Tighter Taxation Management Needed

 

Mr Do Hoang Anh Tuan said tax deferments are quite common in many provinces and cities and this tendency tends to increase. Although local authorities and the tax sector have taken many actions to deal with this problem, outcomes are vague. According to statistics, many localities report that tax arrears exceed 10 percent. Some localities boast over 50 percent of taxes in arrears.

 

On our list, there are many big names. The frozen real estate market caused Hoang Anh Gia Lai Group to owe taxes worth hundreds of billions of Vietnamese dong. Other names include Vinashin, Hanoi Construction Ltd, Cavico Vietnam Bridge & Tunnel Limited Company, Phu Yen Beer and Beverage Joint Stock Company, Thanh Cong Group Joint Stock Company.

 

I think there are both objective and subjective reasons. On the policy side, we grant a “grace period” of 90 days for companies to settle their taxes. Administrative measures are only used when this duration is over. And, taxpayers only need to pay fines for being late. However, the fine value is too small in comparison with lending interests. So, no companies are willing to borrow money from banks to pay overdue taxes. On the business side, many companies responsibly pay all taxes to the State but some try to evade taxes. They even disperse assets and reallocate head offices when tax authorities prepare administrative measures. Finally, tax authorities transfer those cases to the police for investigation procedures but their behaviours are not enough to constitute a crime because they just owe taxes, not evade taxes.

 

In recent years, the market economy has opened up quite wide. According to a survey by Thanh Nien (Young People) Daily, doing business on social networks like Google, Facebook and Yahoo! is expanding in Vietnam. Google made revenues of US$40 million in 2011 and the US internet group had to pay US$4 million of taxes (an equivalent to VND82 billion), according to the law on contractor tax. However, tax authorities have not checked its accounts to conclude whether Google evaded taxes or not. Notably, foreign networks do not have business registration and representative offices in Vietnam. This is a high obstacle for tax authorities to manage taxes levied on foreigners doing business on electronic means because tax officers’ knowledge of e-commerce and information technology is not enough to deal with the matter.

As regards personnel issue, a tax officer now has to track and settle tax debts with some 300 enterprises. As a result, coercive measures are not frequent. This also leads to lengthy arrears tax.

 

Transfer pricing is now not only performed by FDI enterprises but Vietnamese companies are also found to have done it. This is not a new problem. Authorities started issuing guidance to deal with this matter (with the latest being the Decree on Tax Inspection issued by the Prime Minister in February 2012). However, the enforcement of this ruling confronts a lot of difficulties because of policy, personnel capacity and determination of competent authorities. For that reason, transfer pricing is becoming popular amongst FDI companies and Vietnamese companies. Transfer pricing is in nature the behaviour to minimise income tax obligations by transferring profits from places with high tax rates to places with lower ones.

 

Cross-border tax collection mainly happens in six northern border mountainous provinces. According to the Decree 139, a border resident is allowed to buy VND2 million of goods with zero tax a day. In a month, a person can buy VND60 million worth of foreign goods without any tax. Many merchants gather duty-free goods to sell in other locations.

 

First, we need to identify tax evasion and deferment tricks to seek out solutions. To do this, we need to issue, amend and supplement policies. To do this well, local authorities and tax officers must understand their own difficulties and have best solutions for their cases. Second, we need to intensify inspections in hot zones, classify violating acts, create a black list and impose iron grip on violators. Third, we need to build a coordinating mechanism for different branches of State authorities.

 

The task of preventing transfer pricing is heavy for the tax sector because many large corporations set up many subordinated companies in areas with preferential tax policies to be subjected lower taxes. Then, they transfer profits from companies without tax preferences to companies with this special treatment or they transfer from profits from profitable companies to loss-making ones by transferring products and services to diminish overall tax obligations. For example, Samsung had huge profit of VND12 trillion but tax authorities could not interview if it committed transfer pricing because it is enjoying tax preferences. Or, in Thai Nguyen province, a company registers coal price of VND800,000 per tonne with the provincial authorities but it sells at only VND400,000 per tonne to the sister company. There are no sanctions for this act. As regards mechanism, according to the Organisation for Economic Cooperation and Development (OECD), the time for inspecting transfer pricing is 435 days. In Vietnam, the duration is only 60 days, not enough for thorough evaluation. Most legal documents related to transfer pricing are mainly instructive, not punitive. Advance pricing agreement (APA) has appeared in Vietnam but there are no official regulations on this. That is why transfer pricing prevention is ineffective.

 

Transfer pricing prevention in Ho Chi Minh City is also ineffective. As for offshore outsourcing companies for foreign partners, prices depend on foreign contractors. However, those prices are much lower than cost prices in Vietnam. Many companies registered to pay high wages for workers while outsourcing values are usually very low. This sends many companies to losses and they are free from corporate income taxes. Another example is administrative expenses in operating restaurant, hotel and office for lease. According to the Circular 13/1997 of the Ministry of Finance and the Ministry of Planning and Investment, the limit on administrative expenses in foreign companies is 3-10 percent. But, according to the Decree 108/2005, companies could negotiate this matter with clients. They raised the rate to 20 percent in 2007 and to 40 percent in 2008. So, all profits in this business were put into this kind of cost. Before this reality, the tax sector asked the Ministry of Finance to reapply the Circular 13/1997. And, with this circular, Ho Chi Minh City recollected more than VND170 billion of taxes from just four companies. To sum up, the coordination of competent agencies is essential, especially to deal with sophisticated tax evasion manoeuvres.