Paradox: FDI enterprises expand investment while having losses

Besides true FDI enterprises, there are also companies operating in Vietnam for a long time with prolonged losses and contributed ineffectively. Picture for illustration.

According to experts, from the limitations of FDI, it is time to review the entire investment incentive framework and re-establish the balance between “profit-based” preferential policies and “efficiency-based”. The fight against transfer pricing in the FDI sector also has become the key task and top priority of the tax sector.

Many types of transfer pricing

Continuous losses but still expanding production and business, this is the phenomenon of many FDI companies in Vietnam. This situation was represented by the Department of Finance and Ministry of Finance when assessing the financial situation and results of production and business activities of the FDI enterprises.

Ms. Nguyen Thi Ngoc Khanh, Director of the Finance Department of the Ministry of Finance, said that the overall efficiency of production and business activities of FDI enterprises in 2016 was high. However, enterprises with losses occupied a large proportion and have continued to increase over previous years. Specifically, the proportion of FDI enterprises reporting losses and capital losses in 2016, decreased compared with the data of 2015, but is still higher than the years from 2012 to 2014. The rate of FDI enterprises loss accumulated in 2016 is 61%, higher than from 2012 - 2015.

Representatives of the Department of Corporate Finance also noted the phenomenon of transfer pricing, transfer of profits (to foreign countries from Vietnam) by some domestic FDI enterprises, which have enjoyed large incentives on the CIT rate and exemption time, reduction of CIT for transfer pricing between FDI companies in their associated countries, and enjoyed different levels of CIT incentives.

Regarding this issue, Ms. Nguyen Thi Cuc, Chairman of Vietnam Tax Consultant Association mentioned the worrying figures. According to Ms. Cuc, applying risk management measures, in recent years anti-transfer inspection work is promoted by tax authorities.

Accordingly, in 2016, through the inspection of 329 companies having associated transactions, the tax sector has collected 607.52 billion VND, reducing a loss of 5.162 billion VND. In particular, there were 23 cases of criminal offenses. In 2017, through the investigation of 734 enterprises with associated transactions, the tax sector has collected, retrieved and fined up to 2,270 billion VND, reducing a loss of 7.146 billion VND,” said Nguyen Thi Cuc, who also believed that this number will increase in 2018.

In addition to the true FDI enterprises, there are also companies operating in Vietnam for a long time, that have prolonged losses and contributed ineffectively, and this is a pressing issue for true FDI enterprises. That is shared by Ms. Nguyen Thi Lan Anh, Deputy Director of Inspection Department, General Department of Taxation, Ministry of Finance, at a recent seminar on incentives for FDI companies. Ms. Nguyen Thi Lan Anh said that current forms of transfer pricing in the world are present in Vietnam, implemented in many forms such as through the transfer of tangible and intangible assets, through the provision of services.

Sharing more about the form of transfer pricing through service delivery, Ms. Lan Anh said, this is the arrangement of services in the internal corporation, thus it is done relatively easily, but difficult to control. As a result, multinational corporations often design corporate service contract agreements with a variety of services, such as technical services, legal services, and administration. Through this, multinational corporations can transfer profits to their desired destination.

“This is a good thing for multinational corporations, but the tax administration faces many difficulties to control it,” said Ms. Nguyen Thi Lan Anh.

Anti-transfer pricing: Top priority?

“Another form of transfer pricing is conducted by FDI enterprises through the provision of services to overseas affiliates. These services may not charge or charge at very low rate, out of line with the market price. As a result, besides the contributions made by true FDI enterprises, some enterprises reported losses in the long term while expanding their investment,” said Lan Anh.

According to the representative of the General Department of Taxation, “Through inspection, the taxation also assessed the transfer pricing may also be implemented through loans or financial transactions of a similar nature. For example, by setting up loans from parent companies, affiliates, or back-end loans through independent intermediaries where Vietnamese FDI enterprises can transfer profits abroad through interest expenses in line with market price. This interest expense often exceeds the required norms.”

It is emphasized that the overall performance of FDI enterprises is quite high compared to that of other economic sectors, but detailed analysis of the performance of FDI enterprises shows that the contribution of FDI enterprises to the State budget is still low. Mr. Nguyen Thi Ngoc Khanh said that, the reason is due to FDI companies taking advantage of high investment incentives (such as land rent, CIT, PIT, etc.) to make transfer pricing and transfer profits.

In order to effectively attract and manage foreign investment capital, experts recommend the MPI to review and evaluate the current investment incentive policies in order to study and propose mechanisms and policies to attract investment, and management mechanisms for the FDI sector in the coming period.

Accordingly, the representative of the Department of Corporate Finance proposes the MPI to develop and complete a synchronous and smooth database of FDI enterprises, so that central and local agencies can access and export all information related to business to serve their general work; this helps to evaluate and supervise effectively and promptly.

At the same time, the MPI should study and report to the Prime Minister on the mechanism of control to limit the expansion of investment by loss-making enterprises that enjoy tax incentives.

Stressing that, “We have invested $US 100 million to get $US 1 billion, economist Nguyen Minh Phong said that, it's time to take action against transfer pricing, because this is the top priority of the tax sector and we must focus on investing in it as a form of beneficial business.”

In addition to the above solutions, the experts emphasized that the need is to take consideration of the current investment incentive framework and re-establish the balance between “profit-based” preferential policies and “efficiency-based”.

On the business side, looking for super profits is what every business wants, but businesses need to determine that profit seeking by transfer pricing is a short-term option, because by increasing business efficiency through positive measures for increasing productivity, saving costs, and improving product quality is the ultimate way forward of every successful business. Instead of seeking ways to maximize profits by short-term transfer pricing, which is both risky and unequal, consider the longer term for your business’s realistic success, and also have the pleasure of repaying the opportunity your host country provided.