Current situation of price transfer of FDI enterprises

Transfer pricing is understood as the implementation of the price policy for goods, services and
assets transferred between members of the Group or between subsidiaries together or
Subsidiaries with the Parent Company within the scope of National or out-of-state countries do
not follow market prices, in order to minimize the amount of tax payable by companies to the
State.
Thus, transfer pricing is an act carried out by business entities to change the value of
exchanging goods and services in relation to associated parties.

The transfer pricing of some FDI enterprises

FDI enterprises often use tricks, such as: raising prices of goods, high input materials, lowering
export prices, so as to report losses or reduce profits on books (transfer prices) in order to
evade Taxes, enterprises with the above phenomenon are often the most common in industries
with many intangible assets, which have proprietary technology, produce products that are not
popular in the country, so there are no criteria or basis for comparison. compare. According to
Mr. Nguyen Trong Hanh - Former Deputy Director of Ho Chi Minh City Tax Department, said:
“Some FDI enterprises do both at the beginning of the year to increase input costs, seek to
squeeze output prices down and export goods. produced in Vietnam through an intermediary
country (intermediate countries with low tax rates), then from intermediate water companies to
bring goods into Europe or America ”. Some other FDI enterprises use "tricks" to find ways to
increase input costs (raising prices such as equipment, supplies, raw materials, material
consumption norms / product units, expenses allocated from public works). Parent company) to
make profit decrease, then businesses have no profit or little interest, so they do not have to pay
or pay less income tax. Finally, there are FDI enterprises with parent companies in foreign
countries. Often these companies use both of the above methods to carry out price transfer,
provided by the parent company. At the same time, the output of the product, so the control of
raw material prices as well as the export product prices will become difficult for the management
agencies of Vietnam, especially these products are exported to 3rd intermediate country.

Causes
Internal motivating factors.
When the production and business activities of FDI companies in the parent company are at a
loss or in member companies in other countries, transfer pricing will help FDI companies share
losses between members with each other, thereby reducing payable taxes and creating a
brighter financial picture for the company when reporting to shareholders and other
stakeholders. FDI companies in the period of new market penetration will enhance advertising
activities, promote new products in order to build a foundation for future business activities, so
this period the company will have to accept bear heavy losses for a long time. And based on
their strong financial potential, FDI enterprises will carry out illegal transfer pricing to make their
business suffer from losses for a long time, then push the business partners out and take over.
taking control and control of the company. After knocking out competitors and business partners
out of the market, FDI companies will dominate the market and raise product prices to offset the
previous cost. Due to the privilege of privilege in the process of calling for investment from the
host country, the multinational company considers its subsidiary based on the country as the
profit center of the whole company and carries out acts Transfer pricing leaves significant
consequences for the host country. Through the sale of obsolete assets and equipment at high
prices, on the one hand, national financial companies can change technology at low cost, while
on the other hand recovering investment capital quickly in other countries. receiving investment
and FDI companies have transferred a part of their income abroad. At the same time, FDI
companies can avoid risks in product research and development activities because these
activities often cost a lot and are not likely to be successful.

External factors
Tax
With the goal of maximizing their profits, FDI enterprises are always looking for an advantage
from the CIT rates of countries with different tax rates by price transfer acts. The most
commonly used tricks are to raise the purchase price of commodity materials and sell prices or
low export prices at subsidiaries located in countries with high CIT rates. As a result, FDI
companies have transferred a portion of their profits from countries with high CIT rates to
countries with low CIT rates, thus the company has achieved its goal of maximizing profits. In
short, the difference in CIT rates is a big incentive to transfer prices.

Exchange rate fluctuations

Another factor is that FDI companies want to preserve their investment in local currency.
Expectations on changes in exchange rates and in investment opportunity costs, companies will
make investments in a country if they predict that in the future the currency of the country will be
stronger meaning the number Their initial investment is preserved and developed. Based on the
forecast of the exchange rate situation, FDI companies make early or later internal payments to
reduce exchange rate risks. Debts can be paid out sooner if the projections suggest that the
currency of the country in which the FDI company has a subsidiary will be devalued and vice
versa, if it is forecasted that the country's currency will rise in price, Multinational companies can
delay payment of debts. Moreover, this early payment or deferred payment may also help to
avoid borrowing needs, reducing short-term loans on member companies' balance sheets.

Policy of the host country

For countries with tight monetary policies, it is necessary to make fake transfers to FDI
companies to easily transfer profits abroad and make business plans quickly, without missing
out on the business opportunities . At the same time, it is also possible to avoid high interest
rates which will lead to pressure on the labor force to increase wages.

