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Workshop hears of measures needed to address transfer pricing and other behavior.
by Long Van
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A workshop entitled “Investment Incentives, Related Party Transactions: Situation and Solutions” was co-organized in Hanoi on July 10 by Deloitte Vietnam, the Ministry of Planning and Investment, and the Ministry of Finance.
Mr. Bui Ngoc Tuan, Deputy General Director of Deloitte Vietnam, was quoted by the English-language daily Vietnam News as telling the workshop that changes in tax policy and investment incentives are the issues of the greatest concern for foreign investors in Vietnam.
“The factors impacting foreign direct investment (FDI) activities often include the fluctuation of the tax rate through the years, available incentives in the country, flexibility in the application of incentive schemes, time for investment procedures, and the advantages and disadvantages of investment administrative procedures,” he said.
The government continues to make policy adjustments with a flexible and transparent orientation to create the most favorable conditions for foreign investors to enhance their national competitiveness, he added.
Ms. Nguyen Thu Thuy from the Taxation Policy Department at the Ministry of Finance was quoted as reporting to the workshop that the tax reform strategy for the 2011-2020 period has gained achievements, creating a fair and equitable environment without discriminating between different economic sectors, forms of ownership, and taxpayers.
However, she went on, many foreign-invested enterprises (FIEs) are taking advantage of strong investment incentives, such as in land rentals and corporate income tax (CIT) and personal income tax (PIT), to conduct transfer pricing and transfer profits.
An analysis of financial statements from FIEs from 2012 to 2016 reveals that the number reporting losses stands between 44 and 51 per cent.
The increase in their scale of investment and business activities is higher than the increase in the number of FIEs reporting losses, which shows that the problem of transfer pricing in the FDI sector is increasing and becoming more complex, she said.
Besides transfer pricing there are also cases of the backwards transfer of profits from abroad to Vietnam by some large FIEs enjoying high incentives in CIT rates and CIT exemptions and reductions.
“The average return on equity (ROE) of FIEs in some sectors over the years has always remained very high, such as in electrical components, computers, peripherals, telecommunications, and software, with an ROE before tax of more than 30 per cent,” Ms. Thuy said.
There should be a control mechanism to limit FIEs reporting losses or losses in capital that still continue to invest in expanding operations in order to enjoy tax incentives, she added.
Transfer pricing is an integral part of global trade and so cannot be avoided, Mr. Thomas McClelland, General Director of Deloitte Vietnam, told the workshop.
“Transfer pricing is not only about margins and benchmarking analysis; it also requires business performance assessments,” he said.
He added that tax authorities need to understand business realities and then take an appropriate course of action. They also need to enforce basic compliance first rather than cherry-picking taxpayers for audit.
The national legal system needs to be internationalized in order to promptly catch up with international trends. For example, more bilateral treaties should be signed, he said.
“If Vietnam currently does not have mechanisms in place to measure the impact of its incentives, it is strongly advisable that a monitoring and evaluation (M&E) system be implemented,” said Mr. Wim Douw, a senior expert for trade and competitiveness policy at the World Bank.
Such a system should be based on clearly-defined policy objectives and would track the performance of both the costs and benefits of the incentives offered.
- Tax policy
- foreign investors