There are many FDI firms declaring losses

Transaction at the Tax Department of Ho Chi Minh City. Photo by: Nguyen Hue.

Firms declaring losses account for over 31%

In recent years, with the integration of the international economy, FDI’s capital flow into Ho Chi Minh City have significantly increased and importantly contributed to the City’s economic growth. Currently, the amount of FDI capital invested in Ho Chi Minh City reached $US 40.99 billion, with 6,485 foreign investment projects in force.

According to the Management Board of Export Processing Zone - Industrial Park of Ho Chi Minh City, until December 31, 2016, in 17 Export Processing Zone - Industrial Park of the City, there were 535 foreign investment projects in force with the registered capital of over $US 5.4 billion. In particular, in 2016, the total investment capital in the Export Processing Zone-Industrial Park was nearly $US 226 million, of which 22 new projects were granted the Investment Certificate with registered capital of $US 65 million, and 144 projects in operation were adjusted, of which 32 increased capital projects with adjusted capital increasing by nearly $US 191 million. Most of the foreign investment projects were implemented in accordance with the registered contents, and created jobs for 200,000 employees, the total export turnover in 2016 reached nearly $US 6 billion, and the total import turnover reached over $US 5 billion.

It can be seen that the attraction of foreign investment played an important role in the sustainable and quick development of Export Processing Zone-Industrial Park. However, there are also many problems arising in the management of foreign investment projects after registration. Many FDI firms have suffered losses for many years, even losses in excess of charter capital, but the revenues of all years increased and firms still continue to invest and expand production.

According to the statistics of the Management Board of Export Processing Zone-Industrial Park in the Ho Chi Minh City, in the recent 3 years from 2013 to 2015, the situation of declaring losses of FDI firms in the Export Processing Zone-Industrial Park in Ho Chi Minh City is relatively large with the average rate of over 31%. The proportion of FDI firms declaring losses and having accumulated losses in excess of the charter capital accounted for nearly 16% of the total number of firms in operation.

According to Ms.Ta Chu Uyen Nguyen, the Deputy Head of Enterprise Management Division, the Management Board of Export Processing Zone-Industrial Park in the Ho Chi Minh City, besides objective reasons influenced by unstable world economy and other risks in production and business activities. There are subjective reasons such as: enterprises’ revenues recognition and accounting profit and loss are not transparent and clear, accounting books are adjusted by the foreign parent company to raise input costs (import materials, machinery, advertising, interest from the parent company) and lower selling prices (resell products to the parent company or associate company with low or equal to cost price).

In addition, most of the foreign-invested projects process products, and low localization rates due to weak domestic support industries, and input materials must be imported, leading to the situation of depending on the supply of raw materials from abroad.

Many difficulties

The situation of FDI firms declaring losses and having signs of transfer pricing is quite common, but the anti-transfer pricing of the competent authorities are facing with many difficulties. According to Mr. Phan Phung Hung, the Transfer pricing inspection Division, Ho Chi Minh City Tax Department said, transfer pricing of FDI firms to evade tax obligations is taking place in HCM City under many sophisticated forms and modes with increasingly serious violations. However, it is not easy to accurately detect transfer pricing. In order to have anti-transfer pricing, we must have methods to find evidence to collect arrears.

According to Mr.Phan Phung Hung, the issue of anti-transfer pricing is not only in Vietnam but also in the region and international, because if wanting to examine this issue, we must know the original price of the commodity when it is imported into Vietnam as well as imported into others countries. This requires the Tax authorities to access data reported by the parent company to the host country, with analysis and comparison of data from branches operating in Vietnam to detect loopholes, such as raising the original price, downing the output price of the branch in Vietnam, and allocating unreasonable costs in advertising and administration causing loss in many years. However, the Tax authorities of other countries also protect their enterprises, so it is very difficult to get the information.

According to Mr. Phan Phung Hung, although the Tax administration policy on transfer pricing in the recent times had positive changes both in legal and practical application, the collection of information to prove associated enterprises is difficult, but the collection of information to prove that an FDI firm in a transfer pricing operation is much more difficult because the legal frameworks are still being completed. In the coming time, only the Decree on handling the transfer pricing will be issued, but the highest legal level is the Law on Anti-transfer pricing which has not been issued. The Tax authorities from the General Department to the provincial and city level have not been granted the competence to investigate, and the information system on Taxpayers is being completed to closely monitor the change of enterprises’ revenues and interests. Besides, the apparatus is being set up and strengthened.

Recently, the General Department of Taxation officially established the Transfer pricing inspection Division. At the same time, the transfer pricing inspection force was also set up at four Tax departments of Hanoi, Ho Chi Minh City, Binh Duong and Dong Nai where there were many risks related to transfer pricing. The Tax authorities are also urgently building a database system to meet the requirements of risk exploitation and analysis, and use as a basis to determine the market prices for associated transactions.

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In addition, database and data linkage, and information on FDI firms in the competent agencies have not been systematically built and synchronously and smoothly collaborated in transfer pricing control, and the force of specialized monitoring and control in anti-transfer pricing is still in the training phase, causing difficulties affecting anti- transfer pricing in HCM City.

According to the Tax Department of HCM City, in 2016, the Department inspected 99 associated enterprises and collected arrears of over 116 billion vnd, reduced losses of over 871 billion vnd, and reduced deduction of over 1.3 billion vnd . In particular, although there are many enterprises declaring losses, they are still imposed and collected arrears with taxes from 2 to 16 billion vnd per enterprise.