Vietnam - Transfer pricing skills plentiful

 VietNamNet Bridge – All the tricks played ever in the world to transfer pricing have also been used in Vietnam.

Transfer pricing burns in Vietnam 

According to Nguyen Dinh Tan, Head of the HCM City Taxation Department, tax officers would have doubts about the accuracy of businesses’ finance reports, if they can see “abnormal things.” For example, the enterprises declare losses for many consecutive years, but they still continue expanding operation and production, especially the businesses in garment, handbag and footwear industries. The sale prices of goods and services to associated companies prove to be lower than the prices applied to independent units.

Transfer pricing by declaring higher capital contribution

The overvaluation of the initial investment equipments can help MNC to transfer a sum of money back to the parent group right in the investment period. Meanwhile, the annual depreciation for the equipment would lead to the state failing to collect tax from the enterprises.

A hotel joint venture between Saigontourist and Vina Group, for example, declared the Vina Group’s capital contribution in the joint venture at 4.34 million dollars. However, experts from an inspection company later found out that the actual capital contribution by Vina Group was 2.99 million dollars only. In this case, the move by the foreign partner caused a loss of 1.35 million dollars, or 45.2 percent, to the Vietnamese side.

No	Names of joint ventures	Declared value of equipments	Actual value of equipments	Gap between declared and actual value	Percentage
1	Thang Long Hotel Joint Venture HCM City	496,906	306,900	190,006	40.43
2	Hoa Binh Automobile Corporation	5,823,818	4,221,520	1,602,298	27.51
3	BGI Tien Giang	28,461,914	20,667,436	7,794,478	27.38
4	Hanoi Hotel	2,002,612	1,738,752	263,860	13.17
5	Saigon Vewong HCM City	4,972,072	4,612,640	359.433	7.22

(Source: SGS’ report 1993)

The wrong declaration of capital contribution in the joint ventures has caused damages to three involved parties – the Vietnamese party in the joint ventures, the government of Vietnam, and Vietnamese consumers.

The real capital contribution proportion of the Vietnamese partners cannot be recognized. The government of Vietnam cannot collect tax. Meanwhile, Vietnamese consumers have to buy products and services at the prices higher than the actual values.

Since the foreign partners had higher capital contribution in the joint ventures, they have the right to make decisions in important issues. The foreign partners tried to manage the companies in the way they wanted. They deliberately drove the joint ventures to unprofitability. As the Vietnamese partners could not contribute more money to maintain their positions in the joint ventures, they had to transfer their capital contribution in the joint ventures to the foreign partners. The joint ventures then fell into the hands of the foreign investors, while they did not have to spend too much exertion.

Making transfer pricing through technology transfer

The Vietnam Brewery Joint Venture was a joint venture established in December 1991, and operated under the Foreign Investment Law and put under the management of the State Committee for Cooperation and Investment (which is now the Ministry of Planning and Investment). The two partners in the joint venture were Vietnamese Food Company II in HCM City and Dutch Heineken International.

In 1994, the joint venture turned into the joint venture between the Vietnamese partner and Singaporean Asia Pacific Breweries. The total investment capital of the joint venture was 49.5 million dollars, and the legal capital was 17 million dollars. The Vietnamese partner contributed 40 percent of capital, while the Singaporean partner 60 percent.

The joint venture continuously incurred loss in many years, mostly because the joint venture had to pay too high for the royalties which increased gradually year after year. As the joint venture incurred big losses, the Vietnamese partner suffered heavily, while the foreign partner remained unharmed, because it still received the trademark royalties.

The brewery joint venture is a typical example of MNCs transfer pricing through the technology transfer and royalty collection. Royalty is a kind of fee which accounts for a big proportion in the total expenses of businesses.

Negotiating royalties was really a complicated process. Mercedes Benz, at first, required the royalty of 42 million dollars for the technology transfer. Later, the royalty was lowered to 9.6 million dollars after the negotiation, or 77 percent lower than the initial price.

