Tax authorities will enhance the inspection on foreign direct investment (FDI) enterprises, which reported big and prolonged losses, and had large associated transaction value.
The losses of Coca-Cola even exceeded its owner’s equity
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The tax departments were also instructed to be cautious with firms which had transactions with their affiliates locating in countries and territories with low tax rate or corporate income tax (CIT) exemption policies.
The move was made after reports revealed that a number of FDI firms declared major losses but had high annual revenue and still expanded business and production. Some of them had losses that even exceeded their owner’s equity.
Nguyen Thi Ngoc Khanh, director of the Finance Department of the Ministry of Finance, said that the overall efficiency of FDI firms’ production and business performance in 2016 was high. However, enterprises running at a loss made up a large proportion and their number is on the rise.
It was worth noting that each year, approximately 50-60 percent of total FDI firms reported losses, meaning they didn’t have to pay CIT, while revenues from the FDI sector had been growing strongly. Specifically, the FDI sector’s revenues grew 21.7 percent in, up 39.7 percent from a year earlier.
The contradiction is that despite reporting losses, a great number of foreign-invested enterprises continued to expand their operation, many of which are the world’s top companies that have been present in Vietnam for years.
A survey of the State Audit Office of Vietnam (SAV) showed loss-making firms focus on garment and textile, footwear and the processing industry. Up to 90 percent of FDI companies operating in the textile industry in Ho Chi Minh City reported losses while most domestic firms posted profits.
Strict measures needed
According to experts, fraudulent pricing and the abuse of transfer pricing for tax evasion include a range of activities aimed at reducing taxable income, decreasing or evading tax obligations, maximising investors’ profits by taking advantage of tax preferences and legal loopholes, false declaration of costs and prices, and using sophisticated connections of interests.
A fashionable transfer pricing strategy is through intra-firm parent debt or related-party loans, following which firms borrowed from their parent companies or affiliates with excessive interest expenses.
Other pricing methods include inter-company transactions in various forms such as overseas parent companies selling raw materials and equipment to subsidiaries with high prices, charging high royalties fees, or Vietnamese affiliates bearing the cost of advertising, marketing, research, etc which should be covered by overseas parent firms.
Dang Van Hai, deputy director of the SAV’s Legal Affairs Department, said the purpose of those transactions was to minimize tax payments in Vietnam, causing big losses to the state budget, creating an unfair competitive environment and contributing to the country’s trade deficit.
Therefore, efforts to prevent the illegal activities are necessary to not only improve government revenues but also ensure an equal and transparent investment environment for both foreign-invested and domestic enterprises.
This requires the competent agencies, especially tax authorities, to be fully aware of the necessity and capacity to deal with the illegal activities.
The representative of the Department of Corporate Finance proposed the Ministry of Planning and Investment (MPI) to develop and complete a synchronous and smooth database of FDI enterprises, so that central and local agencies can access all information related to business to help evaluate and supervise effectively and promptly.
At the same time, the MPI should study and propose to the Prime Minister the mechanism of control to limit the expansion of investment by loss-making enterprises that enjoy tax incentives.
