Foreign-invested enterprises (FIEs) contribute significantly to Vietnam economy but there are those that have “fallen into disrepute”, with GDT figures proving they have engaged in transfer pricing. What are your comments on this?

    To be fair, not only foreign enterprises but also local enterprises engage in transfer pricing and this activity is readily found all around the world. Transfer pricing has considerable negative consequences, causing shortfalls in State budget collections and distorting competition, to the detriment of the local business environment.

    The fight against transfer pricing is an ongoing task for State agencies, with the GDT playing the key role. The Organisation for Economic Co-operation and Development (OECD) has summarised dozens of types of transfer pricing for reference by tax authorities around the world.

What are the specific methods used in transfer pricing?

    By overvaluing prices of imported machinery, equipment and raw materials while stating lower export product prices, a company division located in an invested country - although financed by its parent corporation - is not profitable on paper and may even suffer nominal losses in order to quickly recover its capital and achieve high returns. Depending on the future market situation, they may even cease operations and sell the business or bankrupt it.

    Investors involved in transfer pricing will increase the input prices of machinery, equipment, technical secrets, and patents, for instance, to overstate the fixed asset value of the business. During future operations and business, the cost of new machinery and equipment for supplementation or replacement are always overstated in order to increase depreciation, which may also happen in the case of increasing capital investment to expand operations. As these costs are substantial, profits will be rather low or even non-existent, and losses may be accrued.

    Similarly, during production and business operations, enterprise declare high input prices and concurrently try every means available to overstate other expenses such as marketing and promotions, among others, to wipe out any profits. Some FIEs also take advantage of the Vietnamese Government’s incentives on advertising and marketing expenses to promote the parent firm.

    Over-declaring interest expenses is another method often used. Usually the parent entity brings in input materials, supplies and components that cannot be manufactured in Vietnam or are of poor quality when locally produced. The subsidiary in Vietnam state that they have insufficient funds to purchase these items and the parent entity then grants them credit, with late payments incurring interest that is posted on their books as an interest cost. The actual business profit, under interest cost payment transactions, goes to the parent corporation while the subsidiary remains unprofitable.

    FIEs also choose certain countries and territories around the world that have lower corporate income tax (CIT) rates than in Vietnam to set up their so-called headquarters in their business registration when investing in Vietnam and then exploit the tax difference to evade their tax obligations. Some countries charge only 10 per cent CIT, and in the British Virgin Islands or United Arab Emirates CIT payments are foregone. The division located in Vietnam sells products to its headquarters in these countries at a base price to avoid paying tax in Vietnam. These products are then resold to a third party at a profit. Because the CIT rate in the country where it is registered for investment in Vietnam is either zero or at a very low level, the business avoids paying tax or only pays a very small amount.

Since 2010, tax authorities have been focusing on inspecting transfer pricing and fighting it but the situation seems not to have improved. What are your thoughts?

    From 2010 to the end of 2013 tax authorities inspected 4,857 businesses with affiliated transactions that were suspected to have involved transfer pricing. From these inspections some VND4,200 billion ($200 million) was collected in arrears, losses of VND11,000 billion (more than $500 million) were reduced, and VAT deductions were cut by VND335 billion ($15.75 million) for thousands of local and foreign enterprises.

    In 2013 in particular, tax authorities inspected 2,110 businesses, collected arrears and issued fines totalling more than VND988 billion ($46.91 million), reduced VAT deductions by nearly VND137 billion ($6.44 million), and forced businesses to reduce stated losses by more than VND4,192 billion (nearly $200 million). These results prove that inspections of affiliated transactions are becoming more effective.

But do these results actually indicate that transfer pricing is occurring in an increasingly complex manner? How can we differentiate activities between the parent and the subsidiary to fight this type of tax evasion?


    The number of businesses identified and the amount of tax arrears and reduced losses from these inspections show that fighting transfer pricing has been more effective. It’s a very complex and unique task, however, which requires co-operation between countries.

    I should add that, around the world, transfer pricing is seen as a regular activity of businesses, so anti-transfer pricing measures are a routine and ongoing task for tax agencies. In recognising it as a regular activity, tax agencies must have effective and comprehensive solutions, in particular setting up and developing a database of information relating to business transactions.

    Uncovering transfer pricing is a very difficult assignment, with signs of it occurring being easy to recognise but making a legal decision not being at all simple. To determine whether the transactions and product prices of enterprises are close to prevailing market prices requires information from other markets, so we need to set up an information database of business transactions and at the same time improve supervision over enterprises’ operations. Moreover, in order to fight transfer pricing effectively, tax authorities in related countries need to have strong alliances and cooperation between local agencies, including tax departments, customs agencies from the central local level, and even with Vietnam’s commercial affairs bureaus overseas.

How would you assess the level of cooperation between tax agencies in Vietnam and abroad?

    To know whether product and service transaction prices are close to market prices requires information. Tax agencies can obtain information from many different sources, among which an important source is from other countries’ tax authorities.

    Since 1992 Vietnam has signed agreements on double taxation with about 70 countries. One of the most important parts of these agreements is that tax agencies are responsible for providing each other with information.

    In order for foreign tax authorities to give us information, we must provide them with the specific address of the business and what information is required. Securing this information, however, is not straightforward, because on the one hand tax authorities in other countries need time to compile it, while on the other hand, for the sake of their country’s businesses, they often reply slowly or provide insufficient information.

Is it a case of your hands being tied?


    According to the OECD summary, dealing with a transfer pricing cases, even in developed countries with advanced tax management technology and the information to analyse and compare, takes at least one or two years. To successfully combat transfer pricing we need time to collect information relating to a business’s transactions from different sources, including databases of tax departments, ministries, and branches, information we gather from within and outside of the country, and information provided by foreign tax agencies.

    All of the information Vietnam’s tax authorities have, including that supplied by foreign tax agencies, is only for our tax authorities’ reference, to provide evidence proving that the transaction price was not close to the market price. It is not the foundation in concluding whether the business conducted transfer pricing or not.

    In short, to effectively fight transfer pricing tax agencies must take the initiative in exploiting many other sources of information, develop a full database of businesses and categories of goods in a timely, comprehensive manner, and implement mechanisms, policies, procedures and tasks.