Transfer pricing makes cars in Vietnam three times more expensive than in the US

A report by VCCI and USAID shows that 13-20% of enterprises that consider Vietnam a part of the global supply chain carry out transfer pricing.

In addition, 37% of FDI enterprises from countries with lower tax rates than Vietnam tend to transfer pricing. Not only that, 65% of FDI enterprises with profits greater than 20% carry out transfer pricing and 44.5% of enterprises with profits from 10-20% carry out this behavior.

The price of components is inflated higher than the real value, making the price of Vietnamese cars higher than many other countries.

For example, in the automobile sector, in addition to increasing the value of joint venture capital assets, investors also transfer prices through technology transfer and royalty collection. This is a type of cost that accounts for a large proportion due to depreciation of intangible fixed assets.

Auto parts are mainly imported from multinational companies and are priced by the parent company. High pricing of imported parts will increase costs, increase prices, reduce profits, thereby reducing corporate income tax payments for auto companies, while the parent company still makes a large profit from selling parts. In fact, there are auto parts imported to Vietnam with declared prices equal to the price of an imported complete car.

Car prices in Vietnam are currently 70% higher than in Europe and the US, and 30% higher than in the region. In addition to high taxes, there is also the reason that investment costs, machinery and equipment, copyright fees, and component prices have been inflated much higher than their real value.

According to the Vietnam Tax Association, the fight against transfer pricing has achieved positive results in recent times, preventing many tax frauds through transfer prices between parties with related-party transactions. Specifically, in 2016, tax authorities inspected 329 enterprises with related-party transactions, collected 607.52 billion VND, reducing losses by 5,162 billion VND; in 2017, they inspected 734 enterprises with related-party transactions, collected, refunded and fined 2,270 billion VND, reducing losses by 7,146 billion VND.

However, anti-transfer pricing activities have not been really effective. Transfer pricing is not new and transfer pricing investigations have encountered many difficulties in the past. Economic experts say that data is an extremely important factor in anti-transfer pricing investigations. When investigating transfer prices, it is often necessary to use the comparative price method, to find a similar company and transaction. But our current database is not enough.

For example, in the automobile sector, authorities may know that the cost of importing components to assemble a car in Vietnam is up to 30% higher than in other countries in the region. However, how can we know the real price of a car frame or an engine when most of those components are only traded between companies in the same group or supply chain?

Economic experts also believe that in production sectors with unstable tax and fee policies, unpredictable future, large differences with other countries... transfer pricing will appear more often.

Transfer pricing behavior of FDI enterprises in Vietnam is leaving negative consequences, causing budget losses, creating unfair competition, and putting pressure on enterprises to comply with tax obligations.