A firm hand for a taxing issue

Nguyen Quang Tien, director of the Ministry of Finance’s Tax Reform and Modernisation Department, discussed  the role of Vietnam’s tax agency in policing transfer pricing and tax evasion.

Could you share with us some results on the anti-transfer pricing moves by Vietnam’s tax authorities in 2012 and plans for 2013?

Inspecting the transfer pricing situation has been a pressing task in 2012. As a result, the tax authorities in the whole country carried out inspections of 1,495 enterprises reporting losses as a transfer pricing signal. After the inspection, many enterprises adjusted to report profits instead of losses. The tax authorities collected tax arrears of VND622.8 billion ($29.9 million), reduced losses of VND3.3 trillion ($158 million) and paid additionally to the state budget of VND206 billion ($9.9 million). Specially, there was a case where after the inspection, up to $80 million was redefined as taxable income.

The tax authorities proposed to the Ministry of Finance that a programme on controlling transfer pricing during 2012-2015 be rolled out. Accordingly, it will focus on enterprises with transfer pricing signs such as reporting losses for many consecutive years while aggressively expanding investment, or artificially raising their costs. Coca-Cola is a typical suspicious case where the company often bought materials from its parent company at high prices, leading to big losses.

Recently, Coca-Cola was discovered to have continuously reported losses and never paid any corporate income tax in Vietnam while continuing to expand its business in Vietnam. Have the tax authorities had any inspection on transfer pricing at such enterprises?

In fact, the tax agency did not have a transfer pricing inspection of Coca-Cola. In 2006, we had a tax inspection at Coca-Cola which focused on inspecting its revenue, invoices and other documents.

However, Coca-Cola together with other big names like Metro Cash&Carry and PepsiCo are now also under the tax agency’s field of view. The General Department of Taxation suspects that those firms conducted  transfer pricing. But due to limited resources, we cannot carry out inspections right now. A transfer pricing inspection often takes a lot of time to define and get a result, about two years, even 13 years as a case in Australia.

So what do you think is the reason for the transfer pricing situation in Vietnam?

Transfer pricing is a pressing matter not only in Vietnam, but many countries  which requires the tax agency to work with other ministries and agencies. One of the reasons for transfer pricing in our country is the policy to attract foreign investment which created some loopholes for many foreign firms to avoid paying tax.  For example, the current Law on Corporate Income Tax allows enterprises in the technology sector to enjoy tax exemptions in the first four years of operation and a tax reduction in the next nine years. Therefore, some enterprises, after the tax incentives became invalid, established a member company for transfer pricing for tax evasion.

Besides, the weakness in the professional capacity of tax officers also affected the efficiency of anti-transfer pricing in Vietnam. We now do not have an inspection team specialised in transfer pricing. The tax agency is trying to raise the quality of the tax officers in this field.

In addition, I know many cases of transfer pricing had support from audit firms which helped foreign firms evade tax. Therefore, in the upcoming time, the tax agency proposed to revise and supplement some legal mechanisms on responsibility of auditing agencies in declaration of related-parties transactions. In case of tax arrear collection on related party transactions, the audit company would have to hold some responsibility.