Many foreign-invested firms have been reporting losses for years even as they expand, but authorities are still struggling to prevent transfer pricing.
This has cost the nation dozens of trillions of dong (VND10 trillion = $434 million) in losses every year for many years, Deputy State Auditor General Doan Xuan Tien said at a recent forum.
He noted that in Ho Chi Minh City alone, 60 percent of the 3,500 FDI companies have been reporting annual losses.
While many Vietnamese companies in the same sector such as textile and footwear reported profits, the FDI firms post losses despite receiving incentives in taxes, partly because of transfer pricing, he said.
Transfer pricing happens when a parent company in the headquarter country sells products or services to its own Vietnam subsidiary at high costs, transferring the latter’s revenue directly to the former. This way, the subsidiary will also report losses and avoid tax obligations in Vietnam, especially special consumption tax.
Nguyen Phuong Hoa, Deputy Director of the Auditing Department at the National Economics University in Hanoi, said that another method is for the parent company to charge its Vietnam subsidiary high fees for training and management consulting.
Transfer pricing via these types of services is difficult to discover because it involves evaluation of the real value unique services, she said, adding that this makes it challenging for authorities to fine FDI firms.
According to the General Statistics Office, FDI companies accounted for 66 percent of Vietnam’s $99 billion exports value in the first five months of this year.