23:51 (GMT +7) - Sunday 28/05/2017

Business

Problem to tackle

Released at: 03:50, 28/07/2014 Transfer Pricing

Problem to tackle

Abuse of transfer pricing by FIEs in Vietnam is growing worse as tax authorities struggle to keep pace with the increasingly sophisticated tactics in use.

by Thong Dat

    Amid ongoing problems for the State budget, companies considered to be not paying their fair share of tax are obvious targets for authorities. Over the last couple of years Vietnam has significantly increased transfer pricing enforcement activities to tighten the screws on those using the practice. A series of investigations launched by the General Department of Taxation (GDT) have recently shone light on the abuse of transfer pricing by foreign-invested enterprises (FIEs). Last month the GDT released a report highlighting widespread tax violations with signs of transfer pricing by 20 FIEs. The agency reclaimed VND230 billion ($10.9 million) in taxes and fined these enterprises VND12 billion ($571,428) for their violations. Notably, all 20 FIEs accepted the penalties without appealing.

Case in point

    Keangnam Vina is renowned for developing Vietnam’s tallest skyscraper - the Landmark Tower in Hanoi. Ironically, it is also now known for tax violations. An investigation conducted by the Hanoi Department of Taxation revealed several irregularities and concluded that Keangnam Vina used transfer pricing tactics to lower its tax corporate income tax (CIT) bill. Consequently, the Ministry of Finance (MoF) has asked Keangnam Vina to adjust its revenue and profit calculations and pay $4.5 million in tax arrears.

    Since it began operating in Vietnam in 2007, Keangnam Vina has reported losses every year and was yet to pay any CIT. The Landmark Tower was opened in the first half of 2011, earning the company $250 million in revenue since but total losses of $6.7 million were reported. Tax authorities, however, took note and recalculated the costs and earnings from the company’s reported data. Among other things, one red flag was Keangnam Vina’s contract agreement with the South Korea-based Keangnam Enterprises, with which it shares the shame parent company and which was an EPC contractor on the Landmark Tower project. It’s worth mentioning that the contract stipulated that Keangnam Vina would pay the Keangnam Enterprise $871 million for these services.

    In this case, the fee Keangnam Vina paid to Keangnam Enterprises was so high that no profit could possibly be made by the former. In other words, by paying such a large amount of money to its sister company, Keangnam Vina incurred losses and subsequently avoided paying CIT as Vietnam’s tax policy absolves loss-sustaining companies from tax payments. Meanwhile, Keangnam Enterprises made a fat profit from the deal. In coming to this arrangement Keangnam Vina was successful in shifting part of its profits back to South Korea and keeping its profit out of the reach of Vietnamese tax authorities. One observer, Mr Nguyen Mai, Chairman of the Vietnam Association of Foreign Invested Enterprises, pointed out that three or four years ago Vietnam had a suspicion that some large FIEs were abusing transfer pricing tactics but the country has not been quick enough in formulating policy responses.

    In late 2012 authorities began an investigation into possible transfer pricing by Keangnam Vina through related party transactions. Investigators discovered major profits from the developer that were previously unreported and so far has identified $4.5 million in unpaid taxes.

    Tax authorities are rightly concerned that the case may be just the tip of the iceberg, as Keangnam Vina was one of 122 FIEs found to have used transfer pricing to avoid paying a total VND214 billion ($10.1 million) in taxes. In reality, authorities face a number of obstacles in attempting to combat this behaviour. “The first task is to identify which companies are more likely to be abusing transfer pricing principles and focusing investigations on them,” said Mr Tom P