In another case, Japanese Mitsubishi Motor Corporation required 61 million dollar for the royalty for the technology transfer to the Ngoi Sao automobile joint venture. Meanwhile, the final royalty was fixed at 4.4 million dollars only. A Taiwanese sugar company initially required 54 million dollars, but finally, the foreign partner accepted the royalty at 6 million dollars.

Making transfer pricing to control the market

MNCs, when making investment in a country, would prefer to team up with a domestic company to set up joint ventures rather than setting up 100 percent foreign owned companies.

It was because MNCs wanted to take full advantage of the existing distribution network and develop their business with the domestic companies’ market share. Just after a period of operation, the foreign MNCs would play different tricks, including the transfer pricing, to weed out the Vietnamese partners in the joint ventures and turn the joint ventures into 100 percent foreign owned legal entities.

P&G Vietnam is an example.

This was a joint venture between Procter & Gamble Far East and Phuong Dong Company, established in 1994. The initial investment capital was 14.3 million dollars, which then rose to 367 million dollars in 1996, of which the Vietnamese partner contributed 30 percent and the foreign partner 70 percent.

Just after two years of operation, 1995 and 1996, the joint venture incurred a huge loss of 311 billion dong, equal to ¾ of the capital contribution of the whole joint venture.

In an effort to popularize products, in 1995 and 1996, P&G spent a huge sum of money of 65.8 billion dong on advertisement campaigns, a very big sum of money at that moment. The total expenses on advertisements amounted to 35 percent of the net turnover of the company, which were much higher than the allowed level of five percent of the total expenses, and 7 times higher than the initially planned level.

Besides, the joint venture also spent big money on specialists, legal consultancy and other expenses, which all were higher than the initially planned levels.

Coca Cola Chuong Duong is another example.

The foreign partner in the joint venture overvalued the equipments and the production line, thus successfully carried out the transfer pricing by raising the capital contribution.

In its plan to control the market, Coca Cola Chuong Duong spent big money on advertisement and marketing campaigns. Especially, it dumped its products, i.e. selling products at the prices lower than the production costs.

Statistics show that the sale prices of products decreased gradually year after year. According to the HCM City Taxation Department, the sale price of Coca Cola Chuong Duong dropped by 23 percent just in the period from March 2007 to March 2008.

In the US market, a can of Coca Cola was sold at 75 cents, or 10,500 dong. Meanwhile, at the same time, a can of Coca Cola was sold at 5000-7000 dong only, or 50 percent cheaper than in the US.

At the time, Coca Cola also sponsored a football tournament, despite the opposition from the Vietnamese partner, which resulted in the loss of 20 billion dong in the campaign.

Making transfer pricing through tax rate differences

Foster Vietnam, a brewery company, took full advantage of the loopholes of the Vietnamese laws to reduce the tax sums it had to pay.

At that time, the company sold products to sales agents at 240,000 dong per case, which meant that the company had to pay the luxury tax of 102,857 dong (75 percent).

The foreign investor then set up another Foster Vietnam Ltd company, which specialized in distributing the products made by the two brewery factories. The sale price of a beer case applied by the factory to Foster Vietnam Ltd was 137,500 dong, which meant that the luxury tax would be 58,929 dong.

If counting on the VAT tax, the total sum of tax it had to pay was 70,358 dong (5 percent VAT), which meant that with the establishment of the new company, Foster could reduce the tax sums it had to pay by 31.6 percent.

Kim Chi

Business & Investment Opportunities 

YourVietnamExpert is a division of Saigon Business Corporation Pte Ltd, Incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Healthcare and Life Science with expertise in ASEAN. We also propose Higher Education, as a bridge between educational structures and industries, by supporting international programmes. Many thanks for visiting www.yourvietnamexpert.com and/or contacting us at contact@yourvietnamexpert.com