MPI admits it’s difficult to deal with transfer pricing

VietNamNet Bridge – “It is as clear as daylight that many foreign invested enterprises (FIEs) commit the transfer pricing, but it is very difficult to find out the proofs for accusations,” said Do Nhat Hoang, Director of the Foreign Investment Agency, an arm of the Ministry of Planning and Investment (MPI). 

Do Nhat Hoang, Director of the Foreign Investment Agency, an arm of the Ministry of Planning and Investment (MPI)

Experts say that the biggest problem in foreign direct investment (FDI) attraction now is not the continued decrease in the registered and disbursed foreign invested capital, but the enigmatic big losses of a series of FIEs in recent years.

The startling discovery

The big losses do not reflect what Vietnam brings to foreign investors: cheap labor force, tax incentives, young population and favorable export conditions. International institutions also say that Vietnam is one of the three most attractive destinations in Asia.

The reports conducted recently by MPI show that 70 percent of FIEs report loss every year. Other FIEs make profit, but the ratios of profit on turnover are modest. While the enterprises can operate in favorable conditions, their contribution to the state budget through tax payment is relatively low at 9-10 percent of the total receipts of the state budget.

An inspection tour conducted on 88 FIEs in 2007-2009 found out that 90 percent of the enterprises reported losses. Meanwhile, a report by the General Department of Taxation (GDT) shows that 56 percent of FIEs had reported losses for three consecutive years by 2009.

HCM City is considered the most bustling commercial hub in the country. However, 60 percent of FIEs located in the city takes a loss every year. In Binh Duong province, 50 percent of FIEs reported loss for the five year period of 2006-2010. In 2010 alone, up to 200 FIEs reportedly lost the stockholder equity.

The noteworthy thing--is that most of the unprofitable businesses are operating in the key industries in Vietnam which can earn big money from exports, such as garment, footwear and processing. Despite the big losses, the FIEs still continue expanding their business.

In the garment industry, while the companies in other economic sectors all make profit, 90 percent of FIEs in HCM City reported loss. 

It’s difficult to find fault with FIEs

“There are 13,500 FIEs operational in Vietnam, 50 percent of which report loss or have unpaid debts. Meanwhile, it is very difficult to approach the businesses,” Hoang from MPI said.

“The Ministry of Finance and relevant ministries many times discuss the issue and then draw up detailed action plans. However, it seems to be more difficult than previously thought to implement the plans,” Hoang added.

It is obvious that FIEs are committing the transfer pricing, but it is not easy to find out the proofs for the accusation, due to the limited staff, unqualified enough officers, lack of experience and the imperfect of the legal framework.

“We do not have the database about the material prices in the world market to conclude that they evade tax. Meanwhile, FIEs always can show lawful invoices,” Hoang explained.

“We are sure that an import chip is priced at 10 dollars, but FIEs affirm that they buy it at 12 dollars, showing the lawful invoices. In this case, we need to find the proofs to show that the chip is valued at 10 dollars only,” he continued.

“Meanwhile, it is really a difficult task. In general, foreign countries tend to protect their businesses. Therefore, if Vietnam consults with the foreign agencies about the prices, we would receive the answer that the real price is 12 dollars,” he concluded.

In the latest news, MPI has submitted to the government a plan to fight against the transfer pricing. However, Deputy Prime Minister Hoang Trung Hai, realizing the complexity of the problem, has asked the Ministry of Finance to preside the research on the issue.

Pham Huyen