Fighting against transfer pricing will be a violent war

VietNamNet Bridge – The owners of international economic groups are always the wise businessmen supported by experienced accountants, lawyers and strategist. Therefore, it is not easy to force them to admit their transfer pricing behavior.

Bui Van Nam, General Director of the General Department of Taxation (GDT), said it is easy to find out the unreasonable things in the finance reports submitted by foreign invested enterprises (FIEs) that committed the transfer pricing.

The truth will conquer

transfer pricing, fdi, foreign firms, FIEs, investors, losses, profit

According to Nam, it sometimes took GDT officers some years to discover the evidences for accusation.

In case of Hualon Corporation, for example, tax officers had to ask thousands of domestic textile and garment enterprises to provide information about the prices for reference. It then took a lot of days to analyze the figures to find out the unreasonable things which could lead to new discoveries.

The tax inspectors have discovered that the enterprise conducted the transfer pricing when importing an old production line at $16 million which it later sold for $400,000.

“We had to compare the selling prices of the production line imported by Hualon and other products with similar standards. We proved that the production line imported from Taiwan was unreasonably higher than the price of the products from G7 countries,” Nam said.

Tax officers did not miss any information, including the minor details, to find out the truth.

In case of the 17 tea companies in Lam Dong provinces, tax officers found out that 7 kilos of fresh tea could make one kilo of dry tea, while a kilo of fresh tea was priced at VND40,000. This meant that the manufacturers had to spend VND280,000 in materials to make one kilo of dry tea. Meanwhile, the tea companies sold to Taiwanese at VND140,000, or just a half of the production cost.

“No businessman would accept to sell products for such a big loss,” Nam said.

In case of Keangnam Vina, the story arouse from an unreasonable thing that Keangnam Vina borrowed money at the sky high interest rate of 12 percent per annum from the holding company, while the market interest was 5-7 percent only.

FIEs might have to pay much higher tax arrears

“The sum of tax arrears collected from the FIEs that committed transfer pricing could have been much higher,” said Nguyen Quang Tien, Head of the Tax Renovation Committee of GDT.

According to Tien, GDT has only examined the tax payment duty implementation made in the last five years, since 2007. Meanwhile, the number of enterprises conducting transfer pricing would be much higher, if counting on the ones which came to Vietnam in 1990s and repeatedly reported big losses.

This means that the enterprises “had a narrow escape” for the loss reported for 2006 and before.

Also according to Tien, the tax arrears and fine were converted into Vietnam dong with the exchange rate at the time when enterprises conducted the transfer pricing.

“In 2007, a dollar was equal to over 10,000. If the current exchange rate of VND21,000 per dollar had been applied, the sum of tax arrears could have been much higher,” he explained.

According to Nam, GDT will take more drastic measures to investigate the other 40 FIEs. In the fight against the transfer pricing, GDT has one more “legal rod” – the Binding Ruling, stipulated in the Tax Management Law which took effects on July 1.

Pham Huyen

transfer pricing, fdi, foreign firms, FIEs, investors, losses, profit