Vietnam is stepping up investigations into companies that may be avoiding taxes by allocating profits to units in other countries, officials in the two biggest cities said.
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| Hanoi and Ho Chi Minh City are expanding test programs to audit businesses |
The capital Hanoi and the financial hub of Ho Chi Minh City are expanding test programs to audit businesses that have transactions with related parties, according to Nguyen Van Mo, a deputy head of the tax department in Hanoi, and Le Thi Thu Huong, deputy head of the Ho Chi Minh City tax authority.
Tackling potential tax avoidance from the practice known as transfer pricing “would be a good source of revenues for the state budget,” Huong said. “China has enforced transfer pricing quite stringently and got a lot of tax money.” Vietnam tightened rules in April after noting that many foreign investors had reported losses on their operations despite expanding them.
“The tax authority is looking for new sources of revenues to pay for last year’s stimulus package,” said Fred Burke, Ho Chi Minh City-based managing partner of Baker & McKenzie (Vietnam) Ltd. The new drive is partly “because they think companies are jigging their accounts to make it look like they’re losing money in Vietnam.”
The new investigations are to establish if there have been any violations of Vietnam’s rules on transfer pricing, Mo of the Hanoi tax department said. The authority will meet companies this month to ensure they are correctly submitting information about transactions with related parties, he said.
Triple Penalty
About 40 percent of the companies in Ho Chi Minh City, most of which are foreign-invested firms, have reported losses for many consecutive years, Tuoi Tre newspaper reported in its online version on Sept. 8, citing Nguyen Trong Hanh, a deputy head at the city’s tax department.
The new regulation requires businesses to file a list of their related transactions along with their corporate tax returns. Companies face a penalty of up to three times any underpaid tax they are found to have evaded, according to Ronald Parks, a Ho Chi Minh City-based tax partner at Grant Thornton (Vietnam) Ltd.
Vietnam wants to send a message that its tax laws should be taken seriously, Burke of Baker & McKenzie said.
“Like a lot of other countries, they need to keep their budget revenue to pay for their stimulus package from last year,” he said.
Vietnam last year offered about 17 trillion dong ($872 million) in subsidies to bolster lending to businesses. Fitch Ratings said in July it expects the budget deficit to “remain high” at 7.6 percent of gross domestic product this year, after widening to 8.7 percent of GDP, when it downgraded Vietnam’s debt rating by one level to B+ from BB-.
