Adidas may have put foot in it

A senior official at the Tax Inspection Division 1 under the Ho Chi Minh City Department of Taxation, said the department was asking Adidas Vietnam to provide legal documents  that showed costs related to transactions on international marketing, copyright and regional management.

Related party transactions is a method of transfer pricing often employed by foreign-invested enterprises.  Subsidiaries of a parent company use the system to transfer profits from Vietnam to another country with lower tax rates to avoid paying tax in Vietnam.

By the end of 2011, Adidas opened a total of 50 stores in major cities. According to Adidas Group’s annual report 2011, Adidas Vietnam has VND23.7 billion ($1.2 million) in chartered capital and it is wholly owned by Netherlands-based Adidas International BV.

Previously, the General Department of Taxation (GDT) sent a document to the Ho Chi Minh City Department of Taxation on defining market prices in related party  transactions for Adidas Vietnam Limited Company, saying that the transactions between Adidas Vietnam and other partners were likely to be related party transactions.

The GDT, therefore, is requiring the Ho Chi Minh City Department of Taxation to inspect the relationship between Adidas Vietnam and Adidas AG, Adidas Singapore, Adidas International Trading B.V and retailers.

In the document sent to the GDT previously, the inspection results of the Ho Chi Minh City Department of Taxation showed that there were many unreasonable related party transactions involving Adidas Vietnam.

Pham Minh Nguyet, marketing manager of Adidas Vietnam, declined to comment, saying that the company was working with the department to address the issues. Le Thi Thu Huong, deputy director of the Ho Chi Minh City Department of Taxation, said that under the business registration licence, Adidas operated as a wholesaler, not a retailer, but it had earmarked a huge sum of money to equip local retailers with product-display shelves and furniture. And although not a manufacturer, Adidas Vietnam has  generated a cost for copyrights.

“These costs are considered transfer pricing signs, therefore, the department considers them as unallowable expenses when calculating corporate income tax,” said Huong.

Specifically, according to the department, Adidas Vietnam had to pay Adidas AG the cost for copyright and the cost for international marketing equivalent to 6 per cent and 4 per cent of its net revenue, respectively.

Moreover, under a service contract with Adidas Singapore, Adidas Vietnam would have to pay Adidas Singapore for administrative management.  However, Adidas Vietnam is not only under Adidas Singapore’s  management, according to the department.

Although it is legally qualified to directly import goods for sale in Vietnam, Adidas Vietnam has contracted with a partner — Adidas International Trading BV — to carry out all the import tasks on its behalf. In return, the company has to pay the partner 8.25 per cent of the value of each transaction. The expense is counted as a merchandise purchase cost, and added into the product’s cost price.

In the inspection process, the taxation department discovered many signs of related party transactions and Adidas Vietnam itself admitted that member companies in these transactions had a related parties relationship because their managers had “a close relationship”, according to the department. Therefore, the department said, possibly Adidas Vietnam transferred its profit in form of allowable expenses to avoid tax payment.