Transfer pricing has always been a heady problem for the Vietnamese government and ministries since the country began attracting FDI (foreign direct investment).
At the 2018 WEF, Deputy PM Vuong Dinh Hue called on international auditing firms to give advice on how to prevent and deal with transfer pricing conducted by foreign invested enterprises (FIEs) in Vietnam.
A report from the Ministry of Finance showed that 44-51 percent of FIEs report losses each year. The proportions were 51 percent in 2015 and 50 percent in 2016.
Some enterprises have been expanding their investment in Vietnam, though they have been taking losses for tens of years.
Experts pointed out that FIEs conduct transfer pricing right when they arrive in Vietnam. In most cases, foreign conglomerates contribute capital to joint ventures in Vietnam with technologies, machines and equipment, and tend to overvalue the technologies. Meanwhile, the Vietnamese side is not capable of conducting asset valuations
During operation, FIEs declare prices of input materials higher than the real value and provide wrong information about the expenses on ads and promotions to fabricate profits which are lower than real profits. This allows them to reduce their owed corporate income tax.
|During operation, FIEs declare prices of input materials higher than the real value and provide wrong information about the expenses on ads and promotions to fabricate profits which are lower than real profits. This allows them to reduce their owed corporate income tax.|
The Vietnam Chamber of Commerce & Industry (VCCI) and USAID in 2014 conducted a survey in Vietnam and found that 20 percent of FIEs admitted transfer pricing.
The survey also found that enterprises in finance and insurance, textiles & garments, and automobile manufacturing lead in transfer pricing.
The number of enterprises considering Vietnam as a part of a global supply chain to conduct transfer pricing were 13-20 percent of those surveyed.
At least 37 percent of FIEs that came from countries with lower corporate income tax rates than Vietnam tended to conduct transfer pricing.
Around 65 percent of FIEs with profits higher than 20 percent committed transfer pricing, while 44.5 percent of FIEs with profits of 10-20 percent conducted the behavior.
In automobile manufacturing, foreign partners not only conduct transfer pricing by declaring the value of assets contributed to joint ventures, but also do this through technology transfer and royalty collections.
Car parts are imported from multi-national conglomerates and their prices are fixed by the holding companies.
The overvaluation of imported car parts leads to higher production costs, thus reducing profits and taxes that FIEs in Vietnam have to pay. But this brings high profits to holding companies.
Car prices in Vietnam are 70 percent higher than in Europe and the US, and 30 percent higher than in other regional countries.