Stop abusing transfer pricing to avoid tax: officials

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Enterprises need to refrain from tax avoidance practices and it is time for them to stop prioritizing profits over social responsibilities, the Ho Chi Minh City tax authority has said.

Nguyen Trong Hanh, deputy director of the city's tax department, told a gathering of mostly foreign-invested companies on Wednesday, that doing business should not just be about economic benefits.

If companies keep using cheap tricks like tax evasion to beat rivals, the whole business environment will go downhill, according to Hanh. The country will lose tax revenues, and at the same time, lose the confidence of prospective foreign investors.

Hanh used the analogy of comparing the relationship between corporate taxpayers and tax administrations to that of members in a family.

"If one partner in a marriage keeps all the money he/she can make and doesn't support the spouse and kids, there will be conflicts," he said. "The marriage will end if that partner refuses to rectify his mistakes."

Hanh said Vietnamese authorities provide various tax breaks to help businesses weather economic difficulties. Enterprises, on their part, must fulfill their tax obligations to ensure a "long-term relationship," he said at Wednesday's tax dialogue, an annual event organized by the European Chamber of Commerce in Vietnam.

Tax officials said Vietnam has been trying to make tax procedures and regulations simpler over the past few years. Some of the laws and regulations, including the 2007 Law on Tax Management, are still quite new. Tax administrators say they will do their part in giving guidance to corporate taxpayers and revising the law when necessary.

Thomas McClelland, tax partner of audit and consulting company Deloitte, said there is now some stability in Vietnam's tax laws, which helped raise investor confidence.

He said one of the issues that attracted a lot of attention over the past year was that of transfer pricing. "There has not been a week that goes by without an article in the press about transfer pricing," he said.

Transfer pricing refers to paper transactions among members of the same company that allow for allocating profits to lower-tax countries. It is not illegal, per se, to conduct such income shifting activities. However, Vietnam tax administrations are watching closely for potential tax avoidance from companies involved in the practice.

New rules were issued in April last year, under Circular 66, to tighten control over transfer pricing. McClelland said enterprises are now waiting to see what's going to happen in the next stage.

Hanh said although transfer pricing is still a relatively unfamiliar concept in Vietnam, it is already a problem that needs to be carefully considered.

He said in 2009, for instance, 46 percent of foreign companies reported losses, but one third of the cases were suspicious. "We found the losses abnormal because the companies actually expanded their operations despite the reported losses," he said, noting that the so-called losses were often used as an excuse for low wages.

Hanh said that the situation seems to have improved and he recently met with some 20 corporate executives to learn more about their losses. To his surprise, all of them reported that they are in the black now.

Vietnam, like all other Southeast Asian countries, is not a member of the Organization for Economic Cooperation and Development, a 34-member intergovernmental group that has developed guidelines for transfer pricing methods. Global consulting firm Ernst & Young believes that Vietnam's policy on the issue is already based on the widely accepted OECD guidelines.

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