Transfer pricing: the dark side of FDI

Those who have deep knowledge about the Vietnam economy were not surprised about the VCCI’s (Vietnam Chamber of Commerce & Industry) 2016 Vietnam Business Annual Report, which noted that over 40 percent of foreign invested enterprises (FIEs) in 2007-2015 took losses, but many of them still planned to scale up production.

It seems this is not ‘new news’, but transfer pricing has always been a burning problem in Vietnam.

“Though many FIEs report losses, their ROA (return on asset) is higher than any other economic sector. This shows that transfer pricing remains unsettled,” said Pham Thi Thu Hang, VCCI’s secretary general.

In August 2016, when mass fish deaths occurred, a serious environmental catastrophe in the central coast, news reports said that in 2014-2016, the Ha Tinh Taxation Agency refunded VND13.483 trillion worth of VAT to Formosa, the company which caused the catastrophe.

The General Department of Taxation (GDT) then explained that the tax refund was legal, because Formosa, as a big foreign investor, enjoyed many investment incentives.

The huge amount of refunded tax raised questions about why Formosa could enjoy tax preferences though it applied outdated wet coke technology that can pollute the environment. Did  Formosa wrongly declare the value of import machines to get the big tax refund?

There has been no answer to the question. However, the amount of VND13.483 trillion of tax refund is even higher than the VND11.5 trillion Formosa promised to compensate for the environmental damages it caused.

Pham Chi Lan, a renowned economist, commented that Formosa is a ‘bitter lesson’. Vietnam not only has had to offer big investment incentives to the Taiwanese investor, but also has had to accept the outdated technology.

The fact that Besra continuously took losses, went bankrupt and sold all the assets to two former executives appeared suspicious. 

Some analysts have warned that there might be a transfer pricing to turn an unprofitable business into a profitable one. They said Besra may go bankrupt to avoid tax and prepare for the next business plan.

Lan doubts that local authorities may tolerate FIEs’ transfer pricing behavior. Local authorities, trying to attract more foreign investment to their localities, have high regard for FIEs and ignore FIEs’ violations and dare not deal with violations with a heavy hand.

An MOF report showed that the ministry has gained initial achievements in fighting transfer pricing. 

In the first nine months of 2014, taxation agencies inspected 1,990 businesses reporting losses, forcing them to pay VND1,559.8 billion in tax arrears and fines.