Vietnam steps up tax scrutiny of foreign invested enterprises

Tax authorities are stepping up efforts to deal with possible tax avoidance or evasion by foreign-invested enterprises (FIEs) to ensure that they pay the tax due in Vietnam.

The revenue loss associated with tax issues was equal to 1% of Vietnam’s GDP.

Tax Departments of Hanoi and Ho Chi Minh City have recently revealed that thousands of FIEs are failing to comply with tax regulations and the tax authorities are investing the issue to make public the list of violating enterprises.

Earlier, at a National Assembly (NA) meeting this year, Tran Van Tuy, head of the NA’s Committee for Deputy Affairs, said that FIEs tend to have stronger business performance, but the tax revenue collected from them remains modest.

Officials have also expressed concern over the increasingly complicated developments of transfer pricing among FIEs.

According to Minister of Finance Dinh Tien Dung, the ministry last year detected 95,940 transfer pricing cases and imposed fines amounting to VND19 trillion (US$812 million), which is alarming.

In addition, transfer pricing mainly occurs during FIEs’ investment phase, while tax agencies can now check only their production and business activities.

Minister of Planning and Investment Nguyen Chi Dung said that a lot of FIEs earn profits but have reported losses for many years. However, it’s hard to get sufficient evidence to prove transfer pricing activities took place.

He said the previous Investment Law included regulations on the appraisal of assets owned by FIEs during both their investment and business operation periods, which was the basis for calculating their taxes.

In 1992, an independent company was hired to appraise 17 projects. It found violations at all of them. Vietnam later abolished the regulations, calling for self-awareness among FIEs. However, after nearly three decades, transfer pricing in this sector remains a pressing issue, Dung said.

A challenging issue

In fact, the tax affairs of FIEs are not the concern of only the Vietnamese authorities. A World Economic Forum research showed that US$420 billion in corporate profits is shifted out of 79 countries annually.

Statistics from the Organization for Economic Co-operation and Development reveal that the revenue loss associated with tax issues was equal to 1% of Vietnam’s GDP, roughly over US$2.15 billion.

Experts said that identifying exactly where profits are generated is complex, and has become only more so as supply chains become more global.

According to the Ministry of Finance, just over half of a total of operating 16,000 FIEs in Vietnam report losses. However, it may be seen as ironic that despite misfortune in the local market, many have ramped up business expansion.

The heightened scrutiny of multinationals is partly a response to public backlash against tax evasion, highlighted recently by the tax departments of both Hanoi and Ho Chi Minh City.
Local authorities are trialing ways to prevent multinationals from structuring affairs in order to divert profits to low tax jurisdictions, particularly in companies with little physical presence.

Nguyen The Trung, deputy head of Technology Solutions and Security for Local E-government, said that the government will definitely carry out the post-test system that could total up the number of transactions of any platform soon because of its huge advantage for developing the digital economy.

Meanwhile, the Ministry of Finance has proposed that the Law on Tax Administration should regulate the specific responsibilities of the relevant agencies in managing FIEs, from investment to production and business activities.

It is also necessary to supplement a regulation to the Investment Law that enables the state to hire independent companies to appraise foreign invested enterprises’ assets, experts suggested.