Vietnam hoped foreign investment will bring benefits like economic growth and more jobs, but tax evasion by creative accounting is what it is getting
Employees at a hi-tech foreign company in Hanoi. An investigation by tax authorities showed that 720 out of 870 foreign firms in the country engaged in tax fraud last year. Photo: Ngoc Thang
A nationwide investigation into tax evasion found 83 percent of foreign companies used various tricks to minimize their tax liability last year.
Inspectors from the Taxation General Department said they have ordered 720 out of 870 foreign enterprises to pay nearly VND400 billion (US$19 million) in back taxes and penalties for tax evasion.
In some provinces like Bac Giang, Hoa Binh, and Gia Lai, 100 percent of foreign corporations are tax violators, the report said.
The investigation found that the most popular tactic to evade taxes was profit shifting.
The most common form of profit shifting was by manipulating transfer pricing to overstate costs when importing from units belonging to the same company in other countries and understate export values.
The inspectors said the firms were overcharged for equipment and inputs by their parent companies who also bought their products and services at very low prices. This way, they have been reporting losses for a long time, they said.
But despite the losses, they have been expanding their business, they said.
The investigators also said foreign companies operating in the services and consumer products sectors often use an accounting ploy of paying excess royalties to their parent companies for the use of brands.
Bui Kien Thanh, an economist and financial expert, told Thanh Nien that “Vietnam, in the early stages, had a mindset of creating the most favorable conditions to attract FDI at any cost. Thus, we left many loopholes in laws. We committed tax incentives and low land-use fees which were never offered to local companies.
“We thought foreign corporations would create more jobs and boost our economic growth.
"However, this is not true. Vietnam’s labor costs remain at the bottom in the region (excluding Laos and Cambodia).
"Meanwhile, we lost a lot from declarations of losses, and surely a lot of them were false."
He also said some joint ventures in which foreign companies own 70 percent not only fail to pay taxes thanks to profit shifting but also force the Vietnamese partner to bring in more funds to the joint venture to offset purported losses.
How to curb tax evasion?
Tran Xoa, director of Minh Dang Quang Law Company, said it is very difficult to check transfer pricing abuses since tax authorities cannot monitor every purchase and sale by multinational corporations.
He suggested that the government should reduce corporate income tax to the same rate as neighboring countries or lower.
Vietnam currently imposes a tax of 25 percent.
Le Dang Doanh, a trade expert, called on the tax agencies to keep an eye on companies reporting losses for many consecutive years and those in industries with non‐tangible assets like proprietary technology.
But the most important thing is to develop a global price database and have a talented team to prevent and discover transfer pricing manipulation.