Transfer pricing, which was once a scheme exclusively perpetrated by foreign-invested firms, has become a domestic problem, raising concerns about substantial tax revenue losses to the state budget.
Last year the Ho Chi Minh City Tax Department audited 197 firms that had declared year-end losses. Fifteen of the audited firms showed signs of conducting transfer pricing to evade taxes, according to the department's vice director, Le Thi Thu Huong.
The city tax agency asked the firms to pay arrears as they had overstated their actual losses by over VND2.6 trillion (US$130 million). The firms were also fined a total of VND272.9 billion for their failure to correctly report their incomes.
Transfer pricing among foreign-invested firms refers to transactions between members of the same multi-national company that allow them to shift profits to their subsidiaries in countries with lower tax requirements.
Domestic transfer pricing occurs when businesses allocate profits to affiliates that receive preferential tax treatment, she said.
The owner of a firm can set up two or three subsidiaries to absorb their profits or losses in order to pay as little tax as possible, Huong said.
Despite reporting losses for many consecutive years, some firms continue to do business and even expand it.
To dodge taxes, businesses often transfer profits to their newly-established subsidiaries, which enjoy preferential tax treatment, she said.
Local firms also set up subsidiary companies so that they can access bank loans more easily. When a firm's borrowing exceeds its credit limit, it can establish a subsidiary company to keep borrowing capital from banks, she said.
"We are working with commercial banks about the issue, so that they can take measures to prevent it from happening," Huong said.
Deputy Minister of Finance Do Hoang Anh Tuan said conglomerates sometimes opt to establish small- and medium-sized subsidiaries, which receive tax breaks.
Tuan said his ministry has worked with the National Assembly's Finance and Budget Committee to amend the tax management law.
To prevent transfer pricing, Vietnam should draft a regulation which would require firms to negotiate with state management agencies on their business plans and minimum profits before being licensed, he said.
The deputy minister said state management agencies should be authorized to conduct special surveillance over firms which post losses equal to 5 percent of their equity. Firms, whose losses equal their equity, should not be allowed to continue doing business, he said.
According to the Ministry of Finance, nearly 30 percent of firms receiving foreign direct investment (FDI) reported losses for the last few years. Many of these businesses continue to expand, which experts believe is a sign of transfer pricing.
Deputy director of the Lam Dong Tax Department, Phan Thi Vinh, said 100 percent of the FDI firms in her province reported losses for years despite the fact that many received preferential treatment in terms of land use and taxes. "During the course of our inspections, we found that the export prices of these firms are lower than their production costs," she said.
"They have transferred their profits to their parent companies abroad," she said, adding Vietnam should strengthen surveillance and strictly punish firms which conduct illegal transfer pricing.