Transfer pricing still raising its ugly head

July 22, 2010 | 14:53
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Transfer pricing is pointed as a reason for foreign-invested enterprises’ regular reporting of losses.

Thomas McClelland, tax partner of Deloitte Vietnam, said tax authorities’ difficulties in implementing transfer pricing regulations resulted from a low level of transfer pricing knowledge and a lack of data on comparable transactions.

“To address the lack of data on comparable transactions, tax authorities need further cooperation amongst concerning agencies, for example between audit and tax declaration. They will develop their database of comparables.

“Overall there appears to be disappointment within tax authorities regarding the very limited results achieved under original transfer pricing regulations,” he told VIR.

Despite Circular 117/2005/TT-BTC by the Ministry of Finance in December 2005 promulgating the basic transfer pricing rules and documentation requirements, McClelland said many taxpayers had ignored the requirements and even the filing of the mandatory form for reporting transactions with associated parties.

“Although the General Department of Taxation has made adjustments upon audit to items like inter-company service charges, such adjustments have been made under other provisions of the Vietnamese tax law, not specifically under the transfer pricing circular,” he said.

Currently, a handful of foreign-backed enterprises have reported losses for several consecutive years to avoid paying tax, while expanding their businesses and production.

According to Ho Chi Minh City Taxation Department, 60 per cent of the 3,500 foreign-invested enterprises (FIEs) operating in the city reported losses in 2009 and 50 per cent in 2008.

Meanwhile, Lam Dong statistics showed that there were up to 104 out of the total of 111 FIEs operating in the province having reported losses.

Many experts said “transfer pricing” was one of the reasons for that situation, meaning FIEs raised the prices of materials bought from their parent companies abroad to evade taxes.
Pham Chi Lan, a veteran economist, said price transfer would create an unequal business environment.

“This activity fetches real profits for parent companies abroad, but causes false losses to the FIEs in Vietnam. It also helps FIEs dodge corporate income tax and remittance fees,” she said.

To control this situation, Lan said, it was necessary for Vietnam to quickly build a system to keep an eye on world prices and the tax departments to closely check financial reports and compare them to the real import market prices of countries where parent companies were located.

“It is not difficult for tax departments to identify information which will be considered the basis to reject FIEs’ untrue reports,” Lan added. Nguyen Trong Hanh, deputy chief of Ho Chi Minh City Taxation Department, said it was unacceptable that FIEs used transfer pricing to avoid paying tax.

“FIEs operating and making profits in Vietnam should be responsibile for their business. If they only take care of their own profits and evade taxes, it is not only an illegal activity but also a moral problem,” Hanh said.

Vietnamese tax authorities have reportedly received training and cooperation from other governments such as Japan and Australia, and software have been acquired for a transfer pricing database. And with the transfer pricing regulations stated in Circular 66/2010/TT-BTC dated April 22, 2010, tax authorities were more optimistic about transfer pricing enforcement said McClelland.

By Nguyen Trang

www.vir.com.vn/

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