Tax authorities flag worsening transfer pricing fraud by foreign firms

Foreign companies’ financial reports showed that the ratio of those reporting annual losses rose from 44 percent in 2012 to 51 percent in 2016, and the Ministry of Finance’s department of corporate finance said this indicates a rising incidence of transfer pricing fraud.

In taxation and accounting, transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. 

Absurdly, many foreign firms claim to have suffered losses in Vietnam for 20 years yet seek to expand in the country.

The above-mentioned fact raises big questions as to why did FDI firms continue to expand if they had not operated efficiently, said Nguyen Lan Anh, deputy head of the General Department of Taxation’s inspection department.

In 2015-16, tax authorities scrutinised two large retailers on suspicion of transfer pricing abuse, thus gaining over VND4 trillion ($173.9 million) in tax arrears, she said.

Nguyen Thi Cuc, chairwoman of the Vietnam Tax Consulting Association, said in 2016 tax inspectors adopted risk management measures and inspections and managed to collect more than VND600 billion ($26.08 million) from companies they suspected. In 2017, another VND2.3 trillion ($100 million) in taxes and fines was collected after the tax sector inspected 734 companies which had affiliated transactions.

During their investigations, they discovered new forms of transfer pricing fraud.

Lan Anh of the tax inspectorate said all the dubious transfer pricing practices found around the world are also seen in Vietnam.

An official from the department of corporate finance said transfer pricing frauds do not merely involve shifting profits out of Vietnam. In fact, it is quite the reverse, with multinational firms sending their profits here owing to the country’s plentiful tax incentives.

To fill the gaps

Vietnam has been adopting the OECD’s transfer pricing norms, but the task is incomplete, the Vietnam Business Forum’s (VBF) tax and customs working group stated at the mid-term VBF meeting earlier this month.

The working group pointed to the lack of use of the advanced ruling method, which provides transparency, objectivity and predictability.

Enterprises usually find that Vietnamese tax authorities reject this practice and propose others based on other taxpayers’ data or “secret comparables”, it said.

Mark Gillin of the working group said the advanced ruling system used in all OECD member countries is needed in Vietnam.

It involves submission of formulas and their explanations by the tax-paying company to tax and customs authorities and asking whether they agree with them, he said.

Ngo Tri Long, an economist and former head of the Ministry of Finance’s Price and Market Research Institute, said advanced ruling is a good way to deal with transfer pricing, but “more importantly, we need to define prices at the time of assessment and have them compared with world prices as they depend on market fluctuations.”

Bui Ngoc Tuan, deputy general director of audit and advisory firm Deloitte Vietnam, said tax authorities can check with customs authorities about similar products, work with overseas tax authorities to check and learn from financial reports of multinational companies.

Nguyen Lan Anh from the tax inspectorate said tax authorities’ focus was on companies that regularly made losses or are suspected of transfer pricing fraud.

They compared data from enterprises with that from other similar firms, thus eliminating unreasonable expenses and reducing their losses, she added.