Mr Pham Thanh Tung, Head of the Legal Affairs Department at the General Department of Taxation (GDT), and Mr Phan Huu Thang, former Director of the Foreign Investment Agency under the Ministry of Planning and Investment, tell VET's Minh Hoang about the difficulties encountered in fighting transfer pricing activities.
Foreign-invested enterprises (FIEs) contribute significantly to Vietnam economy but there are those that have “fallen into disrepute”, with GDT figures proving they have engaged in transfer pricing. What are your comments on this?
To be fair, not only foreign enterprises but also local enterprises engage in transfer pricing and this activity is readily found all around the world. Transfer pricing has considerable negative consequences, causing shortfalls in State budget collections and distorting competition, to the detriment of the local business environment.
The fight against transfer pricing is an ongoing task for State agencies, with the GDT playing the key role. The Organisation for Economic Co-operation and Development (OECD) has summarised dozens of types of transfer pricing for reference by tax authorities around the world.
What are the specific methods used in transfer pricing?
By overvaluing prices of imported machinery, equipment and raw materials while stating lower export product prices, a company division located in an invested country - although financed by its parent corporation - is not profitable on paper and may even suffer nominal losses in order to quickly recover its capital and achieve high returns. Depending on the future market situation, they may even cease operations and sell the business or bankrupt it.
Investors involved in transfer pricing will increase the input prices of machinery, equipment, technical secrets, and patents, for instance, to overstate the fixed asset value of the business. During future operations and business, the cost of new machinery and equipment for supplementation or replacement are always overstated in order to increase depreciation, which may also happen in the case of increasing capital investment to expand operations. As these costs are substantial, profits will be rather low or even non-existent, and losses may be accrued.
Similarly, during production and business operations, enterprise declare high input prices and concurrently try every means available to overstate other expenses such as marketing and promotions, among others, to wipe out any profits. Some FIEs also take advantage of the Vietnamese Government’s incentives on advertising and marketing expenses to promote the parent firm.
Over-declaring interest expenses is another method often used. Usually the parent entity brings in input materials, supplies and components that cannot be manufactured in Vietnam or are of poor quality when locally produced. The subsidiary in Vietnam state that they have insufficient funds to purchase