Wednesday, 18 Jul 2018
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ECONOMY

Loss-making FIEs in Vietnam are scrutinized for transfer pricing

Updated at Wednesday, 11 Jul 2018, 13:26
The Hanoitimes - "FIEs` contribution to the state budget remains low, which is disproportionate to the used amount of resources, as enterprises are abusing high tax incentives for transfer pricing," said a representative of the Ministry of Finance (MoF).
In the 2012-2016 period, despite about half of foreign-invested enterprises (FIEs) reporting losses, in which many reported losses for a number of years in succession, the majority still planned for production expansion - a sign of potential transfer pricing, according to the MoF.
 
Illustration photo.
Illustration photo.
Specifically, the percentage of loss-making FIEs increased from 44% to 51% during the four-year period, in which the rates were 51% and 50% for 2015 and 2016, respectively, stated representative of the Corporate Finance Department (MoF) at a conference on July 10 on Vietnam's current preferential policies. 

Despite a decline by 1% in 2016 compared to 2015, the rate of FIEs reporting losses was still higher than the figure in 2012, 2013 and 2014. 

Additionally, the rate of FIEs reporting accumulated losses by the end of 2016 was 61%, higher than the rates recorded in period 2012 - 2015.

However, in fact, the majority of the mentioned FIEs were still planning to scale up investment and production expansion, indicating an increasingly complicated situation of transfer pricing, he warned. 

In addition to the issue of FIEs using transfer pricing to shift profit abroad, there is a growing trend of shifting back profit into Vietnam, with the aim of abusing Vietnam's generous tax incentives and long tax holidays, as evidenced by high level of average return on equity (ROE) of FIEs in the high-tech field, he continued.

Transfer pricing among FIEs is aimed to exploit different tax incentives. Some large scale projects are having significant cuts in corporate tax, such as Samsung Electronics Vietnam Bac Ninh (SEV) and Samsung Electronics Vietnam Thai Nguyen (SEVT) with high ROEs of respective 30.1% and 61.4% in 2015, and 26% and 49% in 2016 respectively. 

Meanwhile, some FIEs participating in Samsung's component supply chain are showing low efficiency from their respective business performances, according to him.

"FIEs' contribution to the state budget remains low, which is disproportionate to the used amount of resources, as enterprises are abusing high tax incentives for transfer pricing," he added.

Consequently, the representative recommended the Ministry of Planning and Investment to devise a protocol to limit loss-making FIEs to expand production and enjoy tax incentives. 

With regard to tax incentives for FIEs, Dau Anh Tuan, director general of the Legal Department of Vietnam Chamber of Commerce and Industry (VCCI) informed that there is an internal competition between provinces for foreign investment capital, leaving foreign investors with a variety of options for investment. 

"An investment project is rejected in a province due to environmental risk, but is approved in another. This shows a race to the bottom to attract FDI. Therefore, Vietnam should consider another strategy to attract FDI," Tuan added. 
Nguyen Tung
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