Taxing issue still burns

But, policymakers have not figured out a way to stymie the practice. The increase in inspections this year was part of a frontal assault by the government on transfer pricing activities at foreign invested enterprises (FIEs) – a practice which is seriously damaging the government’s ability to collect tax.

The Ministry of Finance (MoF) last week reported it had inspected 856 FIEs suspected of transfer pricing activities this year – fewer than the ministry’s target of 1,276 cases but 281 cases more than in 2010.

FIEs under the MoF spotlight were those which continued to expand despite suffering huge losses over a long period of time or posting losses bigger than their total registered investment capital.

With the inspections largely complete, the government can boast positive results. Losses reported by operating FIEs in Vietnam this year were $211.5 million lower than last year and the profit of FIEs increased 2.5 times in 2011, according to the MoF.

Cities and provinces’ tax departments also collected tax arrears and fined inspected FIEs which were found to be engaged in transfer pricing to the tune of $80 million. “This result not only brings a huge amount of money to the state budget, but is also a warning to enterprises with transfer pricing activities,” the MoF said in its report. Some enterprises were now reporting profits instead of losses as they did before, the report stated.

But the total number of MoF inspections – carried out in association with other ministries including the Ministry of Planning and Investment and Ministry of Public Security – is still modest given there are almost 13,500 foreign-invested projects in Vietnam.

“Despite the small number of inspections, we discovered many FIEs are tax-dodgers. What would that number be if we inspected all FIEs in the country? It must be very big,” said Do Nhat Hoang, director of the Ministry of Planning and Investment’s Foreign Investment Agency.

A General Department of Taxation report estimated about 3,500 FIEs were showing accumulated losses up to 2010. Many of them were reporting huge losses but still asking permission to expand their investment. “This situation raises doubts over transfer pricing activities and shows inspection is required to prevent tax evasion,” said the report.

But detecting transfer pricing activities in Vietnam is not easy. Hoang said all the inspections could just be warning FIEs and not effectively preventing transfer pricing. “We don’t have measures and databases to officially conclude whether a FIE is implementing transfer pricing or not,” said Hoang.

Taiwan’s Hualon Textile Company in southern Dong Nai province is case in point. The firm incurred continual losses which exceeded $47.6 million by late 2010. Inspection results showed that the firm had unclear transactions with associated foreign firms in purchases of major production raw materials. Dong Nai Tax Department felt it had insufficient information and sent all relevant records to the General Department of Taxation seeking advice.

According to a tax officer in southern Ba Ria-Vung Tau province, there was almost no database of prices of commodities and products being transacted between independent and associate companies.

“Hence, in cases where internal transactions are taking place among associated firms or firms in the same group, it is extremely difficult for tax bodies to source similar transactions to define whether the parties involved these internal transactions strictly abide to market prices,” said the officer.