Anti-Transfer Pricing: Specific Measures to Be Taken

According to Ms Nguyen Van Chi, Director of Taxation Policy of Vietnam General Department of Taxation, transfer pricing is currently used by many enterprises to evade taxes. It is considered a complicated issue in the field of taxation, and verifying related parties as well as estimating market prices are the two core issues in detecting transfer pricing. However, in practice, transfer pricing is very difficult to be estimated when applying those methods.

 

Also regarding Ms Chi, transfer pricing has occurred not only in enterprises suffering losses, but also in those breaking even or making profit. And looking from the aspect of taxation is looking at only a small part of preventing transfer pricing. Practice has shown that FDI enterprises have played many “tricks” in transfer pricing. A given FDI enterprise carries out transfer pricing by converting itself into a joint stock company. During converting, it manages to estimate its assets inaccurately, making up profits in order to be listed in the Stock Exchange; it then takes advantage of the conversion to “capitalize” assets, selling part of its share or even withdrawing all of its capital from Vietnam. There is another trick of enterprises, in which they manipulate prices through overestimating the value of capital contribution. According to regulations, investors can join a business by contributing machines, equipment or technologies. Due to limited skill and price verification capacity, as well as shortage of information and comparative data, the prices of those machines, equipment are frequently valued higher than their real values.

 

The Vietnam General Department of Taxation in 2011 inspected 856 unprofitable enterprises and enterprises suspected of transfer pricing, at the result they have discovered the making up of losses of VND 4,400 billion, recovered taxes and acquired fines of VND 1,650 billion. However, according to the Foreign Investment Department (Ministry of Planning and Investment), so far there has not been accurate figures about taxes recovered and losses reduced by preventing transfer pricing; the number of enterprises inspected for transfer pricing accounts for a very small part of the general number of enterprises inspected for tax purposes. If calculated at the local level, the number is as inconsiderable as sprinkling more salt into the salty sea. For example, in Hanoi there are only 4 enterprises, in Dong Nai 3 enterprises, in Binh Duong 7, and the highest number is in Lam Dong with 17 enterprises.

 

In this situation, recently Deputy Prime Minister Hoang Trung Hai commissioned the Ministry of Finance to elaborate a comprehensive action plan to control transfer pricing more effectively in investment and trading activities in Vietnam, which has to start from 2012. Accordingly, he required the Ministry of Finance to cooperate with relevant ministries to work out an action plan with aims and contents fulfilling legal regulations and sanctions, giving detailed instructions on controlling price manipulation, building up training programmes (including hiring international consultants) that are developed in accordance with international customs and practices of this issue.

 

Deputy PM Hai also said that, in order to combat transfer pricing more effectively, it is important to seriously consider and accurately define the characteristics of the problem, and then work out appropriate solutions with proper assessment methods and activities, at the same time limiting the potential negative effects on attracting investors, as well as on investment environments in general.

 

According to Mr Cao Anh Tuan, Deputy Director of Vietnam General Department of Taxation, currently the greatest difficulty in addressing transfer pricing is how to estimate market prices, independent transaction price. Therefore, the prior agreement on anti – transfer pricing will be a very effective support for preventing transfer pricing in Vietnam. In this orientation, multinational enterprises have to actively propose pricing methods or trading prices between their members before declaring taxes, Vietnam tax authorities (possibly in collaboration with foreign tax officials who have signed agreements on avoiding double taxation with Vietnam) will monitor and supervise to prevent transfer pricing. Moreover, the inspection must be more intensively and carefully conducted. Accordingly, Vietnam General Department of Taxation will concentrate on inspecting joint venture enterprises, enterprises suspected of transfer pricing, enterprises with big losses, enterprises with large tax debts, enterprises that have not been inspected for many years, as well as enterprises that enjoy tax reduction or exemption.

 

“In business, we will focus on banking, pharmaceutical industry, real estate, electricity, petroleum, and telecommunications. Cases that have frequently declared losses will be paid more attention. The comparison of data between seller and buyer with relevant management agencies, such as customs in importing goods, is an important factor to assess the result that enterprises declare in their books,” Mr Tuan said.

 

Also according to Mr Tuan, in order to deal with sophisticated and complex transfer pricing, the State should develop an anti- transfer pricing law, or even establish an authority specialized in preventing transfer pricing at both national and local levels. Transfer pricing and declaring false losses not only reduce taxes to the State, but also leads to unhealthy competition between domestic enterprises and FDI ones.