FDI firms exploit tax loopholes
FDI firms exploit tax loopholes
A number of foreign enterprises have been accused of avoiding corporate income tax when selling shares to other companies.
As a result, the Ho Chi Minh City People’s Committee has asked the Ministry of Finance (MoF) to implement mechanisms and policies to manage share purchases and franchising.
According to a document sent by the committee to the MoF on December 5, after a recent investigation the committee found capital was transferred through a number of different loopholes, primarily by foreign invested enterprises (FIEs), which are difficult for local tax agencies to review and control.
The first way is by producing a contract showing that the selling price of shares equalled that of the purchase price and by not generating profits the transfer is not taxable. For example, Intel Asia Holding Limited Company transferred capital to another company in the same corporation with the selling price which is equivalent to the cost of $100 million. The transfer did not generate any earnings, so the company did not have to pay any tax for this capital transfer.
Other cases were contracts rumoured to involve very high capital transfers, whereas the reported values were very minimal, such as the sale of Pho 24 Commerce and Service Company to Viet Thai International. According to some local newspapers, the Pho 24 brand was bought by Viet Thai for $20 million, but the reported price was only VND1 billion ($47,600).
Soon after, Viet Thai sold 50 per cent of its acquired shares of Pho 24 to Jollibee, the Philippines’ largest fast food chain, for $25 million.
The truly mysterious part of the acquisition is that the company has only changed the name of the legal representative, whereas the names and members and rate of capital contribution has been left unchanged. The Ho Chi Minh City Department of Taxation has been asked to look into the matter.
Capital transfers have also been accomplished by establishing new companies, branches, or changing business offices, making it difficult for tax authorities to manage. A case was that of PT Global Investment Company, which adjusted its charter capital from VND1 billion ($47,619) to VND100 billion to up its share value. A local shareholder of the company then sold its 48 per cent stake in the company to a foreign firm for VND48 billion ($2.28 million), and did not pay any tax. The company has since moved from its registered business address.
Another example is E Ke Real Estate Trading and Construction Company which bought its own shares at high prices and transferred them at below their purchase value to take losses and avoid paying tax.
These cases show the lack of co-operative mechanisms between tax and licensing agencies and are detrimental to the state budget.
The people’s committee document suggested share exchanges include value added invoices that ensure businesses pay taxes as per regulations. Firms that sell shares without these invoices would not see a revision down of their tax status.
Businesses that transfer capital to other businesses will need to show payment receipts. If they cannot produce these receipts, tax authorities have the right to valuate the transfer as per regulations in the tax laws.
Businesses that officially change their shareholders must produce transfer invoices and list the personal income tax and personal tax deductions for the individuals who sell or transfer their shares.
For organisations without invoices for sales and for individuals without the necessary documents showing tax payments on their earnings through selling shares, the buyer will be responsible for registering and paying tax, rather than the sellers.
According to Nguyen Nu Thuy Linh, associate of EPLegal, with regards to capital transferring which results in personal income tax (PIT) obligation, the Circular No. 156/2013/TT-BTC of the MoF taking effect this December 20 may bring a promising tool to the taxation force.
According to the new circular, the company which has the share of capital contribution or stocks to be transferred must obtain the document evidencing the fulfillment of PIT obligations of the individual transferor before amending the members list or the shareholder book otherwise it is responsible for declaring and paying the PIT on behalf of that transferor.
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