Hundreds of FDI Businesses Commit Transfer Pricing, Tax Evasion

According to the report by the General Taxation Department, in 2013, the tax sector focused on the key mission of fighting transfer pricing in FDI businesses who had made associate transactions, incurred losses but still had continued to expand production and business.

 

As shown by inspection result, checking at 2,110 enterprises retrieved arrears tax and fines of more than VND988 billion, reducing deductibles of VND136.95 billion. Especially, tax inspectors successfully demanded companies to shrink losses of more than VND4,192 billion. According to inspectors’ assessment, arrears mainly came from FDI enterprises (accounting for 40 percent of total amount), average arrears per business was VND1.73 billion.

 

However, the figures only reflect part of the tax invasion picture among FDI enterprises. Reports from 63 tax departments and more than 100 tax agencies across the country startled many people. Specifically, the results showed that out of 870 FDI businesses inspected, there were 720 violation cases.

 

Notably, in some areas the violation rate could even reach 100 percent. For example, in Bac Giang, all 16 businesses inspected conducted transfer pricing; Hoa Binh (16/16) and Gia Lai (15/15) also showed high rates.

 

In some other provinces, the rates were not that high but remained alarming. For example, in Hanoi, out of 332 inspected, 326 showed evidence of transfer pricing, faulty losses reduced was of more than VND1,500 billion, arrears tax and fines of nearly VND498 billion. In Ho Chi Minh City, there were 164 FDI businesses violated out of 193 inspection cases, faulty losses reduced of over VND870 billion, arrears tax and fines of nearly VND173 billion.

 

Bac Giang Tax Department inspected 106 businesses and found all 106 guilty. This rate was also seen in Dong Nai 39/39, Gia Lai 30/30, Hai Phong 45/45, Thai Nguyen 46/46, and Quang Ngai 80/80.

 

Transfer pricing acts and tricks of FDI enterprises had been uncovered by the inspectors. Specifically, through reviewing collected information and data, inspectors found that foreign investors often contributed capital to domestic firms in the form of outdated or fully depreciated machinery, equipment but pushed its price much higher than the actual value. This had helped raise capital value, causing losses to the budget and disadvantages for domestic companies.

 

Another form of transfer pricing used by FDI enterprises was selling goods or raw materials to associates for a far lower price than to unrelated parties. According to a Finance Ministry official, this was the most common behaviour. With the advantage of holding the majority of stake in Vietnamese businesses, foreign affiliates could one-sidedly determine the price of goods and materials to transfer a lot of pre-tax profit abroad.

 

“The parent companies overseas make contracts of manufacturing and services with foreign companies with a high price. Then, they assign their subsidiaries in Vietnam to perform production and manufacturing and export directly to enterprises which the parent companies had signed contracts. However, the collected money is not obtained directly from the shipping companies but from the parent companies at the low price agreed before,” stated the report by tax inspectors on violation behaviours.

In addition, a different form of transfer pricing through interest payments of capital was also popular among FDI “magicians”. This behaviour lower price of goods and services exported to foreign countries, mainly selling products through parent companies with price lower than cost, which resulted in continuous losses of FDI businesses years after years. To continue to operate and expand its business, parent companies conducted capital support or interest free loans.

 

Localizing businesses, tax inspectorate noticed that enterprises operating in the field of service and consumer of popular foreign brands often conducted transfer pricing through setting copyright price far higher than actual value. This trick helped foreign investors profit from raising brands value while Vietnamese companies had to bear the cost of advertising for those brands.

 

It is worth mentioning that advertising in the local market with high cost made those brands more popular, and foreign parties using that to request more money from Vietnamese companies even though those costs should be covered by overseas parent companies.

 

The conclusion of tax inspectors, according to economic expert Dr Le Dang Doanh, reflected a commendable effort, as transfer pricing and tax evasion was always extremely difficult to detect, full of subtle tricks and insider trading hard to control. However, too many violations in too many places show that the current policies and preventive measures of transfer pricing has shortcomings.

 

Mr Doanh recommended authorities focus on companies reporting losses continuously, owning intangible assets and having big brand value for frequent checking and inspection. But more importantly, it’s crucial to soon build a global price data system and an efficient team to prevent or detect early suspicious behaviours to avoid losses to the state budget and to create a fair business environment.