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FDI from tax havens raises concerns about transfer pricing
June, 06th 2016

Experts have warned that foreign invested enterprises (FIEs) from tax havens may be conducting transfer pricing, and have urged state management agencies to investigate enterprises with ‘abnormal signs’.

Enterprises, through contracts on goods supply signed with legal entities in tax havens, could wrongly declare production costs higher than the real costs. This allows them to reduce the tax they have to pay in Vietnam.

Meanwhile, the real profit goes to the pocket of their holding companies in tax havens, where they don’t have to pay tax or only pay low tax thanks to preferential tax policies applied in countries.

Nguyen Van Toan, deputy chair of the Foreign Invested Enterprises’ Association, warned that if foreign investors from tax havens deliberately dodge the laws and conduct transfer pricing, this will have serious impact on Vietnam’s economy.

Toan said it was necessary for state management agencies to check all the foreign invested projects, no matter where they are from, to find out what projects have stopped operation, gone bankrupt or have been sold, so as to set up reasonable solutions.

Enterprises, through contracts on goods supply signed with legal entities in tax havens, could wrongly declare production costs higher than the real costs. This allows them to reduce the tax they have to pay in Vietnam.
Do Thien Anh Tuan, a lecturer of the Fulbright Economics Teaching Program (FETP), said that based on Vietnamese laws, Vietnam can only consider inter-border transactions made by the people listed in the Panama Papers, including transactions on services, goods and currencies, to find out if the transactions were declared in a transparent way as demanded by the law.

Vietnam also can check if the investments observe regulations on licensing and go within the permitted fields, and if there were business activities or transactions of goods and services with overseas entities.

One of the typical characteristics of the businesses set up in tax havens to avoid tax is that they don’t carry out any production and business activities. The investors only register legal entities to serve their tricks of avoiding tax.

Tuan said in order to find out if the individuals listed in the Panama Papers committed dubious acts, it is necessary to define their taxable income in Vietnam before they transfer money to tax havens.

Tuan noted that in the BOP (balance of payments) shown on the State Bank of Vietnam’s website, the ‘errors and omissions’ column usually shows high figures.

“This shows that a big volume of foreign currencies go abroad without declaration which is not taken into account in BOP,” Tuan said.

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