Advance Pricing Agreement: Effective Measure against Transfer Pricing

Mr Nguyen Trong Hanh, Deputy Director of the Ho Chi Minh City Department of Taxation, said, by transfer pricing, enterprises can minimise their tax payment and maximise their profit. In HCM City, transfer pricing has been found not only in FDI companies but also in domestic ones. This is no longer unusual, but rather a common phenomenon in economic transactions. It occurs in almost all economic sectors.

 

Enterprises in Vietnam, especially foreign invested ones, use a variety of transfer pricing methods to increase input costs. Especially, for companies producing goods and services for domestic consumption, they usually increase input costs of equipment, materials, copyrights, advertising, and consumption rates. Exporters tend to seek ways to augment input costs and lower selling prices like signing off-shore outsourcing contracts. Most companies that declare operating losses have signs of inside collusion with foreign partners. Transfer pricing and its variations not only cause tax loss to the State but, more importantly, distort the Government's investment incentive policies, exacerbate hostile takeovers in business joint ventures, and create an unequal competitive business environment.

 

According to Mr Hanh, previously, tax authorities mainly used manual methods; thus, they could not analyse revenue, profit ratio and wage data of a company. But, when IT applications are used widely, analytic data show a lot of abnormal signs in business operations. Some companies continuously reported losses but they developed strongly. As a person in charge of working with companies showing signs of transfer pricing in HCM City, Mr Hanh said a company reported losses for 11 years in a row but, after it was invited to work with the HCM City Taxation Department, it was discovered to make a profit of VND180 billion in 2011 alone when the economy was in a much more difficult situation than previously.

 

Mr Nguyen Quang Tien, Director of Tax Reform and Modernisation Department and Head of Transfer Pricing Prevention Research Team, said: The tax sector has to date counted 3,144 companies declaring associative transaction information, of which 2,070 businesses carried out declarative obligations, accounting for approximately 66 percent required to declare. In 2011, tax authorities inspected 921 enterprises suspected of engaging in transfer pricing and claiming continuous losses from one year to another. Through such inspections, tax authorities were able to dispute losses totalling VND6,617 billion. They collected tax arrears and penalties worth VND1,669 billion. The General Department of Taxation set up a tax management committee in charge of preventing transfer pricing.

 

Mr Tien said transfer pricing prevention was defined by the Ministry of Finance as a major task in 2012, in an effort to limit State Budget revenue losses. Accordingly, the war against transfer pricing will escalate in the future. The opening shot is the request by Deputy Prime Minister Hoang Trung Hai, assigning the Ministry of Finance to formulate an action plan and annual plans, commencing from 2012, to more effectively control transfer pricing activities by foreign invested enterprises. Meanwhile, the Ministry of Planning Investment announced that it had completed the compilation of the plan on preventing transfer pricing in foreign direct investment (FDI) activities in Vietnam. More importantly, the General Department of Taxation (GDT) has officially announced that Vietnam would apply the advance pricing agreement (APA) based on market prices in order to prevent fraud. APA includes valuation criteria and methods, selection of comparative counterparts, necessary adjustments and assumptions. This is the best method in managing risks of transfer pricing.

 

As planned, in 2012, the tax sector will inspect at least 1.5 percent of operational enterprises, or 7,800 units, and examine at least 12.5 percent, or 56,500 units, throughout the country, mainly focusing on companies operating in finance, banking, real estate, electricity, petroleum and mining sectors, FDI companies, loss-making companies, and unchecked tax debt-bearing companies. Remarkably, under the guidance of the Government and the Ministry of Finance, the General Department of Taxation is drafting action plans from 2012 to control transfer pricing more effectively.

 

But according to experts, the current legal framework of Vietnam against transfer pricing is limited. To discover acts or signs of transfer pricing, tax authorities need time, patience and absolute seriousness to closely monitor production and business activities of target enterprises. Therefore, transfer pricing prevention is considered one of the most complex issues of the tax sector at present. Ministries and branches have also proposed adding APA regulations into the Law on Tax Management in the near future. In the long term, Vietnam needs to issue Law on Transfer Pricing Prevention.