Besides a series of newly issued documents on defining the values of goods, the Ministry of Finance (MOF) says it is considering amending the law on tax management in an effort to combat with the behaviors of “price transfer”.

“Price transfer” is a term used to talk about the behavior that aims to evaluate financial performance of different business units (profit centers) of a conglomerate, and/or to shift earnings from a high tax jurisdiction to a low-tax one. Generally, the price transfer is carried out when businesses want to evade tax.

Price transfer cases found in Vietnam

A lot of price transfer cases have been found and punished in Vietnam, including the case of 17 foreign invested enterprises which produce and trade tea in Lam Dong province.

The audited finance reports and tax finalization reports of the 17 enterprises showed that the tea export volume in 2009 was 1522 tons which brought the turnover of 105 billion dong. The export prices were between 2.8 dollars and 4 dollars per kilo of tea, which was believed the reason behind the loss of 63.68 billion dong in 2009, and the accumulative loss of 317 billion dong by December 31, 2009.

Especially, the reported losses of some enterprises had been equal to their investment capital or had exceeded the investment capital.

However, the Lam Dong province Taxation Agency found out that with the fresh tender tea leave price at 35,000 dong per kilo, and the fixed production rate (5 kilos of fresh tea can make one kilo of O Long brand finished product), the material cost would be 175,000 dong per kilo. Meanwhile, the average export price was too low at 64,850 dong per kilo.

The Lam Dong province taxation body, after carrying out a series of other measures to clarify the issue, came to a conclusion that it found the practice of price transfer at the 17 enterprises and asked the enterprises to pay corporate income tax.

MOF has also made public the list of 82 enterprises subject to tax inspections due to the abnormal signs in profits in 2010. These include both foreign invested enterprises and Vietnamese enterprises. The enterprises named in the list of enterprises to be inspected are the ones which take losses in the last three consecutive years, or the losses have exceeded the investment capital.

Legal framework not powerful enough

Experts believe that price transfer deals have still been carried out in Vietnam partially because the legal framework is not powerful enough, though the currently applied tax management law stipulates that taxation bodies have the right to set up the tax sums enterprises have to pay, in case they find out that enterprises trade goods and post prices at the levels not in accordance with the popular market prices.

MOF has issued the Circular No 66 guiding taxation bodies to define the values of goods, showing five measures to define the market prices. The circular is believed to help tax officers find out the behavior of price transfer.

Especially, the ministry is considering amending the tax management law, while setting additional provisions to treat tax frauds and price transfer. It is expected that the amended law would be submitted to the National Assembly for ratification at the session in May of 2012.

One of the most important measures to be suggested is that taxation bodies would have the right to fix the tax sums on turnover, when they find out that enterprises make wrong tax declarations. When discovering the signs of price transfer, taxation bodies will have to prove the behavior of price transfer of enterprises and impose the tax sums.

Source: TBKTVN