According to the latest report from VCCI in early 2018, as many as 37,9% of FDI enterprises reported losses in 2017.
This rate has decreased significantly compared to the average of 50% of businesses reporting losses a few years ago. However, transfer pricing schemes by FDI enterprises remain a major headache for tax authorities.
In Ho Chi Minh City, according to information from the Tax Department, FDI enterprises in the supermarket, retail, and beverage sectors top the list of businesses that consistently report losses.
Other reports indicate that up to 90% of FDI businesses operating in the garment sector in Ho Chi Minh City report financial losses, while most domestic businesses in the same industry are profitable.
Notably, despite losses, even accumulated losses leading to negative equity, these businesses continued to expand their operations instead of going bankrupt or shutting down production. Below are typical transfer pricing schemes of FDI enterprises in Vietnam.
1. The transfer pricing scheme involving Coca-Cola Vietnam and Pepsi Vietnam
Some typical cases of declared losses in Vietnam that have attracted public attention in the beverage sector recently include Coca-Cola and Pepsi.
According to the Ho Chi Minh City Tax Department, Coca-Cola consistently reported losses from the time it began operating in Vietnam in 1992 until the end of 2012.
Coca-Cola Vietnam's losses are not due to weak sales growth; in fact, the company's production volume is still growing by over 25% annually.
By December 2012, Coca-Cola Vietnam's total accumulated losses had reached VND 3.768 billion, exceeding its initial investment of VND 2.950 billion.
Therefore, technically, Coca-Cola Vietnam should have gone bankrupt. However, instead of closing down or scaling back operations, in 2014 Coca-Cola continued to invest an additional $210 million to expand its business in Vietnam.
This raises concerns for Vietnamese tax authorities regarding transfer pricing by this company. However, the evidence to prove that Coca-Cola Vietnam is engaging in transfer pricing is very weak.
After much effort and struggle from the Vietnamese side, in 2013 Coca-Cola Vietnam began reporting profits and paying corporate income tax to the Vietnamese government.
A meme went viral on Vietnamese social media when the Coca-Cola tax evasion scandal was exposed.
Pepsi Vietnam's transfer pricing scheme is similar to that of Coca-Cola Vietnam. Although Pepsi entered Vietnam earlier than Coca-Cola (in 1991), for nearly 20 years of operation, Pepsi Vietnam consistently declared losses and did not pay corporate income tax.
However, due to the enormous growth potential of the Vietnamese beverage market, Pepsi Vietnam continues to invest in more new factories in other provinces and cities across the country to expand its market share.
Finding evidence to prove that Pepsi Vietnam engages in transfer pricing is just as difficult as finding evidence against Coca-Cola Vietnam.
2. Adidas Vietnam's transfer pricing scheme
Besides the beverage sector, the distribution sector is also facing allegations of transfer pricing. One typical example is Adidas.
Adidas AG is a multinational company founded in 1948 in Germany, specializing in the design and manufacture of sporting goods.
Adidas products arrived in Vietnam as early as 1993, and it wasn't until 2009 that an Adidas subsidiary was established in Vietnam.
Since late 2012, Vietnamese newspapers have published several articles raising suspicions about Adidas Vietnam engaging in transfer pricing.
Many argue that Adidas Vietnam registers its business in Vietnam as a wholesale distributor but in reality incurs retail costs, raising suspicions that this is a method Adidas uses for transfer pricing through a linked company model between the parent company and its subsidiaries to evade income tax in Vietnam.
Specifically, according to the head of the Ho Chi Minh City Tax Department, Adidas Vietnam operates under a business registration license for wholesale distribution, but its expense list includes many costs typical of a retail business, such as costs for supporting retailers with supplies, international marketing expenses, regional management fees, sales commissions, and notably, Adidas Vietnam is not the manufacturer but incurs royalty fees.
In fact, Adidas Vietnam pays Adidas AG a 6% royalty fee and a 4% international marketing fee on net revenue from products sold, as well as the value of the licensed products.
In addition, Adidas Vietnam also has to pay a commission fee to Adidas International Trading BV, at a rate of 8,25% of the value of each transaction.
In addition, under the Southeast Asia service agreement between Adidas Singapore and Adidas Vietnam, Adidas Singapore and its local subsidiaries, including Adidas Vietnam, provide a service and agree to collect related fees.
The excessive intermediate input costs have unreasonably inflated the import price of Adidas products in the Vietnamese market, causing Adidas Vietnam to consistently incur losses and avoid paying income tax.
3. The transfer pricing scheme of Metro Vietnam
Metro Vietnam began operating in Vietnam in early 2002 with an initial capital of $120 million, of which the registered capital was $36 million.
After approximately 12 years of operation, from 2002 to 2013, Metro Vietnam changed its business license six times, increasing the total investment in Metro Vietnam to over 301 million USD as of May 2013.
It is noteworthy that during this period, Metro Vietnam consistently reported losses, with cumulative losses reaching $1.657 billion USD, and only in 2010 did it record a profit of 173 billion VND.
Despite incurring losses, Metro Vietnam continued to open 19 more retail outlets nationwide. Following this, the tax inspection agency intervened and determined that transfer pricing had occurred. Consequently, they demanded that Metro Vietnam adjust its losses downward, reduce deductions, and pay back taxes totaling over 500 billion VND. They also determined that Metro Vietnam had made a profit of 234,8 billion VND in 2010 and 2011.
Among these, the largest adjustment to reduce losses relates to franchise fees, expenses unrelated to Metro Vietnam's business operations, provisions for inventory devaluation, provisions for doubtful receivables, etc., amounting to 335 billion VND.
