Bid to stop transfer pricing abuse has local firms crying foul

By Dat Nguyen   October 31, 2018 | 11:19 pm PT
Bid to stop transfer pricing abuse has local firms crying foul
Beverages produced by FDI businesses are sold at a supermarket in Ho Chi Minh City, Vietnam. Photo by Shutterstock/Nguyen Phuoc Truong
Local companies complain they are caught in the crossfire of new regulations against transfer pricing abuse by foreign firms.

In May last year a government decree came into effect to prevent the high interest rates that foreign businesses purportedly charge their Vietnamese subsidiaries to reduce profits and thus taxes.

The decree says any interest expense that exceeds 20 percent of earnings is not tax-free and must be taxed at the normal rate. It applies to both foreign and local businesses.

Large Vietnamese companies such as Vietnam Electricity, machine assembling company Lilama, coal mining company Vinacomin, and the Vietnam Cement Industry Corporation are crying foul.

Construction company BOT 36.71 said it has a high ratio of borrowing, accounting for 81 percent of its capital, claiming high interest expenses are unavoidable since it is a new company.

The Ministry of Finance has proposed changes to the decree.

Cao Anh Tuan, deputy general director of the General Department of Taxation, said the decree should only apply to businesses whose parent company pays a different rate of tax in another country.

“The decree will be discussed by the National Assembly on November 8, but won’t be amended until the next session.”

But the legislative body's next session is next May, and experts are concerned that Vietnamese businesses will be hurt in the mean time.

Economist Nguyen Tri Hieu told VnExpress International: “There will be a big loss of profits to Vietnamese businesses because of this regulation.”

He was also unsure about the decree’s ability to check transfer pricing abuses saying companies could easily resort to other ways such as doubling the product cost a subsidiary has to pay or increasing the management fees to unreasonable levels.

The decree has only “scratched the surface,” and foreign businesses are barely affected by it, he said.

“What’s most important is that tax authorities should regularly scrutinize large foreign businesses and impose heavy fines [in case of wrongdoing] to set an example.”

At a recent conference Nguyen Thi Lan Anh, deputy director of the General Department of Taxation’s inspectorate, said one of the challenges in investigating FDI business is the time frame.

The laws require an investigation to be concluded within 70 days in order not to hassle businesses, but the process of gathering facts and analyzing them is time-consuming, she said.

An official from the Corporate Finance Department under the Ministry of Finance said though many foreign firms claim to have suffered loses in Vietnam for 20 years, they still seek to expand in the country.

Between 2012 and 2016, 44-51 percent of FDI businesses reported losses, according to the department.

In 2015-16 tax authorities scrutinized two large retailers on suspicion of transfer pricing abuse, and ended up collecting VND4 trillion ($173.9 million) in back taxes.

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