More teeth needed to bite into taxing issues

Enterprises were obliged for declaring all related party transactions

The latest rules are set out in Ministry of Finance (MoF) Circular 66/2010/TT-BTC dated April 22, 2010, which gives firms guidelines on how to calculate market prices in business transactions between affiliated parties.

According to the circular, the price of a product in a related transaction shall be determined in line with market prices by comparing the equivalence between the related transaction and an arm-length transaction to select the most appropriate method of calculating a price.

Circular 66 also provides guidelines for businesses on how to determine information and analyse database information but many locally-based enterprises are accessing overseas databases for information.

“At this time, Vietnam does not have any agencies that the state allows to provide information or databases on comparable transactions,” said Thomas McClelland, tax partner at Deloitte Vietnam.

McClelland said it would be better if the MoF used overseas databases for a comparative analysis.

A tax expert from Tax Consultant Company said many enterprises wanted to prove true profits, but they faced a lack of information.

Transfer pricing, the process whereby multinationals shift their revenue and profits to markets where taxes are lower than in Vietnam, has become common among many foreign-invested enterprises (FIEs).

Cao Anh Tuan, general deputy director of the General Department of Taxation, said enterprises were allowed to use information and databases with clear origins which tax authorities could check and confirm.

“If tax authorities discover inexact or untrue information after inspection, enterprises will have to be responsible for illegal actions,” said Tuan.

In terms of the transfer pricing documentation reports, McClelland said that many enterprises were wondering how long a documentation report could cover.

He added many firms wanted to know if any template transfer pricing documentation report was provided to them for reference.

Tuan said if enterprises recorded revenues from sales of goods and services or other incomes for associated parties, enterprises were obliged to declare all related party transactions when they submitted their related party transaction declarations. “The MoF has not released a transfer pricing documentation report for reference.”

Deputy MoF Minister Do Hoang Anh Tuan said that the MoF was looking at amending some articles in the Law on Tax Administration which came into effect on July 1, 2007.

This involved the possible introduction of the Advance Pricing Agreement (APA) into the revised law as one of many efforts to control the current transfer pricing situation.

An APA is generally a unilateral or bilateral agreement between a taxpayer and relevant tax authorities on transfer pricing of a specific category of related party transactions.

The MoF’s strengthening of its anti-transfer pricing stance comes in response to the current ‘fake loss, real profit’ situation of many FIEs in Vietnam.

According to the Ho Chi Minh City Taxation Department, 60 per cent of the FIEs in the city reported losses in 2009 and 50 per cent did in 2008.

Specifically, in 2009, among 235 textiles FIEs operating in Ho Chi Minh City, there were up to 109 enterprises reporting losses, while the number of domestic firms was 28.

It was a similar story at 17 FIEs who produced and traded tea in Lam Dong province. For the past 10 years, the Lam Dong Department of Taxation has not collected any corporate income tax from these enterprises who reported losses over many consecutive years.

In 2011, the General Department of Taxation plans to instruct provincial tax offices to audit 870 FIEs which reported tax losses for the years 2008 to 2010, and to audit 100 per cent of tax refund applications by those loss-making companies and those which gained a profit less than two per cent out of revenues.