VINACHEM

Government vows to step up the fight against transfer pricing

VietNamNet Bridge – The determination to combat the transfer pricing has never been so strong as nowadays, which can be seen in a series of moves taken recently.

Government orders to apply more drastic measures

Deputy Prime Minister Hoang Trung Hai has requested the Ministry of Finance to team up with other relevant ministries to build up an action plan and annual plans, commencing from 2012, in order to more effectively control the transfer pricing activities by foreign invested enterprises FIEs.

The Deputy Prime Minister has stressed that it is necessary to conduct inter-ministerial and international cooperation in order to implement the task.

Meanwhile, the Ministry of Planning Investment has announced that it has completed the compilation of the plan on preventing the transfer pricing in foreign direct investment (FDI) activities in Vietnam.

The General Department of Taxation (GDT) has officially announced that Vietnam would apply the APA (advance pricing agreement) based on the market prices in order to prevent frauds.

Dr Phan Hien Minh from the HCM City Open University said that APA is considered the best solution, in case taxation bodies cannot find any others, to both ensure the benefits of MNCs (not to tax double), and ensure the national benefits (all the profits arisen on the Vietnamese territory must be taxed).

Experts pointed out that the biggest question in the work of fighting against transfer pricing is how to define the true market prices. Therefore, the mechanism is hoped to defuse the problem.

Under the mechanism, MNCs have to take the initiative to put forward the measures to calculate prices applied among the MNCs’ subsidiaries before making tax declaration. Vietnamese taxation bodies may cooperate with the taxation agencies of the foreign countries which signed double taxation avoidance agreements with Vietnam to prevent frauds.

At present, according to Cao Anh Tuan, Deputy General Director of the General Department of Taxation, said the measure has been applied in a trial basis at some big FIEs. Samsung is a typical example.

Ministries and branches have also proposed to add APA regulations into the Law Management Tax. The Ministry of Planning and Investmetn, when building up the plan on preventing transfer pricing, has also mentioned the issue.

Vu Thi An, former Head of the Foreign Investment Taxation Division under the General Department of Taxation, who is now Director of C&A, a tax consultancy firm--has noted that in the time to come, tax consultancy firms would have “many jobs to take” amid the drastic measure by the Ministry of Finance.

Dr Le Xuan Truong from the Finance Academy also thinks that it is necessary to perfect the legal framework against the transfer pricing. He said that in the immediate time, it is necessary to add the provisions for transfer pricing into the tax management law. However, in the long term, he thinks that Vietnam needs to enact the law against the transfer pricing.

Besides, Truong has also suggested other three solutions to deal with the problem, including the narrowing of tax incentives. Analyses have shown that the gap in the tax rates applied in different localities of the same countries could promp enterprises to conduct the behaviour of transfering pricing.

The second and third methods Truong has suggested are to give the right to take investigation to taxation bodies and set up intelligency unit under the General Department of Taxation, which has the function of collecting information to serve the tax management. The intelligence unit will be useful not only to fight the transfer pricing, but can serve the tax inspection in general.

In the latest news, the Ministry of Finance is considering establishing a special mission unit specializing in the activities to fight against the transfer pricing. The Ministry of Natural Resources and the Environment would consider refusing to allocate land to new projects or expanded projects to be developed by the investors who take loss for more than three consecutive years.

The state management agencies would keep a close watch over the enterprises which take loss right in the first and second years of operation or demand tax refund. The enterprises would be supervised or may bear tax inspection tours and asked to explain the reasons behind the loss.

In the immediate time, the taxation department would classify FIEs operational in the localities in accordance with the nationalities, business fields, the investment duration, the total loss and tax refunds, so as to apply suitable measures to combat with the transfer pricing.

Especially, the Ministry of Planning and Investment has been proposed to reconsider the investment licenses granted to the FIEs which take loss for more than three consecutive years. Nguyen Dinh Tan, Director of the HCM City Taxation Department thinks that this is a reasonable solution. He said that if necessary, the State should reconsider the provisions of the Investment Law to tighten the control over the behaviours of transfer pricing.

Opinions still vary

While some experts urge the government to take more drastic measures to fight against the transfer pricing, others think that the fight would not bring efficiency, saying that this is like “David fights Goliath,” because FIEs could be seen as the giants backed by professional consultancy firms.

Nguyen Van Nam, Director of the Nam Hung Law Firm, said that transfer pricing has been happening not only in Vietnam, but all over the world. Businesses always try to optimize their profits, which makes it understandable why they try to transfer pricing.

Also according to Nam, the profits of most of the MNCs in Vietnam in industries come from the transfer pricing.

“Transfer pricing is one of the reasons which have lure MNCs to Vietnam, and if the reason no more exists, they would reconsider the decision to make investment in Vietnam,” Nam warned.

He went on to say that instead of trying to fight the transfer pricing, it would be better for the governmetn to create reasonable policies to encourage FIEs to consume products right in Vietnam.

Once FIEs can make profits from selling products in Vietnam, they would not have to seek profits by transfer pricing. “Let’s see automobile manufacturers. Why do they still make investment in Vietnam if they can sell only several products a month? Meanwhile, I think that Honda does not do that in Vietnam, because it is making fat profits in Vietnam already with high volume of products sold every year,” he said.