Taking a sharp aim at transfer pricing

The move is part of a new regulation under Document 14740/BTC-TCT the Ministry of Finance (MoF) has just sent to local taxation authorities.

“The inspection before or after value added tax (VAT) reimbursement for enterprises, especially foreign-invested enterprises  aims to restrict transfer pricing, prevent the loss of state budget collection and create a fair competitive environment among enterprises,” said MoF Minister Vu Van Ninh.

Specifically, the MoF has asked tax authorities to penalise administrative violations and reclaim the reimbursed tax when detecting that enterprises brake tax regulations.

According to the MoF’s recent investigation result, the ministry inspected 127 foreign-invested enterprises  reporting continuous losses in the last three years.

The investigations has helped discover illegally reported losses amounting to VND1,450 billion ($76.3 million) and collect arrears to the state budget as a result.

Recently,  local press reported a range of foreign-invested enterprises which reported losses while still continuing to expand their business and production.

Accordingly, Coca-Cola Vietnam Company has reported losses of about $5 million per year during over 10 years with 2008 seeing a loss of over $6.5 million. Meanwhile, the company has sponsored many television entertainment and game shows. 

Clover Vietnam Co., Ltd., a printer ink manufacturer in Ho Chi Minh City’s Cu Chi district suffered losses of $1.76 million in two years, exceeding its chartered capital of $645,000. Woogwang Vina Co., Ltd. in Hoc Mon District also reported in 2008 that it had sustained the total loss of $463,000 since its establishment.

Another example is Sunway Mario Plastic Joint Venture Company, despite the total loss of VND7.2 billion during 2005-2008, it continuously expanded business, with turnovers increasing annually, from $875,000 in 2005 to $27.1 million in 2008.

Pou Yuen Vietnam, a giant clothing and footwear maker, has topped the list of exporters in Vietnam and also reported losses for many consecutive years from 1998 to 2008. Meanwhile, its current registered capital is $288 million, up 240 per cent from the initial $120 million in 1996.

If tax authorities see unclear reimbursed tax contents, they will ask for enterprises to supplement documents.  However, Ninh said it would be complicated to discover the real prices a parent company in a foreign country sold to its company in Vietnam.

“The MoF also has sent a document to the Ministry of Foreign Affairs to ask its agencies in foreign countries to cooperate with local tax authorities in providing information on prices of products and services abroad which will be basis to define exactly the market price in price aggregated transactions,” said Ninh.