Various forms of transfer pricing

Currently Vietnam has more than 13,500 FDI businesses, many of which report losses and tax debts, according to Do Nhat Hoang, head of the Foreign Investment Agency (FIA) under the Ministry of Planning and Investment (MoPI).

An MoPI survey shows that up to 70 percent of the FDI respondents suffer losses every year; some earn profits, but their return on sales (ROS) remains modest.

“We have worked with the Ministry of Finance and relevant agencies to devise a plan of action to tackle the issue, but it is no easy task in reality,” says Hoang.

Economic expert Dr Vu Dinh Anh says FDI businesses capitalise on incentives offered by Vietnam to expand operations, and after the payback period many of them file for bankruptcy, or change their business strategies, or report losses to avoid paying corporate income tax on mammoth investments.

These are unrealistic loss reports and FDI businesses are trying every trick in the book, including applying transfer pricing techniques, says Anh.

He explains unreal losses are a result of transfer pricing that businesses apply to raise the prices of machinery and input materials and devalue finished products.

Taking advantage of this unhealthy practice, many joint venture companies report losses, forcing the Vietnamese party to dispose of their capital in the JV (mostly in the form of land use rights), and they become wholly foreign invested businesses.

The fact is that this practice is quite complex, not to mention the related transactions.

Some FDI businesses make a profit from transfer pricing by transforming themselves into joint stock companies, during which they exaggerate their assets to become eligible for listing on the stock market. They make use of this process to capitalise their assets, sell part of their stock, or even transfer the entire amount of capital out of Vietnam.

There is no denying that FDI attraction aims to draw foreign investment capital and modern technology, but transfer pricing makes this task impossible, or leave it just half done.

In addition, after reaping profits from transfer pricing, FDI business managers are reluctant to enhance management capacity, cut costs and improve labour productivity.

Another key goal of FDI attraction, increasing business managerial skills, is also hindered by this practice. Furthermore, the goal of generating jobs and higher incomes for employees is badly affected, as businesses suffer from constant loss or low profits.

FDI businesses use those reasons as a pretext for limiting employee recruitment and higher pay, though in fact they yield big profits from transfer pricing.

So much to do, so little done

Hoang says the fight against transfer pricing is an uphill task for Vietnam, citing the lack of legal instruments, staff and inexperience as major reasons.

“Sometimes a certain FDI business is alleged to be involved in transfer pricing, regrettably we cannot find any specific evidence, because their fraud behaviour is so complicated,” says Hoang, adding the tax agency also admits that it is no easy task to deal with this issue.

In a recent online dialogue with the public, MoPI Minister Bui Quang Vinh pointed out that there are several dishonest businesses that intentionally report losses to evade taxes.

The MoPI has worked with the Ministry of Finance, relevant ministries and localities to solve the problem. It has drafted an anti-transfer pricing programme, which was later assigned to the Ministry of Finance to carry out, as it is associated with tax and customs affairs. 

The MoPI has also built a database of the prices of commodity items in Vietnam and abroad to make comparisons as necessary. 

It is the responsibility of relevant ministries and agencies to nip in the bud any negative practice of transfer pricing, said Vinh.

Economic experts say anti-transfer pricing requires a coordinated effort from relevant agencies, not only the customs sector itself, in controlling the prices of machinery, equipment, and related materials during the project appraisal process.

In other words, FDI-related agencies control market prices of imports and exports by FDI businesses to combat transfer pricing and improve the quality of foreign capital attraction.