New policy proposed to prevent transfer pricing, tax evasion of FDI enterprises

Industries including processing and manufacturing, which have made large contributions to the business performance and State budget of FDI enterprises, have lost their roles as growth drivers. Photo vneconomy.vn

The Ministry of Finance has recently proposed changes to policies on foreign direct investment (FDI), including the enhancement of information comparison, to prevent transfer pricing and tax evasion.

The proposals were a response to the ministry’s report which assessed and analysed 2023 financial statements of 28,918 FDI entities, and were sent to the Prime Minister Phạm Minh Chính and Deputy Prime Minister Hồ Đức Phớc.

According to that report, the production and business performance as well as profitability of FDI enterprises in 2023 decreased compared to 2022.

Specifically, revenues fell by VNĐ9.41 quadrillion, (US$352billion) down 4.3 per cent, while their after tax profit was nearly VNĐ337.03 trillion, down 15.7 per cent. The amount paid to the State budget also decreased from nearly VNĐ197.08 trillion in 2022 to nearly VNĐ193.24 trillion in 2023.

Notably, as of December 31, 2023, the number of FDI enterprises reporting losses was 16,292 out of 28,918 enterprises, up 21.2 per cent. The number of enterprises with accumulated losses was 18,140 enterprises, up 15 per cent and the number of enterprises with equity losses was 5,091 enterprises, up 15.2 per cent.

In 2023, their loss was more than VNĐ217.46 trillion, up 32 per cent, their accumulated loss was VNĐ908.21 trillion, up 20 per cent and their negative equity was VNĐ241.56 trillion, up 29 per cent.

The Ministry of Finance concluded that although FDI capital kept growing, most of it is focused on small and medium sized projects. They are those which tend to manufacture industrial products, mainly imported components and equipment for processing and assembly, with low added value and medium-level technological lines, to take advantage of tax incentives and cheap premises and labour.

Sectors such as processing and manufacturing industry, wholesale, retail, repair of automobiles, motorbikes and other motor vehicles, real estate business activities that have made large contributions to the business performance and the State budget, are no longer considered growth drivers.

The ministry assessed FDI enterprises, which reported losses, accumulated losses and losses in equity, have continued to increase significantly in both quantity and value in many years.

The ministry noted many FDI enterprises have reported losses for many consecutive years but still expanded their investment capital. The enterprises focused on processing and manufacturing, automobile and motorbike wholesale, retail and repairing industries.

In addition, many FDI enterprises had large investment capital, high revenue and large pre-tax profits, but contributed modestly to the State budget compared to other enterprises with lower investment capital and business results.

Therefore, under the report, the Ministry of Finance recommends that the Prime Minister direct the review of investment mechanisms and policies to propose amendment or issue timely and effective investment policies.

The ministry specifically proposes strengthening information comparison to combat transfer pricing and tax evasion, as well as effectively managing revenue sources arising from production and business activities of FDI enterprises to increase revenues for the State budget.

The Government should inspect and examine operating FDI projects and strengthen management measures against FDI enterprises that are operating ineffectively or have signs of violations, causing damage to State budget revenue and negative impacts on the socio-economic conditions and the environment.

In addition, according to the ministry, investment efficiency indicators should be developed to serve as a basis for assessing the impact of FDI projects on the socio-economic conditions and the environment in order to promptly manage and prevent possible risks.

The ministry also proposes to issue a decree on the establishment, management and use of the Investment Support Fund to stabilise the investment environment, and encourage and attract strategic investors and multinational corporations.