HA NOI (VNS)— The abuse of transfer pricing is growing worse in terms of scale and sophistication as a method of tax evasionin Viet Nam, according to officials fr om the General Department of Taxation.
Transfer pricing is a method of cross-border pricing of goods or services that allows a company to shift the costs of providing those goods or services from a low-tax jurisdiction to a high-tax jurisdiction.
In the latest development, the department's HCM City office is auditing relations between Adidas Viet Nam and its retailers and other companies affiliated with Adidas worldwide to verify the company's tax-deductible costs.
The HCM City tax office has found that transactions between Adidas Viet Nam and associated enterprises, including Adidas AG, Adidas Singapore and Adidas International Trading BV, might be linked transactions showing signs of possibly unlawful transfer pricing.
Global beverage giant Coca-Cola and Metro Cash& Carry have also been fingered for alleged transfer pricing fraud, a scandal that created a stir recently after the companies had operated in Viet Nam for about 10 years without ever reporting a profit.
The tax department said that focus of the department's audits of transfer pricing would be on enterprises which reported losses interminably while still expanding their business operations.
"Transfer pricing is becoming more prevalent, with increasing sophistication," said Nguyen Quang Tien from the tax department, noting that footwear enterprises with earnings worth trillions dong and thousands of workers still managed to report losses to tax authorities.
Efforts needed to be enhanced to prevent the abuse of transfer pricing, Tien said, stressing that preventing tax evasion would not deter foreign investment but create a healthier and more equitable environment for enterprises.
A recent survey by Ernst & Young Việt Nam found that tax authorities inspected 923 loss-making entities, made adjustments to reduce taxable losses by VNĐ6.6 trillion and collected additional taxes of VNĐ1.23 trillion. The 2012-15 National Action Plan on transfer pricing (issued as a decree by the Ministry of Finance/the General Department of Taxation) provides for covering 20 per cent of the annual tax audits as transfer price audits.
Australian tax expert Michael Palmer told a workshop in Ha Noi on Tuesday that Viet Nam above all needed human resources at both central and local tax offices qualified to make determinations on transfer pricing issues and identify possible tax fraud. Access to foreign data for analysis and comparison was also needed, he said.
Case of Coca-Cola
The HCM City Taxation Department has announced that it plans to conduct tax inspections at Coca-Cola, Pepsi and Metro Cash&Carry Viet Nam corporations as well as other foreign-invested corporations to find whether there are signs of transfer-pricing abuse.
Coca-Cola has reported losses since its establishment in Viet Nam in 1994, even though its revenue has increased every year, according to the HCM City Taxation Department.
Transfer pricing happens when two related companies, a parent company and a subsidiary, or two subsidiaries controlled by a common parent, trade with each other.
When the parties establish a price for transaction, they are engaging in transfer pricing.
Transfer pricing is not, in itself, illegal or necessarily abusive. But transfer mispricing is illegal or abusive, and is also known as transfer-pricing manipulation or transfer-pricing abuse.
In 2004, Coca-Cola's revenue reached VND728 billion (US$35 million), and it reported a loss of VND110 billion ($5.3 million), according to the city's Taxation Department.
In 2006, the revenue surged to VND1,026 billion ($49.3 million), and the reported loss was VND253 billion ($12.2 million). In 2010, the revenue was VND2,529 billion ($121.5 million), and the reported loss was VND188 billion ($9 million).
To date, Coca-Cola Viet Nam has reported a total loss of VND3,768 billion ($181 million), which has surpassed its original investment capital of VND2,950 billion ($141.7 million).
The company has blamed the losses on the high price of raw materials, especially the flavour essence that is imported by its parent company, according to the Thoi Bao Kinh Te Viet Nam (Viet Nam Economic Times).
The cost of raw materials at times accounts for up to 85 per cent of total costs, the company has said.
In 2010, the cost for importing raw materials from its parent company reached VND1,671 billion ($80.3 million) out of total revenue of VND2,329 billion ($111.9 million), while the cost of raw materials in 2009 was VND1,065 billion ($51.2 million).
Tax experts said that increased material prices might cause losses for the subsidiary company, but greater profits for the parent company. The subsidiary company can also avoid paying taxes.
Despite losses, Coca-Cola still plans to expand its business in the country.
During a visit to Viet Nam in October, Muhtar Kent, Coca-Cola president and chief executive officer, revealed that the company would invest another $300 million in Viet Nam.
Another company suspected of transfer-pricing abuse is Metro Cash&Carry Viet Nam (Metro).
After 11 years of operation in Viet Nam, Metro has expanded to 19 wholesale centres in the country, but Metro has still reported losses, and thus has not paid any corporate income tax.
In 2007, Metro's revenue was more than VND6,607 billion, but its reported losses were VND157 billion, according to the HCM City Taxation Department.
In 2008, the revenue rose to VND8,175 billion, and the reported loss was VND190 billion. In 2009, the revenue of Metro reached VND8,728 billion, and the reported loss was VND160 billion.
In 2010, Metro reported that it had achieved profits of VND116 billion in 2010 since its presence in Viet Nam in 2001.
But in that year, the company was exempted from paying tax because of losses that they had incurred.
Last year, Metro continued to report losses of VND89 billion.
This year, the company reported losses of VND254 billion. To date, the total reported loss of Metro is VND598 billion. — VNS