Inflationary
The inflation situation of the countries is different, if any country has a high inflation rate, its
currency is depreciating. Therefore, in order to preserve their profit and initial investment, FDI
companies will conduct price transfer activities.

The presence of local partners in the joint venture

For many reasons, FDI companies will choose joint ventures for investment. The presence of
local partners in the joint venture may stimulate companies to use transfer pricing policies to
reduce the profits of the joint venture while the company still gains from these business
activities. This policy makes local joint venture partners weaken, reducing the rate of capital
contribution in business or reselling the capital contribution in joint ventures to foreign partners.
Political and social unrest
The political and social instability of the host country contains a great risk to the joint venture's
production activities. High risks in the host country 's business may lead FDI companies to try to
profit from investment as soon as possible through a transfer pricing mechanism. In general,
there are many causes of FDI transfer, but the big difference in tax rates is the main motivation
for companies to carry out this behavior, in order to maximize profits by minimizing the payable
tax on the whole scale. bridge.

Some investment results of FDI enterprises in Vietnam in recent years

According to the Ministry of Planning and Investment, from the beginning of the year to
December 26, 2016, Vietnam attracted foreign direct investment of FDI with 2,556 new licensing
projects with a total registered capital of 15, 182 billion. USD, increased by 27% in number of
projects and decreased by 2.5% in registered capital compared to the same period in 2015.
Besides, there were 1,225 licensed projects from previous years registered to adjust investment
capital with the amount of additional capital reached 5, 765 billion USD, increased by 50.5% in
the number of projects and decreased by 19.7% in added capital. In 2016, 2,547 enterprises,
economic organizations with foreign investors contributed capital to buy shares (with a capital
ratio greater than 50% of charter capital or in the field of conditional investment) with a total
investment of 3, 425 billion USD.

Thus, in general, the total registered capital of new projects, additional funding and investment
in the form of capital contribution, share purchase in 2016 reached 24, 372 billion USD, up 7.1%
over the year. before. Realized FDI capital in 2016 was estimated at US $ 15.8 billion, up 9%
compared to 2015, reaching the highest level of FDI disbursement ever. Particularly in the first 9
months of 2017, FDI into Vietnam reached a record level, up to 25, 48 billion USD, up to 34.3%
over the same period in 2016] (Tags: Water Investment Department outside, adjust capital,
foreign investment, buy shares, foreign investors).
However, with the massive investment of FDI enterprises in Vietnam in recent years, there has
been a very difficult problem to control, namely: The number of FDI enterprises in the country
according to statistics in recent years. Up to 50% of FDI enterprises declare losses, of which
many enterprises suffer from continuous losses for many consecutive years (in Ho Chi Minh
City, nearly 60% of more than 3,500 FDI enterprises regularly declare losses in many cases).
Similarly, in Lam Dong province with 104/111 FDI enterprises reporting continuous losses, Binh
Duong province, one of the provinces attracting many FDI projects, up to 50% of FDI
enterprises reported losses from 2006 to Now, ... Despite constant losses, but these FDI
enterprises still invest in expanding production and business, typically there are "suspicious"
expressions about price transfer, including Coca-Cola Company. Vietnam For over 20 years of
investment and business in Vietnam, Coca-Cola continuously reported losses, accumulated
losses as of September 30, 2011 of this company amounted to VND 3,768 billion, surpassing
the first capital. The initial investment was VND 2,950 billion, because of such continuous
losses, Coca-Cola Vietnam did not have to pay corporate income tax, while the continuous
revenue increased from 20-30% / year ...
Before a series of suspicious signs of FDI enterprises. To prevent signs of price shift and
taxation of these enterprises, the Government has issued Decree No. 20/2017 / NDCP on tax
management with businesses with associated transactions effective from May 1, 2017. In the
spirit of this Decree, the principles set out to determine the price of associated transactions such
as: Analysis, comparison with independent transactions; The principle of nature determines the
form to determine the exact nature of the associated transaction with similar characteristics to
the independent comparison objects; Analysis and comparison must ensure similarity between
independent comparison objects and associated transactions; apply the method of comparison,
review, ... for comparison factors to select independent comparison objects to prevent price
transfer of FDI enterprises in Vietnam.

