>> Task force proves FDI firms falsified losses to avoid taxes

>> Enterprises report losses to evade tax

The General Department of Taxation retrieved a total VND2.23 trillion (USD108.2 million) from 107 foreign direct investment (FDI) firms involved in tax evasion.

Many FDI companies reported losses while at the same time expanding the scale of their operations (Illustration photo)

According to inspection results of the Ministry of Finance (MoF), these businesses reportedly took advantage of a transfer pricing mechanism to report false losses in order to evade corporate income tax over a period stretching from 2008-2010.

Le Thi Thu Huong, Deputy Director from the Ho Chi Minh City Taxation Bureau, was cited by the Saigon Times Daily as saying that, many of the firms involved in these FDI tax schemes reported losses while at the same time expanding the scale of their operations.

Tax experts explained the "false losses, real profits" situation was created by using "transfer pricing" strategy, which means FDI enterprises raised the prices of materials bought from a foreign parent company. The profits are then transferred to parent company abroad, leaving phony losses on the books of the domestic enterprises.

This loophole is based on the foreign parent company also acting as customers and suppliers to their domestic subsidiaries. They report losses in Vietnam and only report profits abroad, in places where taxes are lower, or even exempted.

The loophole was put in the light of day by an investigation carried out by Lam Dong Province’s Taxation Department in late 2010.

Their report showed that local tea companies sold one kilogramme of tea at USD2.8-USD4. However, they reported the cost of production to be USD8-USD9, allowing them to claim losses. The tea products were then transferred to their parent companies in foreign countries, where they were packaged, labeled and sold at prices between USD5.5 to USD11.6 per kilogramme (two to three times higher than what was reported).

Closing the loophole

The Ministry of Finance has urged taxation agencies to strictly deal with the transfer pricing activities, considering it their most key task in 2011.

This year, the tax authorities will audit 870 FDI companies suspected of using these transfer pricing methods to evade taxes.

According to the MoF, 120 companies reported suspicious losses in 2010, including such big names such as Metro Cash & Carry, BigC and Philip Morris Vietnam.

The MoF will begin accumulating a list of companies whose losses surpass their total equity, and pass the information along to the Ministry of Planning and Investment for further investigation.

The MoF also proposed that the Ministry of Planning and Investment revoke the investment licenses of FDI companies which have consistently reported losses over several years, while still expanding their operations.

Sharp drop in tax revenue

According to the General Department of Taxation, revenue from tax collection decreased noticeably in the first six months of the year.

In January, collection of VAT was around VND13.8 trillion (USD670 million). However this figure fell to just VND9.2 trilion (USD446.6 million) in the month of April; then to VND8.6 trillion (USD417.4 million) in June.

The same situation can be seen in area of personal income tax collection. Total taxes collected were at VND3.3 trillion (USD160.2 million) in January, but the figure dropped to VND2.8 trillion (USD135.9 million) in June.