Need to check each case for clarifying acts of price transfer

Prof. Phan Huu Thang

According to the Ministry of Finance, FDI enterprises have contributed to the State budget. How do you evaluate about the contribution of FDI sector?

The contribution to the State budget revenue of FDI enterprises in 2019 is very impressive, especially when comparing this figure with the previous periods. The growth of the contribution to the State budget of the FDI sector shows the important role of this business sector in Vietnam's socio-economic development.

Do you have any comments on the situation that 55% of FDI enterprises report losses?

The figure of 55% of FDI enterprises reporting losses in 2019 was alarming and difficult to accept. It is necessary to investigate to clarify the reasons why so many enterprises suffered losses, to have solutions to overcome this phenomenon, bring efficiency in investment, production and business of FDI firms, ensuring the State's interests in attracting FDI, the interests of workers and especially to enhance the competitiveness of Vietnam's investment environment in the international arena when Vietnam must continue to attract and most effectively use this FDI source for socio-economic development in the coming years.

With businesses reporting on losses continuously for many years but still expanding production and business, in my opinion, it may be caused by these reasons.

Firstly, businesses that suffered losses continued to invest to overcome and eventually make profits when they were confident in their management, operation abilities and believe in the ability of the market that continues growing, opening up opportunities for growth.

Secondly, businesses committed tax evasion-transfer pricing. This was a phenomenon that tax authorities and FDI management have known. Transfer pricing is a cross-country pricing structure and is only possible when there is a structure between independent companies, between the investment country and host country to set prices of commodity and services much higher than normal price to avoid paying corporate income tax, avoiding the regulations on transferring profits abroad, quickly recovering investment capital. The sign was that enterprises report continuous losses for a number of years, but revenue had increased, expanded production. Maybe, businesses have been proactive to lose three years, then 1-2 years earning little profit, and then record accumulate losses.

The way to turn a profit into loss, or to arrange a low rate of profit, FDI enterprises could not do individually so they often coordinate and associate in the same group or corporation. These businesses arrange prices with each other through linked transactions, through which companies in the group could reduce the total value of their tax liability on a global scale, increasing profit after tax.

Besides that, many businesses have had the intention of transferring prices and using other "tricks" such as setting high input pricing and declaring low prices when exporting goods, increasing other costs and using costs of paying loan interest to transfer pricing. To sum up, facing with the phenomenon of reporting losses but increasing capital to expand production and business, it is necessary to conduct a case-by-case inspection to clarify.

The story of transfer pricing has been mentioned a lot in recent years. Besides the subjective factor of enterprises, have the inspection and supervision of FDI enterprises really played a role yet?

As mentioned above, the story of FDI enterprises' transfer pricing has been known for a long time by tax authorities and has been inspected and clarified in many cases, recovering billions of VND to the State budget from tax evasion acts. Actually, however, the fight against all the acts of price transfer was not easy because there have been cross-border transactions, belonging to enterprises in the same corporation or in an affiliated group so the transfer pricing acts are not easy to have evidence to accuse. Some tax authorities around the world have had to apply tax measures before accepting and allowing firms to invest in certain areas that were difficult to control inputs and outputs. Recently, the Government issued Decree No. 132/2020/ND-CP dated November 5, 2020, regulating the tax administration for enterprises with associated transactions, which will help more effectively prevent transfer pricing and tax evasion from FDI enterprises.

Are the legal provisions sufficient to deter and prevent this situation? Talking to Customs News, you suggested that an inter-ministerial working group specialised in anti-transfer pricing should be established. What are your current views on this matter?

As I mentioned above, to now, the provisions of Vietnam's legal system on taxation have been issued like the Law on Tax Administration dated June 13, 2019; Law on Corporate Income Tax dated June 3, 2008 and Law amending and supplementing articles of the Law on Corporate Income Tax dated June 9, 2013 and recently Decree 132/2020/ND-CP on management tax on enterprises with associated transactions. With their functions and capacities, tax authorities of Vietnam at central and local levels, on the basis of close coordination with relevant sectors in banking, investment and business registration trade, science and technology and customs would be able to handle and prevent the phenomenon of transfer pricing and tax evasion of FDI enterprises more effectively.

In my opinion, it is necessary to set up an inter-ministerial working group specialised in anti-transfer pricing of FDI enterprises to closely coordinate with localities in this work. For small-scale projects, the responsibility for anti-transfer pricing work must be assigned to localities, and to use independent international expertise when necessary.