Tax office probes transfer price deceptions

Transfer pricing has become popular among foreign-invested companies as well as local businesses, a city trade official has said.

The transfer price is the price that is assumed to have been charged by one part of a company for products and services it provides to another part of the same company, in order to calculate each division’s profit and loss separately.

It refers to the setting, analysis, documentation and adjustment of charges made between related parties for goods, services, or use of property.

Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other purposes.

Le Thi Thu Huong, deputy director of the HCM City Taxation Department, said in an interview with Tuoi Tre (Youth) newspaper that domestic business owners often establish two to three companies at the same time and adjust up or down a company’s revenue to evade paying taxable income.

She said some local companies have founded several affiliates to give the impression that their business is making high profits.

When one of the affiliates listed on the stock exchange, the others would contribute profits to the listed one to earn the latter a high business performance and push stock prices up to deceive investors, she added.

Huong said that another deceptive transfer pricing which firms often employ was to focus profit on a later-established company enjoying preferential taxes. This was done to reduce the amount of taxes to be paid.

Last year, HCM City Taxation Department inspected 827 businesses, retrieving VND754 billion (US$37.7 million) and fining VND246 billion ($12.3 million) for violations of this kind.

The inspection was conducted on businesses involved in construction, insurance, banking, schools, loss-making companies and firms in co-ordinated transactions showing signs of transfer pricing.

For instance, the department inspected 197 loss-making companies, which helped mark down the losses to VND2.67 trillion (US$133.5 million) and retrieve and fine VND273 billion ($13.7 million).

Among 15 of these companies showing signs of transfer pricing, the department chose four to conduct inspections.

Huong said although the inspection had uncovered several domestic companies showing signs of transfer pricing, the department found it difficult to track down violations since it was not easy to confirm selling prices between these businesses and others in co-ordinated transactions.

She said there was currently no basis for local tax agencies to calculate taxes for those businesses showing signs of transfer pricing, nor were there any legal regulations on co-ordinated transaction and independent prices.

She added that it was difficult to identify prices for several forms of business that have different categories, such as steel and iron with more than 50 categories.

The department has only been able to identify prices of 17 kinds of goods, and readjust their prices and taxes, while leaving unhandled other goods with unidentified prices.

Vu Thi Mai, deputy minister of finance, said tax agencies planned to focus inspection on those businesses suspected of transfer pricing over the 2011-15 period.

It will also raise public awareness of taxpayers so they can understand that fines will be imposed for failure to voluntarily pay taxes.

She said the inspections have so far paid off, as several businesses reporting losses for several consecutive years have made a profit.

She said the ministry would concentrate on reviewing revenue sources and fighting tax evasion, particularly among foreign-invested firms suspicious of transfer pricing. — VNS

Tags: Vietnam transfer pricing