External News

date: 21-11-2014 16:41:30

Foreign direct invested Enterprises in Ho Chi Minh: Losses to evade taxes taxation

The Ministry of Public Security has just released a decision on initiating against the investor of the 5-star Hotel Equatorial (located at No. 242 – Tran Binh Trong Street, District 5, HCMC), a joint venture between Hoang Viet General Service Company and Planergo Company (Hong Kong) for taxation evasion of more than 10 billion dong. Not only Equatorial Hotel, the joint venture between Saigon Metropolitan Company (an affiliate of British Virgin, England) and one-member Construction Binh Minh Co., Ltd (a member of Saigon Construction Company), investor of the Project of Metropolitan Office Building implemented the same deed.

In fact, a big problem exists is the pretend posting of loses to evade taxation through price shifting.

According to Lawyer Nguyen Huu Phuoc, of P&P Law Firm (Phuoc and Partners), there are two types of common price shifting,to increase input expense and to decrease turnover in order to decrease leviable income volume.

Through discussion with the Taxation Department of HCM City, although clearly aware that those enterprises use price shifting to regularize its lost business situation, it is difficult for this agency to identify accurately the incomings and outgoings of the enterprisesdue to the fact that they often produce and sell the product to the mother company, buy back copyright of products from their mother company, run up expenditures in global advertising and paying mother company for assigning personnel to support them , and so forth.

Mr. Nguyen Huu Phuoc recommends that it is necessary for tax agencies to keep close eyes on enterprises who declare loss in consecutive 5 years. According to him, the phenomenon of loss is often impacted by 3 main causes: poor business operation, weak business management and price shifting. However, if thinking in a logical way, weak management will obviously cause inefficient business operation, so it is impossible for those enterprises continue their operation stably in the next 10 years.

 According to the Taxation Department of Ho Chi Minh City, a look at record of tax declaration of FDI enterprises operating in its location in the past 10 years (from 1999 to 2008) revealed that only in 2003 through to 2005, did a number of enterprises which were profitable was higher than the those declaring loss.
In addition, loss declaring has continuously increased. Particularly, if the number of enterprises declaring loss is 97 in 1999, 10 years later, the number is now 824, occupying 56.48% of the total number of enterprises operating in HCMC’s location.
In the period of those 10 years, processing – manufacturing industry like metal production, textile, footwear … declared suffering the most “loss of revenue”. In 2008, there were up to 219 enterprises declaring loss in this business section only.

Mr. Diep Thanh Kiet, the Vice-President of Vietnam Leather & Footwear Association of HCMC said that it is a very hard work for tax agencies to determine price shifting through comparing with the same products i.e. a product made in a same cloth material but by different manufacturers may have different prices.

To control the situation of loss declaration in FDI enterprises, a solution that tax agencies often use is to prolong time for tax refund. For instance, Taxation Department of HCMC applied this to a big Taiwan textile company. Consequently, instead of declaring loss, this enterprise declares profitable business (at a moderate level) to be able to receive tax refund sooner.

Regarding price shifting and anti-price-shifting, Lawyer Nguyen Huu Phuoc said that this matter is natural and difficult to avoid, then the key to the matter is how to minimize presumption on price shifting.

Accordingly, to restrict price shifting, besides the fact that enterprises are willing to provide efficient information in the same industry to the tax agency, there should be further sharing of information between state management agencies (tax, customs) through an improved internal information network. Moreover, there should be more strict regulations and sanctions applied to FDI enterprises relating price shifting matter.

(Source: www.denthan.com; Translated by P&P)