With hundreds of millions of dollars in tax revenue being lost in recent years the fight against transfer pricing has become a top priority for tax authorities.
Losses of VND16,500 billion ($775 million) claimed by companies were rejected by taxation authorities following inspections from 2010 to 2013, resulting in arrears and fines totalling VND5,000 billion ($250 million). Inspections from 2007 to 2012 identified thousands of companies, including 122 foreign invested enterprises (FIEs) in 23 different provinces, conducting transfer pricing activities with related entities. Remarkably, the adjusted transfer prices according to authorities were nearly three times higher than the figures reported by some of these FIEs.
Mr Tran Quang Chieu, a member of the National Assembly’s Finance and Budgetary Committee, believes that transfer pricing is a crucial issue and serious action must be taken. “Such acts distort Vietnam’s economic landscape,” he said. “State budget funds are lost, the country’s property is stolen, people’s labour is exploited, and the faith of the genuine business community is significantly eroded.”
The author of “The Vietnam Provincial Competitiveness Index: Measuring Economic Governance for Private Sector Development”, Mr Edmund Malesky from Duke University in the US, sees transfer pricing as an “ordinary” activity of most enterprises, as their ultimate goal is maximising profits. He acknowledges, however, that when such a strategy is misused or implemented too frequently, government intervention becomes necessary.
In the first two months of this year the General Department of Taxation (GDT) completed ten enterprise inspections and increased aggregate revenue by VND3,500 million (more than $164 million) and collected in excess of VND200 billion (nearly $10 million) in tax arrears for the State budget. If all suspicious enterprises were to be inspected then arrears for tax evasion through transfer pricing would certainly be much higher.
Levelling charges of transfer pricing against any enterprise and assessing the impacts on the State budget will never be straightforward until tax authorities are able to gather comprehensive information regarding actual activities by enterprises. Experience from around the globe shows that it generally takes at least a year to collect sufficient detailed data. In Vietnam it takes authorities time to evaluate and carry out inspections to verify whether an enterprise is truly suffering losses or applying transfer pricing methods.
Ms Nguyen Thi Hanh, Deputy Head of the Modernisation & Reform Division at GDT, said that multinational corporations (MNCs) are extremely experienced and skilled in applying such strategies to evade their tax obligations, not to mention the teams of professionals and experts at leading audit and consultancy firms who advise them. “The fight against transfer pricing is extremely complex, requiring a high degree of expertise and relatively high-tech working conditions,” she said, both of which are lacking in Vietnam.
It was only in 2012 that content regarding the management of transfer pricing was placed in the drafts of the Law on Tax Administration, the Law on Corporate Income Tax (CIT), and amendments to the Law on Enterprises. Only then did fighting transfer pricing became a political mission not of only the Ministry of Finance (MoF) but also of various related sectors and localities. Before that, taxation authorities had no specialised transfer pricing management unit, with the task being carried out under a collaborative effort among several departments. Management capability was therefore limited, as these departments were insufficiently active, data and information was inadequate, and inspections were neither widespread nor intensive.
The number of FIEs claiming losses has substantially declined