Transfer pricing and tax evasion are common practices in Vietnam by many foreign direct investment (FDI) enterprises. According to statistics from the Vietnam Chamber of Commerce and Industry (VCCI), approximately 40-50% of FDI enterprises report losses annually. However, many businesses, despite declaring losses, continue to expand their production scale.
Transfer pricing and tax evasion - numerous large businesses embroiled in allegations.
Each year, approximately 40-50% of foreign direct investment (FDI) enterprises in Vietnam report losses. However, despite reporting losses for many consecutive years, many enterprises continue their business operations, and some even expand their scale.
According to a representative from the Ho Chi Minh City Tax Department, the top spot on the list of companies suspected of transfer pricing and tax evasion is held by Coca-Cola Vietnam. Coca-Cola began investing in Vietnam in the early 90s and has reported losses for many years throughout its 20 years of operation in Vietnam.
The second company under suspicion of transfer pricing is Metro Vietnam. Initially, with a capital of $120 million, investing in Vietnam since 2002, after 12 years of operation (2002-2013), this unit increased its total investment capital to $301 million in May 2013, with 6 changes to its business registration certificate.
However, this company consistently reported losses totaling $1.657 billion, with its only profitable year being 2010, when it earned a profit of 173 billion VND. Despite continuously reporting losses, the company expanded by opening 19 new retail locations nationwide. Based on these findings, inspectors discovered signs of transfer pricing within Metro Vietnam. Consequently, the authorities forced Metro Vietnam to adjust its reported losses downward, reduce deductions, and recover over 500 billion VND.
Real estate companies are also facing allegations of transfer pricing and tax evasion.
Besides, other businesses are also suspected of transfer pricing, such as Keangnam Vina. This is a company with 100% South Korean capital operating in the real estate sector, which began investing in Vietnam in July 2007. However, this company allowed Keangnam Enterprise – a subsidiary of the group – to act as the main contractor through a contract signing arrangement.
Accordingly, Keangnam Enterprise not only carried out the surveying, design, and construction of the project, and supplied equipment and machinery, but also arranged loans and provided financial consulting services to Keangnam Vina. Subsequently, Keangnam Vina continuously reported losses due to these very high costs. As a result, Keangnam Vina did not have to pay corporate income tax. Finally, the tax inspection agency intervened, forcing the company to admit to transfer pricing practices, compelling it to adjust its profits and taxes.
Transfer pricing and tax evasion through the transformation of scrap machinery into high-quality goods.
Another company specializing in textile and yarn production with 100% foreign investment is Hualon Corporation. Hualon has consistently declared losses throughout its 20 years of operation in Vietnam. The cumulative losses of this company as of the end of 2010 exceeded 1.000 trillion VND. Despite this, the company continued to expand its business. The unresolved issues surrounding this massive loss only came to light when the tax authorities intervened. The method used by this company to carry out transfer pricing involved transforming obsolete machinery on the books into high-quality goods, artificially inflating the import price to 1.156 trillion VND.
After identifying Hualon Company's transfer pricing practices through an inspection, the tax authorities have collected back taxes from the company.
However, confirming transfer pricing practices for some companies is very difficult. For example, Adidas, which invested in Vietnam in 1993, has consistently reported losses for many years. In the Vietnamese market, the import cost of Adidas products is high due to excessive intermediate input costs, pushing the company into a loss-making situation and avoiding income tax.
Another example is Toshiba Asia Industrial Products Co., Ltd. Over three years, this company reported cumulative losses exceeding VND 430 billion, compared to VND 292 billion for Fujitsu Vietnam, VND 264 billion for Kureha Vietnam, and VND 256 billion for Olympus Vietnam.
Tea companies are consistently reporting losses many times greater than their initial investment.
A number of tea companies in Lam Dong province have also reported continuous losses, while other Vietnamese tea businesses have declared profits and paid taxes to the state budget. A typical example is Jun Chow, a Taiwanese Oolong tea processing company, which initially invested only 6.344 billion VND in Vietnam but after four years of operation reported accumulated losses of 23.903 billion VND, 3,7 times its initial investment.
According to the acting director of the School of Auditing Training and Professional Development – Associate Professor Dr. Nguyen Dinh Hoa, determining the relationship between transactions and applying appropriate procedures and processes for assessing the suitability of transaction prices is very difficult. In Vietnam, cash payments are still very common, which is one of the loopholes that allows entities to not fully declare transactions, facilitating transfer pricing and tax evasion, making management difficult.
Mr. Hoa also added that in the fight against transfer pricing, there is a lack of coordinated efforts between various functional agencies and the tax authorities, thereby creating opportunities for those who exploit loopholes. In addition, there are limitations in IT skills, foreign languages, international accounting and auditing standards, and general knowledge of relevant legal frameworks in international law and business among state auditors.
