The management of transfer pricing may be problematic but as Vietnam integrates further it simply must be done better. Mai Khanh reports.
Inspections over possible transfer pricing activities have continued to be a key task for the General Department of Taxation (GDT) this year. Findings, however, must be based on evidence and arguments and made in a proper and consistent manner to ensure a fair business environment between State agencies and enterprises.
Transfer pricing inspections last year focused on sectors attracting much public attention, according to the GDT, and were both specific and general in nature to evaluate observance of tax laws.
Tax departments around the country carried out inspections at 4,751 enterprises reporting losses and exhibiting signs of transfer pricing in 2015, retrieving VND10.05 trillion ($450.1 million) and issuing fines totaling VND1.7 trillion ($76.2 million).
They also improved their experience in the process, according to Mr. Nguyen Dau, Deputy Director of the Inspectorate Department at GDT. Local tax authorities are now able to recognize methods used in transfer pricing and can conduct thorough inspections.
From 2012 to 2015 transfer pricing inspections were piloted by the Transfer Pricing Management Department at GDT. To strengthen inspections the GDT established the Transfer Pricing Inspection Department at the end of 2015 in Hanoi, Ho Chi Minh City, Binh Duong and Dong Nai. Its major task is to prepare annual plans and conduct evaluations on transfer pricing. Lists of enterprises to be inspected in 2016 have already been submitted to relevant local agencies.
Inspections focus on the transaction of goods, service charges, and management fees. With service charges and management fees, tax authorities query their necessity and nature and seek evidence that they are based on market prices. Royalties are among the transactions most inspected. Local tax authorities analyze any increase in royalties and the details of annual royalty payments and compliance with registration regulations.
Obstacles in collecting arrears
Although the campaign against transfer pricing has been conducted since 2012, data surrounding the activity and business performance remains basic. The incomplete database is one of greatest difficulties facing thorough transfer pricing inspections, according to Mr. Nguyen Van Cong, Head of the Tax Department in Dong Nai province. Only data from the textile and garment sector is available on its database, presenting difficulties in making comparisons to obtain evidence about transfer pricing. The legal framework relating to transfer pricing is also incomplete. “Legal regulations and a database for all sectors are required as soon as possible so that tax authorities can conduct full inspections,” Mr. Cong said. “Otherwise, transfer pricing may be suspected but it can be hard for local authorities to make a ruling and collect arrears.”
An accurate, transparent and public database is needed, in which information is approved by the State, according to Deputy Minister of Finance Hoang Anh Tuan. There should also be a specific agency responsible for the database. “The database would be a valuable tool for local tax authorities in fighting transfer pricing,” Mr. Tuan said.
Tax authorities and businesses have experienced many disagreements in the interpretation of legal documents. Service charges by enterprises are always studied strictly by tax authorities, according to the Tax Working Group of the Vietnam Business Forum. “Some local tax authorities do not agree that expenses relating to service charges signed with the parent company are reasonable expenses in calculating corporate tax obligations,” said Ms. Huong Vu, Head of the Tax Working Group. This shows that local authorities are unaware of movements in the business environment as Vietnam integrates into the global economy. “Using support services from parent companies is common in multinational corporations (MNCs), to optimize production and business activities,” she added.
Many foreign invested enterprises in Vietnam are subsidiaries and possess a tax code and seal but are, in effect, just links in the chain of the MNC.
To maximize efficiency in production and business, MNCs often set up subsidiaries to handle a certain function in global value-added chains. These subsidiaries also receive services from their regional headquarters to ensure consistency, create advantages in economic negotiations with third parties, save on costs and increase competitiveness.
Upon using services from the parent company or head office, the subsidiary in Vietnam must pay for such services and this is perfectly in line with international practice. The Tax Working Group has proposed the government and the Ministry of Finance (MoF) provide consistent direction for tax authorities in localities to give reasonable consideration to such services. This would reflect the true nature of these expenses and create a more favorable business environment.
Responding to the proposal, Mr. Dau said that under Circular No. 78/2014 / TT-BTC, enterprises can deduct expenses when meeting all conditions. Such expenses must be incurred during an enterprise’s production and business activities. Second, expenses must be supported by invoices. Thirdly, payments for purchasing goods and services worth more than VND20 million ($895) each must be accompanied by proof of non-cash payment.
Local tax authorities will base assessments on actual business performance to determine the nature of the expense. If such service charges assist the subsidiary’s business performance they will be deducted when tax authorities calculate corporate income tax payments under Circular No. 66/2010/TT-BTC dated April 22, 2010 from MoF.
With service charges subsidiaries have paid to parent companies but are found to serve the management activities of the latter, such charges cannot be deducted in calculating corporate income tax for subsidiaries that are independent legal entities in Vietnam.
Improvements from APAs
Along with strengthening price transfer inspection, tax authorities also have high expectations of advance pricing agreements (APAs). Many enterprises have proposed applying APAs, according to the GDT, most of which are large-scale companies in cosmetics, electronics, medical devices, and footwear outsourcing, earning annual revenue in the hundreds of millions of dollars, according to Mr. Dang Tuan Hiep, Deputy Director of the International Cooperation Department at GDT. Tax agency partners who can negotiate bilateral APAs with Vietnam include those in South Korea, Japan, Singapore, and possibly the US at some point soon, when the agreement on double taxation between the two countries comes into effect.
Tax authorities view APAs is an additional solution in addressing transfer pricing activities. They are suitable for enterprises that adhere to Vietnam’s tax provisions and those conducting complex associated transactions that are often the cause of disputes between businesses and tax authorities in transfer pricing inspections.
For tax authorities, APAs enhance their capacity in revenue forecasting and allow them to be active in collecting revenue in the period of application. They can then concentrate more resources on inspecting businesses who deliberately abuse transfer pricing to limit or avoid their corporate income tax obligations. APAs can also reduce disputes on transfer pricing between businesses and tax authorities and contribute to improving the business environment.
For businesses, APAs help them predict the tax they must pay for a period of three to five years. They can therefore be more active in establishing business targets and promoting their brands rather than facing the risk of a tax inspection. This is why many MNCs choose APAs in the countries where they invest. APAs also help minimize the cost and risk of disputes and possible litigation between businesses and tax authorities, while bilateral and multilateral APAs can also eliminate the risks from double taxation.
According to Mr. Hiep, tax authorities should balance the use of their human resources between tax inspections and APAs. The greatest obstacle in applying APAs faced by tax authorities are the quality of those agreements signed. Whether they ensure the targets of tax authorities in managing transfer pricing and cutting tax fraud are met remain to be seen. “Improving capacity in managing transfer pricing is a major task but a challenge that must be faced during the process of international integration,” Mr. Hiep added.