The Saigon Times Daily: What are the ways that domestic firms cheat tax authorities via transfer pricing?

- Le Thi Thu Huong: We have found local enterprises establishing two or three subsidiaries at the same time to transfer profits and losses among them to minimize taxable incomes. Other companies opened many offshoots to fake a successful business result to lure investments. For instance, after one subsidiary is listed on the stock market, the other subsidiaries will transfer their profits to that listed subsidiary to increase its stock value to attract investors. We also see a parent company give all of its revenue to a newly-established subsidiary in poverty-stricken areas to take advantage of the tax reductions available to the latter.

How do you comment on levels and tax losses of local businesses’ transfer pricing. Will it spread quickly like in the foreign-invested sector?

- It is hard to compare levels or tax losses from transfer pricing between local and foreign enterprises as it depends on business scale. For the second question, tax agencies have to speed up inspection to cope with transfer pricing in local firms and prevent it from spreading.

However, transfer pricing investigation is not easy, is it? As just a few enterprises have been found to conduct transfer pricing, while thousands of businesses reported losses as they expand their enterprises.

- Actually, it is hard to detect a company’s transfer pricing practices and deal with the violations. The city last year saw 197 firms posting losses, of which 15 were suspected of engaging in transfer pricing after inspection. We have revised business results of four companies while we are suggesting the General Department of Taxation help verify transaction values overseas of two enterprises. We have yet to handle the rest of the firms given shortage of inspection time and information.

The Finance Ministry’s Circular 66 currently is the base for transfer pricing fighting with five price calculation and comparison methods. However, a tax officer finds it difficult to carry out the methods as he cannot base them on any independent data provider and has to survey and collect information from the market and related agencies. For FIEs, authorities should provide tax departments with policies in their home countries to make comparisons.

How can we gradually reduce transfer pricing?

- Transfer pricing will never end as businesses somehow will cheat tax authorities to gain big profits, even in developed countries like Japan and the U.S. Therefore, tax departments must have enough power and measures to cope with transfer pricing and look closer at enterprises. It is necessary to take drastic measures against FIEs who have reported losses for years but have continuously expanded their business. The Government should also raise awareness of tax regulations for enterprises. Businesses should know that they are responsible for paying taxes to develop infrastructure after the Government has created favorable conditions for their business.

Source: SaigonTimes Online.