Nov 26, 2012

Vietnam - Softdrink giant duo face losing their fizz

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The world's biggest beverage brands, Coca-Cola and PepsiCo, are being scrutinised by Vietnam tax authorities as the companies report huge losses or small profits while aggressively expanding investments in Vietnam.

In Vietnam, PepsiCo and Coca-Cola account for an aggregate 80 per cent soft drink market share, according to the Vietnam Beer Alcohol Beverage Association. And the two firms have announced big expansion plans in Vietnam despite negative reported financial results in this growing market.

"Both Coca-Cola and PepsiCo are under the inspection to find out whether they have been implementing transfer pricing activities in Vietnam," Le Duy Minh, head of Inspection Department 1 under the Ho Chi Minh City Department of Taxation told VIR..

"We found out the price of input materials of Coca-Cola was too high. Regarding PepsiCo, we will continue inspecting," said Minh. He added: "PepsiCo's tax contribution is very modest compared with its revenue in Vietnam."

Financial reports of PepsiCo and Coca-Cola sent to taxation authorities do not reflect success. The cumulative losses of PepsiCo Vietnam till end of 2010 were VND1.2 trillion, or $57 million at current exchange rate, according to Department of Taxation of Ho Chi Minh City, where the firm headquartered.

Since entering the market in 1994, PepsiCo has undertaken an investment program of more than $500 million and now has five beverage manufacturing plants in Vietnam. However, during 13 years, from 1994 to 2007, the firm continuously reported losses.

In 2007, PepsiCo Vietnam started reporting profit but it was allowed to carry forward loss, so the firm did not have to pay any tax. In 2008, the company continued to report losses. The tax authority has just collected corporate income tax (CIT) from PepsiCo since 2009 with the modest total amount of $1.9 million from 2009- 2011, according to Ho Chi Minh City Department of Taxation.

Figures from the taxation authority show that PepsiCo Vietnam's revenue in 2009 was $184.6 million, while the reported profit was only $3.9 million. In 2010, its revenue was $264 million while profit was $6.58 million. And the revenue in 2011 was $332.4 million, while profit was $9.18 million.

"It is not equivalent when the profit PepsiCo reported only made up around 2-3 per cent of its revenue," said Minh.

Despite big cumulative losses and modest profit compared with revenue, PepsiCo still continued to expand its business scale in Vietnam. In October, the firm officially inaugurated a new $45 million beverage plant in the southern Dong Nai province and a $73 million beverage plant in northern Bac Ninh province.

Minh said the consecutively reported losses for 13 years and the beggarly profits compared with its business scale raised doubt over transfer pricing activities at PepsiCo in Vietnam.

"It is likely that after many strong efforts of Vietnam tax authorities to prevent transfer pricing situation, the firm began to report profit in order to exclude the tax authority's field of view," he said.

VIR tried to contact Shekhar Mundlay, general director of PepsiCo Vietnam but he was not available for comment.

However, while Vietnam has reported profits in recent years, its biggest rival, Coca-Cola, which operates three plants in Ho Chi Minh City, Hanoi and Danang, has never reported profit in Vietnam.

Coca-Cola's cumulative losses in Vietnam were $181 million till September 30, 2011 which was even bigger than its equity of $141.8 million, according to Ho Chi Minh City Department of Taxation. Minh said Coca-Cola Vietnam had blamed high price of materials exclusively provided by its parent company for the loss.

Still, like PepsiCo, Coca-Cola still expands its investments in Vietnam. Last month, Muhtar Kent, chairman and chief executive officer of Coca-Cola, announced to invest additional $300 million to Vietnam in next three year, bring its total investment capital in Vietnam to $500 million.

Vietnam, Kent said, was an important growth market in Asia Pacific for Coca-Cola to reach its vision goal of doubling system revenues, and the investment expansion was "an important acknowledgement of our belief in the long-term potential of this key market."

In addition to attracting attention of tax collectors, Coca-Cola's reported losses have not have complicated the company's expansion plans.
Last month, Danang City People's Committee rejected Coca-Cola's 5,000 square metre production line expansion plan because the beverage producer had reported losses since 1998.

Vo Duy Khuong, Deputy Chairman of Danang City People's Committee, said the city leaders suspected Coca-Cola had implemented transfer pricing activities to avoid tax contributions.

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