The adjustments to contractor tax for reimbursement of salaries paid to Metro Cash & Carry Germany to pay foreign employees working at Metro Vietnam amounted to approximately 62 billion VND; the adjustment to input VAT for advertising, marketing, and promotional support payments from suppliers amounted to 110 billion VND.
Due to excessive and unreasonable expenses accounted for in Metro Vietnam's costs, most notably franchise fees, the company has consistently reported losses for decades.
According to data from the General Department of Taxation, between 2002 and 2013, the franchise fees that Metro Vietnam had to pay to its parent company in Germany amounted to 731 billion VND.
In addition, the cost of salaries, bonuses, and allowances for the board of directors and foreign experts paid to individuals through Metro Cash & Carry GmbH (MCC) in Germany is also a very large figure, amounting to 699 billion VND.
According to the General Department of Taxation, these are fraudulent related-party transactions used by Metro Vietnam for transfer pricing.
4. The transfer pricing scheme of Keangnam Vina
Keangnam Vina Company is a real estate company with 100% South Korean capital. Entering Vietnam in July 2007, Keangnam Vina signed a turnkey contract with Keangnam Enterprise Company – a subsidiary of the Keangnam Group of South Korea – as the EPC general contractor.
The total value of the contract amounts to 871 million USD. Keangnam Enterprise's role is not only to survey, design, supply equipment and machinery, and construct the project, but also to provide financial consulting services and arrange loan financing for Keangnam Vina.
In 2008, Keangnam Vina paid Keangnam Enterprise $30 million in financial consulting fees, $20 million in fees for arranging loans, and several million dollars in consulting fees for advertising, land use rights, and investment licenses.
Due to these expenses, Keangnam Vina consistently reported losses and therefore did not pay corporate income tax. This loss, of course, turned into profit for Keangnam Enterprise in South Korea. Meanwhile, Keangnam Enterprise only had to pay contractor tax to Vietnam at a much lower rate than Vietnamese corporate income tax.
Keangnam Vina's performance over the past five years shows that the company has consistently reported losses. According to tax authorities, by 2011, when the Keangnam Hanoi Landmark building began operations, the company's revenue exceeded 5.200 billion VND, but it reported a loss of up to 140 billion VND.
Based on this situation, the Vietnamese tax authorities launched an investigation and determined that Keangnam Vina was engaging in transfer pricing practices.
Following the audit, the tax authorities required the exclusion of all unreasonable input costs. Many unreasonable construction cost adjustments were forced to be made. As a result, the total value of the EPC contract decreased from $871 million to just $699 million.
The inspection results forced Keangnam Vina to admit to transfer pricing practices and adjust prices by up to 1.220 billion VND. Furthermore, Keangnam Vina was also ordered to pay back 95,2 billion VND in corporate income tax due to adjusting profits for the period 2007-2011.
5. Transfer pricing cases of tea companies in Lam Dong
Transfer pricing is not limited to large international corporations; even much smaller foreign businesses engage in transfer pricing.
One typical example of this situation is the tea processing and export companies in Lam Dong, notably Jun Chow Oolong Tea Processing Company from Taiwan.
This company invested in Vietnam in 2006 with a capital of only 6,344 billion VND. After 4 years of operation, the company's total accumulated losses reached 23,903 billion VND, which is 3,7 times the initial investment.
Similar to Jun Chow Company, Taiwan Tea Company had a registered investment capital of VND 10,427 billion, but by 2009, its accumulated losses had reached VND 17,7 billion.
Kinh Lo Tea Company also had an initial capital of 26,9 billion VND, but after 4 years of operation, its accumulated losses had reached over 56,8 billion VND. King Wan Chen Company, with an investment capital of 29 billion VND, also suffered losses of over 38,3 billion VND.
It is important to note that this is not the general situation of the tea industry, because in the same context, Vietnamese tea businesses, both state-owned and private, are profitable and contribute to the state budget.
To compensate for losses, FDI enterprises often receive loans from their parent companies abroad. Taiwan Tea Company borrowed up to 28 billion VND from its parent company to cover a loss of 17 billion VND; Kinh Lo Tea Company borrowed over 27 billion VND to cover a loss of over 26 billion VND; King Wan Chen Company borrowed over 12 billion VND from its parent company to cover a loss of 38,3 billion VND.
Naturally, these loans will incur interest, and often the interest rates are very high, thus avoiding new income tax liabilities.
Based on the above situation, the tax authorities of Lam Dong province conducted an inspection and discovered that the export prices of these FDI enterprises were consistently much lower than the production costs of their products.
Specifically, after processing the tea into finished products, businesses package and export them to foreign markets (where the parent company is located) at very low prices, only from 2,8 to 4 USD/kg, while the production cost of one kilogram of finished tea has already reached 8 to 9 USD/kg.
After being transferred to the parent company, the tea products are repackaged into smaller quantities before being labeled and sold at a much higher price.
Foreign direct investment (FDI) tea businesses in Lam Dong have admitted that the actual export price ranges from 5,5 to 11,6 USD/kg, many times higher than the figures reported to local authorities.
Through inspections, the Lam Dong tax authorities have guided 17 FDI enterprises to settle their accumulated losses within the loss carryforward period until the end of 2009, totaling over 316,5 billion VND. Among them, HaiYih Co., Ltd. settled its accumulated losses at 63,6 billion VND, Kinh Lo Tea Company at 56,8 billion VND, and TFB Vietnam Company at 47,9 billion VND… These enterprises have also declared and paid corporate income tax amounting to nearly 8 billion VND.
In addition to the typical situations mentioned above, there are many other transfer pricing situations that have been investigated and clarified by the Vietnamese tax authorities. However, there are also many cases that have not been detected, or are currently suspected, but the investigation and conclusion still face many difficulties and challenges.
(Source: Cafef.vn)
See more:
