The legal framework to fight against transfer pricing is ‘not powerful enough’, while the defining of tax arrears that enterprises have to pay is still based on negotiations with taxpayers, experts say.
Thomas McClelland from Deloitte Vietnam said at a workshop on investment incentives held in Hanoi some days ago that transfer pricing is a normal business operation. The CEO of one of the world’s biggest tax consultancy firm said the problems related to transfer pricing are unavoidable.
Nguyen Van Chi from the National Assembly’s Finance & Budget Committee agreed with him, saying that this is a ‘natural phenomenon’ which is unavoidable.
Meanwhile, Nguyen Minh Phong, a respected economist, said transfer pricing is an ‘illegal’ and ‘immoral’ behavior. “I know all businesses seek profit. However, transfer pricing can be seen as a way of deliberately evading tax, which must be criticized,” he said.
Vietnam has attracted 24,000 foreign invested projects, which make up 20 percent of the state budget total revenue and nearly 20 percent of GDP.
However, according to the Ministry of Finance (MOF), transfer pricing conducted by foreign invested enterprises (FIEs) is a burning issue.
Vietnam sets low corporate income tax rates which has prompted multinational groups to carry out transfer pricing to optimize their profits.
MOF, after analyzing FIEs’ finance reports in 2012-2016, found that 44-51 percent of FIEs report losses each year.
The figures were high, 51 percent and 50 percent in 2015 and 2016, respectively. Despite the continued loss, many of them continued expanding their operation in Vietnam.
Tax bodies have discovered transfer pricing activities at multinationals such as Coca Cola, Metro Cash & Carry, Big C and Keangnam, and collected trillions of dong worth of tax arrears.
However, even though the wrong tax declarations by the groups were discovered, transfer pricing activities in Vietnam continued to increase.
The Corporate Finance Department has found a growing tendency of profits being transferred back from abroad to Vietnam by some FIEs in order to enjoy big corporate income tax incentives.
This can be seen in the extremely high ROE (return on equity) ratio of FIEs in some sectors such as electronics, telecommunication and software, which is always over 30 percent.
A report of the department showed that despite good operation, FIEs’ contribution to the state budget is low, not corresponding to the resources used. They exploit investment incentives, including land rent, corporate income tax, and personal income tax to conduct transfer pricing.
Experts from the World Bank have recommended that Vietnam replace current policies which offer investment incentives based on profit with investment incentives based on business efficiency.
According to a report on Vietnamnet