LLM., Nguyen Thanh Ha

Transfer pricing exists in every country. It is not an illegal act, but contains many illegal elements. Now, finding effective legal tools to control this phenomenon for an equity integration and investment environment equity is an important thing that we should do. So, first of all, we have to identify the transfer pricing principles, the negative effects of transfer pricing on the trade balance and nonresident balance of Vietnam.

1. Notion of transfer pricing
Transfer pricing is an act that enterprises do by minimizing their obligations to the State (such as taxes…) in order to maximize their profits. According to international rules, transfer pricing is understood as "the implementation of the price policy”, for goods and services, among members in one group (or groups) cross border, not comply with the market price in order to minimize the taxes obligation with the countries in which investments are made (host countries). To realize this purpose and build up the internal policy in transaction value, multinational enterprises have to adopt the difference in policies, tax incentives, tax rate differences between countries [1].

As of 2015, one of the most typical cases of transfer pricing is Coca Cola Vietnam with nearly 20 consecutive years of incurring losses. It hasn’t to pay enterprise income tax these years, but its tunrover increased steadily from 20-30% / year, and hence, it plans to expand investment in Vietnam with 300 millions dollars. PepsiCo Vietnam, the same case, from the time of establisment, has always reported that it incurred losses with the percentage between turnover and profit was 2%; but never stop expanding the investment project, building new factories in Dong Nai (45 million dollars), Bac Ninh (73 million dollars)…

Step 1: Enterprise raises the value of contributed capital, fake the amount of intangible assets. Boosting the value of contributed capital (higher many times than the real value) can raises  enterprise’s annual depreciation expense and input costs. Hence, this enterprise can quickly gets its fixed payback (which means fixed investment capital) and reduces the investment risk to a minimum; minimizes the enterprise income tax it has to pay host countries. Finally, these host countries may experience a budget deficit and an imbalance of their budget.

Step 2: Enterprise applies all its skills to raise the input costs, such as: Import materials which the price is determined by themselves from parent company or integrated company abroad; make commercial aboard at high costs; fake administrative and management costs… The devaluation of output products compared to high input costs brings more profits for transfer pricing enterprise. Products will be taxed with low tax rate. Especially, in case the products are transferred/distributed in Foreign Direct Investment’s country, this company will be reduced enterprise income tax in the countries ịn which products are distributed.

To implement these forms, transfer pricing enterprise shall uses some fake accounting tricks, such as: Conduct cost accounting without expense; setting up illegally; expend without bills, vouchers; conduct cost accounting not for production; wage costs; amortize costs illegally… In there, the most popular activity is fake accounting and carry bussiness loss forward illegally.

Using the loan interest payment expenses is another method that FDI often used: Parent company exports raw materials and components which can not be manufactured in Vietnam or its quality is not guaranteed, allows subsidiary company in Vietnam to pay both the debt and interest after the goods production and distribution. Therefore, all benefits from products of Vietnam subsidiary company are accounted into the business expenditures of foreign parent company. The real interest, hence, is tranfered abroad.

Tranfer pricing creates some negative effects to the national market such as: Reduces tax obligations, alters the structure of business trade, distorts input cost then leads to distort in distributing interest, helps company to dominate over other partners with lowest expenditure. [3]

First, transfer pricing causes loss of national budget in some important fields. FDI abuses tax policy (the different in enterprise income taxes) and transfer benefit abroad. In detail, some FDIs invest in countries where, on a national level, their enterprise income taxes are levied at a very low rate (as known as tax havens). Nevertheless, in case other relate countries strengthen their measures in order to manage transfer pricing, it will leads to economic crisis in these tax havens.

Second, transfer pricing causes many negative fluctuations to capital structure, the flow of internal capital in countries receiving the investment, namely: FDI boosts inputs expense evaluation in order to shorten the payback period of parent company. It makes capital flows contrariwise from the invested country to parent company’s country, falsely reflects business performance, causes losses for the economy of investment-receiving countries.
Third, by the over-declaring input costs (invest expense in materials, components, equipments…) and dumping output product costs, FDIs shall lose their profits, create "virtual value" for fixed assets, increase depreciation rate in real value, falsify total FDI capital after disbursing.  So, internal material market has to incur an unacceptable high cost. The thing is, high level of import costs caused by transfer pricing abolished the import cost benefits, made the cost level high artificially, even made the price of goods and services in Vietnam higher than other countries in the region, limitted the competitiveness among enterprises of Vietnam and foreign enterprises in the region.

[3] Dr. Phan Thi Thanh Duong: Law on control of transfer pricing in Vietnam. 2012