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Officials say many foreign manufacturers found to be declaring ‘virtual’ losses
Many of the foreign invested enterprises (FIEs) reporting losses in 2008 seem to be profitable businesses which have doctored their returns to evade Vietnamese taxes.
The appearance of losses
Fifty-two percent of some 2,000 tax returns submitted to the HCM City Tax Department in 2008 by foreign-owned or foreign invested enterprises claimed a business loss. Similarly, many finance reports on the 10-year financial situation (1998-2008) released by 1,300 out of 2,730 FIEs in the city also showed continued losses. However, many of the loss-reporting enterprises have been unceasingly expanding their business over the last few years, according to Nguoi Lao Dong daily.
South Korean and Taiwanese firms are overrepresented in this group, it said, quoting a tax official.
A garment company in Tan Tao Industrial Zone, for example, reported heavy losses although its revenue increased by 100 times in 1998-2007, surging from 130 billion dong to 9 trillion dong. Meanwhile, Vietnamese owned garment companies, including Saigon 2 and Saigon 3, competing in the same market as the FIE, reported profits for the same period.
The HCM City Tax Department has found after thorough analysis that many enterprises declared losses not because they really incurred them, but because they aimed to shift their tax liability to other countries.
According to a deputy director of the department, Nguyen Trong Hanh, many FIEs have attributed the claimed losses to stiff competition, higher input costs and high material consumption levels.
However, Hanh said, most of the enterprises used tricks to ‘create loss’ and evade tax. For example, they declared input costs that were higher than the actual levels, or exaggerated claimed expenses on marketing and advertisement. All these measures helped make the expenses higher than the actual levels and turn profit into loss.
The corporate income tax rate currently applied in Vietnam is 25 percent, which is considered relatively high among Asian countries. This has prompted many FIEs to seek to shift profit-taking to parent groups or other members of the multinational groups, so that the FIEs can pay low tax in Vietnam.
According to the HCM City Taxation Department, the majority of enterprises that declare unending losses are companies from Asia, especially South Korea and Taiwan. Most of these enterprises operate in fields that use high numbers of labourers, such as textile and garment-making, or are difficult to control, like software production.
What’s the remedy for this problem?
Tax officials point out that it is illogical to report consecutive loss and continuously expand business scope at the same time. However, local tax offices do not have the right to to impose penalties on the enterprises, if they can show lawful vouchers when they are inspected.
The officials add that the reporting of paper losses needs to be stopped as soon as possible, explaining that this not only loses revenue for the state budget but also creates an unfair playing field for competitors.
The HCM City Taxation Department has many times reported this problem to central government agencies and asked them to take steps to solve the problem. However, the situation has not been settled.
The HCM City Tax Department has forced enterprises which have lost all the chartered capital because of continued losses to shut down operation.
The department said it is asking loss-reporting enterprises to show the reasons behind the reported loss, pointing out unreasonable things (enterprises showed sales of products at prices lower than the cost of production, or expanded business scope despite loss) and asking the enterprises to show their business plans for the near future.
Many enterprises, after working sessions with the Tax Department, have reported profit instead of loss, though just a modest profit.
VietNamNet, NLD
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