Many major companies are under suspicion of transfer pricing.

Appeardomestic transfer pricing

The State Audit Office of Vietnam, together with the Association of Chartered Certified Accountants (ACCA), recently organized a scientific seminar titled "Transfer Pricing - Issues Arising in Current Management Practices." According to Dr. Ho Duc Phoc, the Auditor General of Vietnam, transfer pricing was a novel concept in Vietnam about a decade ago, but now it has become a common practice.

Notably, not only FDI enterprises but also many domestic enterprises have shown clear signs of transfer pricing, resulting in revenue losses for the state budget, including Sabeco. From a legal perspective, the State Audit Office's recommendation to collect excise tax from this enterprise can be seen as indirectly pointing out a loophole in the management of excise tax.

“Transfer pricing activities are becoming increasingly complex, sophisticated, and escalating, not only in FDI enterprises but also in domestic enterprises. This reality poses significant challenges to state management of transfer pricing activities, including auditing,” said Dr. Ho Duc Phoc.

According to the Chief Auditor of the State Audit Office of Vietnam, Sector VI, Nguyen Anh Tuan, the equitization process of state-owned enterprises is raising issues regarding the management of subsidiaries and affiliated companies in which the state has invested but holds less than 50% of the charter capital. Between 2011 and 2015 alone, the country restructured 588 enterprises, of which 508 were equitized with a total value exceeding 760 trillion VND.

However, in the first two years of this period, only 25 units were equitized. In 2016, the first year of the 2016-2020 equitization process, things improved significantly with 56 enterprises approved by competent authorities, with a total enterprise value exceeding 34 trillion VND, of which the actual value of state capital in these enterprises was over 24,390 billion VND.

"With the increasing number and value of privatized enterprises where the state holds less than 50% of the charter capital, the potential for transfer pricing between subsidiaries and affiliated companies is growing. This poses a significant challenge for specialized agencies in combating transfer pricing," Mr. Tuan stated.

Signs of transfer pricing

According to Dr. Nguyen Manh Cuong, Deputy Director of the General Affairs Department of the State Audit Office, signs of transfer pricing often occur in businesses by inflating the value of input goods and services; and reducing the value of output goods and services. In other words, they buy at high prices and sell at low prices, even though they incur continuous losses, they still expand their production and business activities and conduct transactions with affiliated companies abroad with large transaction volumes and values.

Mr. Cuong cited examples from some localities with many FDI enterprises declaring losses, such as Binh Duong, where the number of FDI enterprises declaring losses reached 754 in some years, with 200 of them exceeding their equity capital. In Ho Chi Minh City and Dong Nai, the percentage of FDI enterprises declaring losses was 60% and 52.2%, respectively. By reporting losses, most of these enterprises do not pay taxes, meaning the budget loses a significant amount of revenue.

According to Mr. Nguyen Anh Tuan, surveys show that FDI enterprises operating at a loss are often concentrated in the garment processing, footwear, tea production and export, and processing industries. In particular, up to 90% of FDI enterprises operating in the garment sector in Ho Chi Minh City are operating at a loss, while most domestic enterprises in the same industry are profitable.

Notably, despite persistent losses, FDI enterprises in Vietnam continue to invest in expanding their production and business operations. A prime example is Coca-Cola Vietnam. In its first 20 years of investment and business in Vietnam, this beverage company consistently reported losses and did not pay corporate income tax, while its revenue increased by 20-30% annually. Remarkably, despite significant losses, the company has plans to invest an additional $300 million in Vietnam.

The most prominent issue recently highlighted by the State Audit Office is the case of Metro Vietnam supermarket, which is suspected of transfer pricing. Established in 2001, Metro has developed 19 wholesale centers nationwide but has consistently reported losses, despite continuously increasing annual revenue. In addition, many other FDI enterprises are also under suspicion, such as: Adidas Group, Big C supermarket, PepsiCo Vietnam, Sumitomo Bakelite Vietnam Co., Ltd., Meiko Electronics Vietnam Co., Ltd., etc.