Solutions to prevent transfer of prices for foreign-invested

enterprises (FDI)
Transfer pricing not only causes loss of state budget revenue, but also creates an unfair
competition environment among businesses. In order to limit this situation, it is necessary to
focus on effective implementation of some of the following solutions:

 First, perfect the legal framework. In the short term, Vietnam needs to complete legal
documents on anti-transfer pricing and proceed to issue a Law on anti-transfer pricing;
Narrow the tax incentives, particularly to minimize social policies in tax incentives;
Transferring investigation rights to tax authorities from the General Department and
long-term to the provincial and city tax authorities; Completing the information and data
system of people and enterprises paying taxes to monitor closely changes in revenue
and profit of enterprises.
 Second, strengthen the apparatus. Recently, the General Department of Taxation
officially established the Inspection Department for transfer prices. At the same time, the
transfer price inspection force established in 4 local tax departments has many risks
related to transfer prices, such as Hanoi, Ho Chi Minh City, Binh Duong and Dong Nai.
This is a specialized force working against price transfer at the central to local tax
authorities, as well as collecting and processing information from enterprises with links
from tax agencies and third parties. The question now is that tax authorities should
urgently build database systems to meet the requirements of exploitation, risk analysis
and serve as a basis for determining market prices for inter-transactions. link. Because
according to the local Tax Departments, the identification of transfer pricing is not
difficult, but the processing process faces many difficulties because no data is available,
so tax officials still have to do it manually, pick up each item to compare, compare.

 Third, apply valuation method (APA - pre-agreed mechanism on price determination).

This measure is being widely applied in Europe and many countries in the region such
as China, Indonesia, Thailand, Malaysia, ... In Vietnam, according to the Law on
amendments and supplements to a number of Articles of the Tax Administration Law,
from July 1, 2013, tax authorities are allowed to apply APA. Under this mechanism,
multinational enterprises must proactively propose measures to calculate prices or
prices of buying and selling goods and services among group members, before
declaring and paying taxes. Tax authorities will coordinate with foreign tax authorities
signed a double tax avoidance agreement with Vietnam to organize supervision and
control to combat tax fraud. In theory, APA may help reduce price cheating and chorus
"fake hole, real interest" that public opinion has mentioned in many enterprises.
 However, it is unlikely that enterprises with foreign capital voluntarily act as APA.
Because APA applies on the principle of voluntariness, tax authorities cannot force
businesses to do so. Tax authorities should have mechanisms to encourage businesses
with associated transactions to apply APA to avoid price transfer inspections. Currently,
Vietnam has also issued guidelines on APA and some companies have applied.
 However, APA is also a complicated and time-consuming process, so it is only suitable
for large-scale enterprises and has a stable business model. On the other hand, the
Ministry of Finance and the General Department of Taxation should continue to improve
the legal mechanism in managing transfer pricing.
 Fourthly, the Government and the authorities also need to review and adjust the
direction of narrowing the gap on tax incentives between sectors, sectors and regions
and localities. As mentioned above, one of the reasons for the transfer pricing behavior
is that there is a difference in the corporate income tax between countries, the difference
in the corporate income tax rate in a country due to the application of preferential tax
rates. and other incentives such as tax exemption or reduction.

 Fifthly, the tax authorities at all levels should strengthen the inspection of transfer prices,
considering this is one of the key tasks of the tax industry. Focusing on inspection and
examination of transfer prices for enterprises with many members; industries that show
signs of great tax risk due to price transfer behavior of affiliated enterprises, enterprises
that have been implementing restructuring are able to take advantage of transfer pricing
to avoid taxes. In the case of transfer pricing, there must be sanctions in the direction of
increasing the fine and penalties compared with the current regulations to ensure the
strictness of the law.

 Sixthly, building a database system and linking data and information on FDI enterprises
in Vietnamese authorities to have a coordinated and smooth coordination in controlling
transfer prices of agencies. function. In the coming time, Taxation, investment licensing
agencies, Customs, Public Security, Bank, ... should strengthen the establishment of
databases and information connection to have a secure information system. for tax
administration process in general and risk analysis activities, inspection and handling of
violations on transfer prices between associate members in particular.
 Seventh, strengthen training and development of human resources for the tax industry to
specialize in monitoring and controlling transfer pricing, with a focus on training in market
valuation skills, knowledge of industry economy, information technology, foreign
languages, ...

 In summary, anti-transfer pricing activities can affect the ability to attract foreign
investment into Vietnam in the short term in the direction of reducing the number of
projects and investment capital, but in the long term, it will enhance the quality of
attraction. FDI by limiting inefficient investors and increasing the contribution of the
foreign investment sector, attracting reputable investors, Vietnam's investment
environment will develop in a positive and healthy direction. stronger. It is time for
functional branches and localities to be more resolute and fierce in implementing
synchronous measures against price transfer, to avoid losses for Vietnam when
attracting investment capital from FDI enterprises. .