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Transfer pricing rears its ugly head
A handful of foreign-backed enterprises have reported losses for several consecutive years to avoid paying tax, while expanding their businesses and production.
According to the Ho Chi Minh City Taxation Department, 60 per cent of the 3,500 foreign-invested enterprises (FIEs) operating in the city reported losses in 2009 and 50 per cent in 2008.
One enterprise reported it had incurred losses for 11 years despite its turnover and operating scale jumping nearly 100-fold during the period, from $6.9 million in the first year of operation to $508.7 million in 2009.
Nguyen Trong Hanh, Deputy Chief of Ho Chi Minh City Taxation Department, said it was impossible for an enterprise to expand its business 100 times, while having reported to be in the red for over 10 years.
“It is unreasonable that during the same time, in the same industry and in the same business environment, domestic garment enterprises such as Saigon 1, Saigon 2 and Viettien still attained annual turnover growth, while FIEs must bear losses for such a long time,” Hanh told VIR.
South Korean firms made up 30 per cent of the loss-reporting companies, followed by Singaporean (12.57 per cent), Japanese (9.04 per cent) and Taiwanese (7.49 per cent) ones. Most of the loss-reporting enterprises specialise in manufacturing garments and footwear.
The city’s tax department had examined about 20 large-scale FIEs which have significant turnovers, but have been reporting losses. As a result, 17 of them finally declared profits in their 2009 tax statements.
Hanh said “transfer pricing” was responsible for the situation, which meant that FIEs raised the prices of materials bought from their parent companies abroad to evade taxes.
“This activity fetched real profits for parent companies abroad, but caused false losses to the FIEs in Vietnam. It also helps FIEs dodge corporate income tax and remittance fees,” Hanh added.
Hanh said it was unacceptable that FIEs used transfer pricing to avoid paying tax. “FIEs operating and benefiting in Vietnam should have a responsibility for its development. If they only take care of their personal profits and evade taxes, it is not only an illegal activity but also a moral problem,” Hanh said.
Meanwhile, a transfer-pricing specialist at PricewaterhouseCoopers Vietnam, Poh Wen Jean said there was no specific transfer pricing penalty in Vietnam. However, any non-compliance, for instance a failure to submit the annual transfer pricing declaration, with the transfer pricing requirements would expose a company to various types of penalties under the general tax administration laws.
“The Vietnamese transfer pricing rules set out in Circular 117/2005/TT-BTC are somewhat more stringent and rigorous compared with other countries in the region. Taxpayers in Vietnam need to proactively look at and manage transfer pricing risks and compliance requirements. Understanding the tax authorities’ intentions as well as the embedded challenges ahead would be a good first step,” said Jean.
vietnamnews, VIR
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