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Efforts to fight against price transfer bring initial successes   2012-03-26 - VietNamNet

A lot of foreign invested enterprises (FIEs) have been found as conducting the behavior of “transfer pricing” which have been forced to pay tax arrears. However, the fighting against price transfer has always been a thorny issue to the state management agencies.

Legal framework – the weapon in the fight against price transfer

A survey of Dr Phan Thi Thanh Duong from the HCM City Law University--showed that the first move taken by the government of Vietnam to fight against the price transfer was the promulgation of the Ministry of Finance’s Circular No. 74/1997/TT-BTC that guides the taxation on foreign investors. After that, the Circular 89/1999/TT-BTC and Circular No. 13/2011/TT-BTC were issued.

However, the issue later was not covered by the Circular No. 05/2005/TT-BTC on the contractor withholding tax. After that, the price transfer was once again mentioned in the Circular No. 117/2005/TT-BTC which guides the defining of the market prices in the business transactions between associated units.

The circular No. 117 allows to re-define the transaction prices among associated units in order to adjust the transaction prices to the truly market prices.

The latest legal document is the Circular No. 66/2010/TT-BTC, a Ministry of Finance’s document issued in 2010 which was hailed as a fully worked out document on the fight against the price transfer applied to all types of businesses, both FIEs and others. Especially, the regulations and the methods defining the market prices stipulated in the Circular 66 are believed to come in line with the international practice.

The Article No. 37 of the Tax Management Law stipulates that taxation bodies have the right to fix the tax rates themselves once they discover that the tax payers make purchases or exchange goods and services not in accordance with the market prices. The provision cannot settle the price transfer to every root, but it has laid out a certain foundation to treat the behavior of transfer pricing.

Deloitte, in a document released in 2010, said that the Circular 66 shows that after a period of interruption, taxation bodies now show stronger determination and take more drastic measures to combat the transfer pricing. This means that Vietnam will strengthen the inspections and examinations to find out the behavior of transfer pricing, especially at FIEs.

The initial achievements

Then-Minister of Finance Vu Van Ninh, when answering a National Assembly deputy’s question in 2010 about the price transfer, informed that his ministry inspected 127 FIEs which incurred big losses for three consecutive years and discovered the wrong declared loss of 1450 billion dong.

Dr Le Xuan Truong from the Finance Academy cited the 2010 report of the General Department of Taxation as saying that in the year, taxation bodies inspected the tax payment at automobile and tea enterprises in Lam Dong, collecting the tax arrears of 133.4 billion dong and corrected the losses declared by enterprises. This showed the initial success of the fight against the price transfer.

According to the Lam Dong provincial taxation department, the finance reports of 17 FIEs that make tea in the locality, the tea export volume in 2009 was 1522 tons, while the total turnover was 105 billion dong and the average export prices were between 2.8 and 4 dollars per kilo.

In 2009 alone, the FIEs incurred the loss of 63.68 billion dong, while the accumulative loss by December 31, 2009, had reached 317 billion dong. Especially, some of the businesses reportedly lost all of their investment capital.

The taxation body then found that the material price was 175,000 dong per kilo (five kilos of fresh tender tea leaves can make one kilo of oolong tea, while a kilo of fresh tender tea leaves was priced at 35,000 dong). Meanwhile, the enterprises exported o long tea at 64,850 dong only.

Further investigations then confirmed that the enterprises, in fact, made profit instead of incurring loss, and that conducted the price transfer to evade the corporate income tax.

Finally, 10 out of the 17 enterprises had to accept to adjust the declared prices.

In Dong Nai province, the local taxation body has found out that many FIEs have been using different tricks to avoid tax. Especially, they have made the price transfer, dispersed profits through problematic contracts, transfer products in big quantities abroad and make the corrupt use of the investment incentives.

A breakthrough has been made in the fight against transfer pricing. Instead of taking inspection and imposing fine, the issue has been “criminalized” when the Ministry of Public Security decided to initiate prosecutions for tax evasion at Equatorial Hotel in HCM City.

The history of FDI attraction shows that in most of the cases, where FIEs were found as violating tax regulations, the violators were just imposed fines, while the fines were so modest that they would be acceptable by all FIEs.

The investigation body found out that Equatorial Hotel made a lot of violations during its operation. The HCM City Taxation Agency found out that from 2003 to 2008, the hotel did not keep accounting books as prescribed, and did not follow the Vietnamese accounting system.

Besides, the joint venture also did not follow some other regulations which made the management agency unable to define the taxable income of the enterprise. The hotel also “ignored” the contractor withholding tax of 6.3 billion dong when declaring tax.

The case then caught the special attention from the public, which was considered the “war declaration” against the transfer pricing, though it was clear to everybody that this will be a stiff battle.

Dealing with price transfer not an easy task

The Ministry of Finance in early 2011 stated at its conference to implementing the tasks in 2011, that it will gather strength to inspect businesses to find out the behavior of transfer pricing.

However, the year-end report showed the modest results of the task implementation. The ministry planned to inspect 1276 enterprises (10 times higher than the number of inspected enterprises in 2010). Meanwhile, it only took inspection tours to 856 unprofitable businesses, or just fulfilling 67 percent of the plan. The ministry released the decision to reduce the loss by 4400 billion dong, collect tax arrears and impose the fine of 1650 billion dong.

The figures raised worries among people, who could see that the results were so modest if compared with the statements of the ministry’s leaders.

Taxation bodies have admitted that they have not gone far in the fight against the price transfer. Nguyen Dinh Tan, Director of the HCM City Taxation Department, said that his department has been facing a lot of difficulties. He said it is very difficult to compare the independent transaction prices because it is difficult to find complete similarities of goods and services for the comparison.

Besides, state management agencies do not have sufficient information which serves the works of the taxation bodies, while there is no information connection between state management agencies and other involved parties.

Ninh in 2010 admitted that it is really very difficult to fight against the price transfer, because it is very difficult to find out the actual values of import equipment and materials imported, when the documents shown to taxation bodies seem to be very lawful.

He also said that since Vietnam has joined WTO, Vietnam now cannot set up minimum prices for goods and services as the taxable values, while it must calculate tax based on legal invoices. Therefore, it is not easy to define the actual values of the imports.

In fact, this is not the problem of Vietnam only. An expert from OECD said that transfer pricing is a complicated problem to nearly all countries in the world. The countries all set up procedures to inspect businesses to find out price transfer and have taskforces to deal with the issue. However, the battle would still last.

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