Last updated: Tuesday, March 26, 2019


Will New Generation FDI Reduce Transfer Pricing?

Posted: Monday, October 15, 2018

After 30 years of the foreign direct investment (FDI) attraction policy, a lot of achievements have been obtained; however plenty of limitations have also been exposed. Therefore, according to experts, formulating a new generation FDI policy to address existing corollaries, particularly backlash against the guise of transfer pricing, is an urgent task that needs to be done immediately.

Strategy for new generation FDI needed
According to Deputy Minister of Planning and Investment Vu Dai Thang, Vietnam’s FDI attraction was previously based on cheap labour and abundant natural resources; however, amidst the rapid ongoing evolution of the Industrial Revolution 4.0, these advantages are gradually vanishing. Many simple jobs in garment and textile and leather and footwear, for example, will be replaced by robots. This is a challenge for Vietnam to develop a new generation FDI and pick up better FDI projects in the future.

Mr Wim Douw, an expert for the World Bank, said, Vietnam’s new generation FDI attraction strategy needs to focus on such solutions as building an enabling business environment that fits the needs of business in the digital technology era. Vietnam is pursuing a national strategy for the Industrial Revolution 4.0 but its business environment is rated at 2.0 only. In addition, the Government and other relevant bodies need to survey demands and supplies of leading sectors such as information technology, electronics, mechanical engineering and biochemical to introduce capital and personnel support strategies to stimulate enterprises to grow stronger. Another key issue is that Vietnam needs to develop a national strategy for improving skills for its workers because this is its weak link easily replaced by foreign labour or machinery. The backbone of the issue is that the Government of Vietnam needs to review the entire policy framework for investment incentives in order to maximise international investment resources.

Focus on transfer pricing
Mr Bui Ngoc Tuan, Deputy General Director of Tax Consultancy, Deloitte Vietnam, said, given special incentives, FDI enterprises in Vietnam are enjoying many benefits such as import tax exemption or reduction, land tax preference, and corporate income tax exemption and reduction. At first, these will make a ‘red carpet’ to invite foreign investors to do business. But in the long run, excessive incentives will result in environmental problems, emissions and resource depletion. So, Vietnamese lawmakers need to rebuild incentive mechanisms to attract investors to the domestic market, and change the mindset from using incentives to using peculiar advantages like location, strategic assets and land to woo investors.

According to the Department of Corporate Finance under the Ministry of Finance, tax incentive policy is a hot issue. At present, many FDI firms resort to tax incentives to evade taxes, even transfer pricing. Statistical data compiled from financial statements of some FDI enterprises from 2012 to 2016, up to 44 - 51 per cent of FDI companies reported annual loss. Over half of FDI companies suffered loss in two consecutive years from 2015 to 2016 before falling to about 37 per cent in 2017. Many loss-making companies however kept expanding their operating scale and investment pace, heralding that transfer pricing in the FDI sector is unpredictable. They even carry out transfer pricing from Vietnam to foreign countries. Many FDI companies reportedly transfer price and reverse profit transfer (from foreign countries to Vietnam). According to analysts, this resulted from our excessive incentives for FDI companies.

Meanwhile, according to Prof Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises (VAFIE), it is high time Vietnam changed its approach in FDI attraction to prevent negative acts, including transfer pricing. It must shape major directions for FDI attraction and select only qualified investors. It must improve investment quality and link FDI firms with domestic companies to join global value chains more effectively, he said.

Anh Phuong

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