How should Vietnam behave towards transfer pricing?

How should Vietnam behave towards transfer pricing?

While taxation agencies are vowing to punish those foreign invested enterprises (FIEs) which conduct transfer pricing, investment consultants believe that the negative impacts of price transfer on the national economy have been exaggerated.

Twenty percent of the FIEs polled in a Vietnam Chamber of Commerce and Industry (VCCI) survey admitted that they have engaged in transfer pricing.

The Ministry of Finance in May 2012 set up a 2012-2015 action plan on tax inspection, demonstrating its strong commitment to fight against transfer pricing.

The General Taxation Department (GDT) announced earlier this year that battling against the practice would be its key task in 2014. It has threatened to inspect a series of FIEs suspected of committing the fraud.

In 2013, GDT released its decisions on imposing fines and collecting tax arrears from more than 100 FIEs which were found to be conducting transfer pricing.

Meanwhile, a survey of EuroCham, which represents the European business community in Vietnam, revealed that 57 percent of its members think that transfer pricing has no significant effect on the business climate in Vietnam.

Transfer pricing? Nothing’s the matter

Nguyen Mai, former Chair of the Vietnam State Committee for Cooperation and Investment, and now Chair of the Vietnam Association of FIEs (VAFIE), said that transfer pricing should not be considered as a specific characteristic of foreign direct investment (FDI) in Vietnam, and that there is no need to focus on the matter.

Dr Edmund Malesky, Head of the Provincial Research Index (PCI) Research Team, commented that transfer pricing is a regular operation which multi-national conglomerates conduct to optimize their profits.

However, he said that once businesses abuse the operation, the government does need to intervene in the situation and find reasonable solutions.

Vietnamese maintain two different points of view about how to deal with the practice. In the eyes of the majority, businesses which engage in transfer pricing must be punished, just like tax evaders. Meanwhile, others believe that this is an unavoidable element of the national economy, one which Vietnamese should “learn to live with”.

“Manage FIEs with policies, not orders”

This was what a law expert said when asked how Vietnam should behave towards transfer pricing.

He said optimizing profits is the primary goal of any business. In general, international conglomerates all have lawyers who advise on determining transfer prices, which helps them avoid taxes and minimize costs. Therefore, now that Vietnam has opened its doors to foreign investors, it should lay down a perfect legal framework to manage them instead of calling on them not to transfer pricing.

Dr Edmund has suggested amending the current tax policies to discourage FIEs to transfer pricing. Vietnam should either reduce the corporate income tax, or remove the tax, but impose higher rates on personal income tax. These are the policies being pursued by Ireland and Singapore.

Another solution he has suggested is to tax businesses on their expected profits rather than on their books.

“The simplest thing Vietnam can do is to maintain stable tax policies,” he commented.

vietnamnet