Transfer pricing - a challenge to Vietnam’s tax authorities

Photo: Vnexpress

According to the Department of Corporate Finance under the Ministry of Finance, as of early 2018, Vietnam had 24,748 active foreign direct investment (FDI) projects with total investment pledges at US$318.72 billion and disbursement at US$172.35 billion.

FDI enterprises come from over 100 countries and territories worldwide and are present in every province and centrally-governed city in Vietnam, operating in a wide range of fields, from manufacturing to construction, services and agriculture.

Their investment accounts for one quarter of Vietnam’s total investment, while contributing 18.59 pct of the country’s total economic output, 19 pct of government income and 70 pct of the total exports.

FDI enterprises have also created an estimated 4 million jobs.

However, statistics show that among the 17,493 FDI enterprises operating in Vietnam, as of the end of 2016, only roughly 14,400 submitted their financial statements to the Vietnamese authorities, of which only 12,589 included all of the necessary information for analysis of their reports.

In other words, nearly 30 pct of foreign-invested businesses did not file their financial statements or lacked the required information in their reports. Meanwhile the reliability of data on the submitted statements is another problem.

It is worth noting that each year approximately 50-60 pct of total FDI enterprises report losses, meaning they do not have to pay corporate income tax, while revenues from the FDI sector have been growing strongly.

Specifically, the FDI sector’s revenues grew 21.7 pct in 2016 with pre-tax profits at VND311.071 trillion (US$13.4 billion), up 39.7 pct from a year earlier.

The contradiction is that despite reporting losses, a great number of foreign-invested enterprises continued to expand their operation, many of which are the world’s top companies that have been present in Vietnam for years.

The losses of Coca-Cola, for instance, even exceeded its owner’s equity.

These figures show that the FDI sector’s transfer pricing is growing in number and complexity, causing public resentment and presenting a direct challenge to the tax authorities.

Transfer pricing is a range of activities aimed at reducing taxable income, decreasing or evading tax obligations, maximising investors’ profits by taking advantage of tax preferences and legal loopholes, false declaration of costs and prices, and using sophisticated connections of interests.

Therefore, efforts to prevent transfer pricing are necessary to not only improve government revenues but also ensure an equal and transparent investment environment for both foreign-invested and domestic enterprises.

This requires the competent agencies, especially tax authorities, to be fully aware of the necessity and capacity to deal with transfer pricing.