Transfer pricing claimed to partly cause FIE losses

More foreign-invested enterprises (FIE) in HCM City have reported losses in recent years and transfer pricing is claimed to be one of the reasons behind this fact.

Loss-making FIEs have increased steadily, Le Thi Thu Huong, deputy director of the HCM City Tax Department, said at a dialogue organised on Wednesday by the European Chamber of Commerce in Vietnam (EuroCham) for more than 70 corporate representatives.

“Our statistics showed over 60 percent of the FIEs in the city posted losses last year,” Huong said in response to a question about the reasons why many FIEs have been making for years while Vietnamese firms of same sizes have been profitable at home and abroad. The global economic downturn, Huong said, made life tougher for businesses in Vietnam in 2009, leading many of them to fall into the red. The Vietnamese government took action by providing businesses with tax breaks and deferral to help them out of tough times.

But some multinationals are believed to take advantage of transfer pricing as an illegitimate and immoral means to shift their revenues and profits to the markets where taxes are lower than in Vietnam. Huong claimed a number of FIEs imported machines and materials from the parent company at high prices but sold the finished products they produced in Vietnam at prices lower than normal market levels.

“So their losses are certain given the practice of transfer pricing,” Huong said. She added the city tax agency discovered some businesses for faking business losses when comparing their selling prices to market levels.

However, speaking to the Daily after the dialogue, Huong conceded it was hard to look for evidence of transfer pricing transactions by a company in Vietnam and its associate companies and affiliates.

Meanwhile, Thomas McClelland, tax partner of Deloitte Vietnam Tax Co., Ltd, pointed out a reason why FIEs were making losses in Vietnam. “Maybe, they have a strategy to grow the market share when they first enter the market.”

McClelland told the Daily that major multinationals followed very strict internal compliance requirements and there were probably some companies taking advantage of the tax and transfer pricing to result in “forced losses and real profits.”

Huong said there were more than 2,000 tax-paying FIEs, but major companies which have thousands of employees pay their annual business tax of just several million dong on grounds of losses.

What matters most is the “loss-making” companies still enjoy value-added tax refunds. Therefore, Huong called for FIEs to practice business ethics and show responsibility.

“They should be responsible for paying taxes to support development of the country where we operate, in addition to providing jobs for locals. This is a matter of business ethics for business people and FIEs,” Huong said.

Huong said the HCM City tax agency would find ways that can help FIEs fulfill their tax obligations. This point was supported by McClelland of Deloitte Vietnam Tax Co., Ltd

“We want the law to be clear so they can pay the right amount of tax. Our work is getting people not to try to avoid tax,” said McClelland, who is also chair of EuroCham Taxation Sector Committee.

Tags: foreign-invested enterprises, Vietnam companies, Vietnam enterprises