procedures may also constitute a breach of the highest standard of care.

• Related-party transactions and the Arm’s Length Principle: Under international transfer-pricing rules and applicable tax administration regulations, business transactions between related parties must be conducted at prices comparable to those that would apply between independent parties. Mr. M’s unilateral establishment of fictitious pricing on a weekly or quarterly basis without proper technical benchmarking and reconciliation directly violates tax compliance requirements. From an internal corporate governance perspective, Articles 135 and 153 of the 2020 Law on Enterprises provide the Board of Directors with broad authority over financial strategies and major transaction plans. Mr. M’s unilateral abuse of his executive authority under Article 162 of the 2020 Law on Enterprises effectively undermined the company’s internal safeguards under Article 122 of the 2015 Civil Code, thereby giving rise to non-contractual property damage under Article 584 of the 2015 Civil Code.
• Personal civil liability of corporate managers: Under Article 165 of the 2020 Law on Enterprises, managers are required to perform their duties honestly and with the highest degree of care in order to protect the company’s legitimate interests. Mr. M’s dishonest and negligent handling of administrative safeguards, which resulted in the freezing of the company’s entire cash flow, constitutes a direct management failure. Under Article 585 of the 2015 Civil Code, Mr. M may bear legal responsibility for compensating the economic losses caused by his arbitrary managerial decisions with his personal assets for the benefit of the company and shareholder K.

3. Psychological – Educational – Management Perspective – “The Human Key”

Psychological and Educational Perspective

• Short-term profit-seeking and greed for artificial cash flow undermine integrity: Mr. M was influenced by a short-term mindset, viewing transfer-pricing tax avoidance techniques as sophisticated business tactics for inflating the company’s valuation during fundraising. His superficial financial ambitions blinded him to the strict international audit framework and the capital invested by his long-time neighbor and friend. When the crisis occurred, Mr. K experienced severe anxiety and panic over the risk of losing his assets, triggering suspicion that ultimately destroyed their long-standing friendship.
• Insufficient education in compliance with the global financial system: Many startup executives lack adequate education regarding administrative compliance and the rule of law in multinational business operations. They mistakenly believe that informal accounting practices and ambiguous invoicing methods used domestically can simply be transferred to highly regulated markets such as the United States without detection. They fail to distinguish between legitimate cost optimization and irresponsible conduct that crosses the boundaries of corporate legal protection.

Management Perspective

• Critical failure in international tax compliance risk management (Transfer Pricing Compliance Risk Failure): Mr. M effectively gambled TechTax’s survival on perceived weaknesses in U.S. tax enforcement. Managing a company while leaving transfer-pricing documentation and supporting records incomplete is highly risky. The absence of a Transfer Pricing Audit and post-transaction review procedures significantly weakened management’s ability to respond to tax reassessments and potential penalties.
• Crisis in the internal pricing policy approval and control process: TechTax completely lacked an effective financial compliance approval process. A properly governed company should establish clear procedures under which all cross-border software licensing transactions are supported by an independent price benchmarking study, accompanied by legal and accounting compliance reviews, and approved by the Board of Directors through a formal resolution and dual authorization before operational funds are disbursed.

4. Comprehensive Solution Proposed by Expert Nguyễn Hữu Long

Step 1: Neighborhood Mediation and Engagement of International Tax Experts to Resolve the Tax Dispute (Short Term)

• Immediate neighborhood mediation: Mr. M and Mr. K must immediately stop throwing dirt or waste into each other’s homes in order to avoid further public-order violations under applicable law. Mr. M should remain calm, put aside his personal ego, and proactively invite the neighborhood representative to mediate a private meeting in the An Cựu neighborhood. The objective is to prepare a written neighborhood mediation record and ensure the safety of both families before addressing the underlying economic dispute.
• Urgently engage tax counsel to negotiate the release of frozen funds: As a major shareholder, Mr. K should immediately restrict Mr. M’s unilateral access to the accounting records in order to preserve accurate and reliable accounting data. Mr. M should cooperate with an international accounting advisory firm to urgently prepare supplementary Transfer Pricing Documentation and provide evidence demonstrating the reasonableness of R&D expenses incurred in Vietnam. A U.S. tax law firm should be engaged to represent TechTax directly in negotiations with the IRS regarding an Advance Pricing Agreement (APA), with the aim of minimizing penalties and restoring the company’s working capital.

Step 2: Restructuring Documentation Governance and Internal Financial Compensation (Medium Term)

• Agreement to assume personal financial responsibility for correcting the damage: To compensate for the budget deficit caused by the tax assessment and ease internal concerns, the two parties should execute a supplementary agreement based on the 2015 Civil Code. Mr. M may voluntarily offset the losses against his existing personal assets or reduce his future dividend entitlement to secure his obligation to compensate Mr. K for losses resulting from his arbitrary and negligent management decisions, thereby helping restore clean cash flow and internal trust.
• Establish a mandatory transfer-pricing control policy and dual-approval mechanism: Immediately draft and issue a new Corporate Global Tax & Transfer Pricing Policy based on the 2020 Law on Enterprises. The policy should establish clear limits and strictly prohibit the CEO from unilaterally determining software licensing prices without a written risk assessment and compliance report from the chief accountant. A mandatory dual-signature approval system should require quarterly co-approval by both founders through digital signatures to ensure effective internal control.

Step 3: Long-Term Lesson on Separating Personal Relationships from Corporate Assets

• Transparent accounting is the most civilized way to protect a business: The hard-earned lesson for corporate managers is: “When a startup’s cash flow expands globally without clear boundaries and strong protection through written procedures and practical tax-compliance policies from day one, an arbitrary and fraudulent mindset on the part of a founder can ultimately destroy the entire business.” Clear and disciplined management of intangible financial infrastructure and strict adherence to legal requirements from the outset do not waste time. On the contrary, they are the essential safeguards for protecting personal assets, securing corporate capital, and preserving long-standing neighborly relationships in the face of the challenges of the broader business environment.

EXPERT PERSPECTIVE

• This article was developed based on the professional consultation and expert advice of Nguyễn Hữu Long, M.A. – a specialist in Leadership, Law, Psychology, and Education. Through an integrated multidisciplinary approach, we provide not only a strong legal shield but also comprehensive risk-management and psychological solutions aimed at the sustainable development of the community.
• If you or your organization is facing similar difficulties relating to land or educational matters, please contact us via our hotline or submit your questions through the website tuvanphapluattamlygiaoduc.vn or call 0898.627.762 for timely assistance.