Firms evade taxes through transfer pricing

VietNamNet Bridge – Tax authorities have recently audited some foreign-invested enterprises suspected of evading taxes in Viet Nam through transfer pricing. Vietnam News Agency spoke to the director of the Ministry of Finance's Department of Tax Reform and Modernisation, Nguyen Quang Tien, about the issue.

Why do you suspect transfer pricing is being used as a tax evasion technique?

A big problem facing tax authorities has been the rising number of foreign-invested enterprises declaring losses. Their statistics suggest that total tax collections from such firms haven't been commensurate with their investment capital for a number of years.

As of December 20, there were 11,110 foreign-invested firms, compared to 7,400 State-owned enterprises.
However, the tax contributions of foreign-invested firms accounted for only 10.2 per cent of the total State budget in 2008, compared with 16.7 per cent of State enterprises. Taxes collected from foreign firms in 2009 and 2010 accounted for about 11 per cent of the State budget, while taxes paid by State enterprises accounted for 19-20 per cent.

The difference was partly because foreign-invested firms are beneficiaries of preferential corporate income tax policies during their initial years in operation in Viet Nam. However, some companies have been using transfer pricing once their investment incentives expire to evade further tax obligations.

How does transfer pricing work?

Audits have shown that foreign firms often deduct raw material costs at much higher than their actual values while reporting lower values for their finished products. They also give their products specific characteristics or associate them with other transactions to avoid detection by tax authorities.

How do you detect the practice?

The most common signs of transfer pricing are that firms declare losses for many consecutive years while still expanding their investments in Viet Nam and conducting significant business transactions in other countries.

However, controlling transfer pricing is difficult since it requires the tax agency to have the professional skills and the authority to investigate it. The co-ordination between State agencies also remains loose and ineffective.

Furthermore, the country hasn't regulated reasonable profit levels for each industry. It has been difficult, for instance, to determine market prices for products since information exchanges between Vietnamese and foreign tax authorities remain limited by the goal of each country to protect its tax base.

Which measures have been taken by the tax authorities to prevent the transfer pricing of FDI firms?

Viet Nam's long-term goal is to create a healthy investment climate to attract foreign investors. We are currently focusing on building a database to try to minimise transfer pricing. Tax authorities will buy the data, especially that related to parent companies of foreign-invested firms in Viet Nam, to serve for the task.

The General Department of Taxation is also researching an application for risk analysis and audit of transfer pricing.
In the future, tax agencies will also focus audit efforts on foreign groups which have many subsidiaries and show signs of transfer pricing. Particularly, tax agencies will inspect distribution systems of exclusive importers and distributors on the Vietnamese market whose raw materials are sourced entirely from associated companies abroad.

In addition to issuing regulations to guide the execution of the revised Law on Tax Management approved by the National Assembly late last year to better manage transfer pricing, the General Department of Taxation will also streamline the current legal framework related to transfer pricing.

The department is also co-operating with the European Commission Delegation in Viet Nam, the Organisation for Economic Co-operation and Development (OECD), Japan International Co-operation Agency (JICA) and World Bank to provide training programmes General Department of Taxation staff.

Source: VNS

Tax authorities, some foreign-invested enterprises, transfer pricing, evading taxes