Transfer Pricing in Vietnam: Businesses Confess, Sanctions Undetermined

Besides, according to recent reports from 63 provincial/municipal tax departments and over 100 tax branches in the country, up to 720 FDI enterprises out of 870 surveyed committed transfer pricing. In some localities, the more inspections they perform, the more violations they find. For example, all 27 FDI inspected in Quang Ngai province violated and all 14 companies in Bac Giang province infringed. Gia Lai and Hoa Binh provinces also found all 15 and 16 FDI firms breaking transfer pricing regulations.

 

The survey showed that about 20 percent of FDI companies surveyed have confessed to do transfer pricing to reduce tax burdens. Respondents are classified into four groups, based on their profits. The results showed that 65 percent of companies with a profitability ratio of over 20 percent, 44.5 percent with a profitability ratio of 10-20 percent, 12.3 percent with a profitability ratio of 5-10percent, and 9 percent with a profitability ratio of 0-5 percent carried out transfer pricing. This means that better performing companies commit more. Sectorally, nearly 90 percent of financial and insurance companies did the act of transfer pricing, followed by garment - textile companies with nearly 70 percent and auto parts producers with more than 50 percent.

 

Dr Luu Bich Ho, former Director of Development Strategy Institute (DSI) under the Ministry of Planning and Investment, said transfer pricing of FDI companies is not new. The problem is it is not stopped but tends to rise sharply. This requires us to have clear-cut standpoints and precise settlement.

 

According to local tax authorities, the act of transfer pricing and tax evasion is not new but it is developing more and more sophisticated and serious. In the most common way, companies raise input prices and lower selling prices to result in a loss or reduce book profits to evade taxes. Companies usually use transfer pricing if they have a lot of intangible assets, use proprietary technologies and makes uncommon products in the country as authorities have no comparators for them. Transfer pricing is usually carried out by companies having the same holding company, e.i. the parent company in foreign countries supplies inputs for the subsidiary company in Vietnam and purchases outputs as well. Hence, it is not easy to identify real input prices and real selling prices. Service and consumer goods companies usually overvalue their brand royalty when brands are used in Vietnam.

 

Prof. Nguyen Mai, Chairman of the Foreign-invested Enterprises Association, said some US universities also teach businesses how to exploit policy loopholes to evade taxes. Thus, the transfer price should not be regarded as something awful but we must accept the fact that tax evasion always exists in transfer pricing. Authorities must be react more quickly and more flexibly and fix policy loopholes to reduce violations. Eliminating the transfer pricing entirely is impossible.

 

According to the provincial Competitiveness Index in 2013 (PCI 2013), Vietnam's tax policies are incomplete and changeable. Therefore, tax policies are necessarily amended to catch up with international standards.

Dr Le Xuan Truong, a lecturer at the Academy of Finance, said that Vietnam should immediately complete its legal framework to fight against transfer pricing and then issue the Law on Transfer Pricing Prevention. It should also reduce tax incentives, decentralise transfer pricing investigations to provincial level from the current central level, and complete the taxpayer information system to closely track changes in their revenue and profit.

 

Bui Van Nam, General Director of the General Department of Taxation, said it is very difficult to determine behaviours, acts and tips of transfer pricing. Fighting against transfer pricing is not simply checking input prices and selling prices but it is carried out in many different stages and steps. Inspectors need a lot of time to synthesise and analyse data to choose independent comparators. After finding out absurd prices, they will impose new prices and force enterprises to accept. But, the most important factor is sufficient database and standards, which we do not have right now.

 

The recently revised Law on Tax Administration, which took effect on July 1, 2013, supplements advance market pricing mechanisms in arm’s length transactions. Accordingly, when tax authorities have advance market pricing agreements in arm’s length transactions, FDI companies will not be able to counter-argue.

 

We should not underestimate the role of FDI companies because of transfer pricing. But, economically, a high percentage of FDI companies doing transfer pricing is not normal. This act causes tax losses and adversely affects domestic enterprises.