Transfer pricing not in vogue

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Tax authorities appear to be winning the fight against transfer pricing. A new General Department of Taxation (GDT) report shows the country’s tax authorities investigated 585 enterprises suspected of transfer pricing in the first six months of 2011. That’s five times the number of inspections carried out in the same period last year and 45.8 per cent of the plan for 2011.

In the first six months of this year authorities collected tax arrears to the tune of VND978 billion ($47 million), a four-fold increase on 2010’s corresponding period. “These first results in the fight against transfer pricing in foreign-invested enterprises (FIEs) are a real highlight for tax authorities this year,” said a GDT representative.

Meanwhile, a Ministry of Finance report shows 35 cities and provinces reported on FIE operations in 2010. Some of the cities and provinces where a large number of FIEs posted big losses were northern Vinh Phuc province with 23 out of 46 enterprises reporting losses, northern Bac Ninh province (90 out of 152) and northern Hung Yen province (73 out of 128). Almost half of 56 FIEs operating in central Danang city posted losses while in central Phu Yen province it was 15 out of 23.

In southern Binh Duong province it was 279 enterprises reporting losses. This number was 71 in neighbouring Dong Nai province. The report also revealed FIEs were reporting losses in sectors including textiles and garments, chemicals, cosmetics, electronics, food processing and tourism.
Phan Phung Hung, an investigator from the Ho Chi Minh City Department of Taxation, said FIEs reporting losses over many consecutive years while expanding businesses was a sign of transfer pricing.

The practice involves enterprises raising the prices of materials, parts or machinery bought from parent companies abroad to evade taxes. The GDT said that in 2010, total tax collected from FIEs was VND15 trillion ($724 million), or equivalent to 9-10 per cent of the state budget collection from taxes. At the same time, FIE’s investment accounted for 30 per cent of total investment in the whole country. Thus, it was clear FIEs’ contributions to the budget was not comparable with their investment scale. Nguyen Thi Phuong Hoa, chief of the National Economics University’s Accounting Faculty, said transfer pricing not only decreased tax contributions, but also created unfair competition among enterprises.

“In addition, the situation has a negative impact on macroeconomic management because it increases the trade deficit and raises the burden on exchange rates,” said Hoa.
However Duong Van Hoa, deputy head of the GDT’s Investigation Department, said summarising the total losses of FIEs did not provide a detailed overview of transfer pricing in Vietnam.
“It is also necessary for tax authorities to make clear how many enterprises among FIEs reporting losses really took advantage of transfer pricing to evade tax,” Hoa told VIR.