Research on the transfer pricing phenomenon of fixed asset at FDI companies in Vietnam

851 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam Research on the Transfer Pricing Phenomenon of Fixed Asset at FDI Companies in Vietnam Nguyen Duc Dunga, Le Ngoc Thanga aNational Economics University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract At present, Vietnam has been integrating in the economy of region and the world, with an open door policy to attract the investment. FDI companies has become an active part in the economy of Vietnam. Howver, taking an advantage of potentials and preferential policies of Vietnam, some FDI companies have carried out the activities related to transfer pricing. In the transfer pricing phenomenon at present, an issue necessary to pay attention that is fixed transfer pricing while making a price is not based on the market price to change the real value of asset as a unlicensed operation. Article on researching the argument base of transfer pricing phenomenon relevant to the fixed assets, use of qualitative method of researching to interview the customs officers, professional tax officers relevant to transfer pricing in some provinces to have a clearer way of looking at the fact of fixed asset transfer pricing. Through interviews, the authors found that the issue of transfer pricing was most significant for intangible fixed assets in various forms, so the authors propose the methods of restricting the transfer pricing phenomenon. Keywords: FDI Companies, Fixed assets, Transfer pricing. JEL codes: M41 1. Introduction: Transfer pricing is a popular phenomenon in the world and Organization for Economic Cooperation and Development (OECD) (2014) has referred to the concept of price transferring as a transfer of assets, goods or service in the internal company, so this act must be considered in the transacting scope of associated subjects 852 Act of transfer pricing has been increased in the recent years and still continued in the following years. According to Nguyen Xuan Truong and co-workers (2017) looked back in the previous years since 2009, there has been 1,100 FDI companies in HCM City announced on loss, number of progressive lost companies in excess of the owner’s capital have increased from 141 (in 2007) to 232 in the year of 2009. Next, in 2014, according to the Ministry of Finance as promulgated with a report of General Department of Taxation has inspected 870 FDI companies and found out 720 companies violated on the transfer pricing, evading tax, in which, some counts rate of violation up to100%. In which of violated rate in HCM City ís 85%, Hanoi is 90%. Authorities have searched for VND 1,500 billion of tax. In 9 beginning months of year, General Department of Taxation has also carried out checking 1,990 lost companies, with the symbol of transfer pricing, collecting, penalty and refunding with VND 1,559.8 billion, reduced loss at VND 4,720 billion, reduced the discount of VND 99.9 billion. This is regarded as “figures” alarming on the fact of transfer pricing at present in companies of Vietnam. There are many ways of transfer pricing especially at the tendency to carry out the price transferring by means of fixed asset àtransfer has been popular. According to Le Thanh Ha (2017), operation of fixed asset valuation is an operating containing a lot of risk. Price valuation is not based on the market price aimed to change the real value of fixed asset for the purpose of transferring profit or evading tax are illegal. Operation of transfer pricing of FDI companies in Vietnam not only make loss of revenue in tax but also caused to the unhealthy situation of competition in economy Therefore, researching on the transfer of pricing in which of fixed asset transfer pricing of FDI companies is necessary, contributed to control, prevent the phenomenon of transfer pricing, evade the loss of tax revenue from these companies in Vietnam 2. Theoretical Framework and method of research 2.1 Theoretical Framework According to OECD (2010): “Transfer price is the price of tangible goods and intangible or price of providing service that a company has transferred to the other associated company”; Fixed asset transfer pricing of FDI companies relevant to the tangible and intangible fixed assets of companies • Transfer pricing by means of transfer operation of tangible assets According to Nguyen Ngoc Lan (2016), the transfer of manufactured machines and equipment: Machines and equipment are often provided by the parent company for the subsidiary company as manufactured units. Machines and equipment transferred can be the medium to support for subsidiary company or can be in the form that parent company will sell the completed production line to newly established subsidiary company. This equipment can be purchased from outside, manufactured by the parent company or can be old equipment of parent company or other subsidiary company has not the requirement to use. One of reasons for the companies to carry out the transfer of price in this transaction is to reduce tax and maximize the profit by means of asset valuation higher or lower than market 853 price. Therefore, tax rules have required the transfer of equipment must be applied with market price for this type of transaction at the time of transaction • Transfer pricing by means of transfer operation of intangible assets Types of intangible assets include the commercial advantage, patent, trademark and brand, intellectual property, license, publishing right, ability to provide services Intangible assets without material features, but it is possible to create the economic benefit in future, it can be defined separately and can be protected with the legal right. According to Nguyen Huu Anh and co-workers (2016), intangible assets have made the monopoly or quasi-monopoly in products of ownership companies, so the value of this asset has also features of market and it is difficult to compare, define on the market. This is also “an advantage” for the companies to carry out the activities of transfer pricing Activities of transferring the intangible assets are carried out in four ways: (i) Selling and collecting money at once (ii) Transfer that is not necessary to pay money (donating) (iii) License to change and take the copyright royalty (paid once or many times according to the percentage of revenue, total amount above a unit, etc...) (iv) License without losing money to use the copyright By this way, form of transfer is not necessary to pay money that is nearly not accepted by the tax authorities in the transactions of transfer pricing and the most popularly is the form of transferring the intangible assets by means of licenses As considering the issues relevant to transfer price, intangible asset is divided into three main groups: Group of intangible assets relevant to production, group of intangible assets relevant to the marketing activities in companies and group of mixed intangible assets - For the group of intangible assets relevant to production: Including the assets such as patents, secrets of production technique. As transferring the patents to the branches, associated companies, it is necessary to evaluate the monopoly level of company for the patent because this is a basis for verifying the properly value of assets in transaction and transfer. For the secrets of technique; depending on the features of manufactured branch, manufactured articles to define the value of this asset - For the group of intangible assets relevant to the marketing activities in companies: This is the asset made from marketing activities, distributing activities and after sale services. Intangbile assets in this group include the brand name and trade mark, fame of company, quality of sale team or capability of providing the service and training for ccustomers. For the trademark and brandname, feature of these assets is also created in the life cycle of products (or products of one brand name) at a certain market in a certain period of time. Value of this asset is very small if it is a new product or participating in a new market. This is an important basis for valuating the transfer of this asset. Fame of company has shown the commercial advantage of company. Company has a good fame, so sales team has a good 854 quality, good after sales services. After sales servies and training the customers are also important asset of company. Definition on the properly transfer price of this asset required a very careful knowledge about the features of every branch, every type of product provided by the company - Group of mixed intangible assets: These are mixed intangible assets either having the features of assets relevant to production, or having the features of assets relevant to marketing activities such as the fame of company originated from the product they have made with high quality and efficient advertising strategies. Or soft product of informatic company, sale of soft product for the customer either has feature to transfer the products for customers to use, but also has the features to transfer the copyright. For these assets, to define the transfer price in itnernal transactions, that is necessary to define clearly which company has developed with this asset? Is that company possible to get the money from customer according to the reasonable price or not? 2.2 Method of researching This article uses the method of qualitative researching by means of interview activities. The research uses the method of interview or discuss in group for 7 tax officers and 8 custom officers. Customs officers strictly relevant to the task of transfer pricing of enterprises. Group discussion is carried out in some city provinces: Hanoi, Da Nang, Khanh Hoa, In provinces divided in the unified groups relevant to the tax branch or customs. Ideas recorded to serve for the research of fixed assets price transfer in FDI companies 3. Result and discussion By means of interviewing the general ideas of managing officersinterviewed to control the price transfer as a complicated task required a combination of different authorities. If lacking the combination, state offices such as tax office, customs office, are not able to control the activity of transfer pricing more complex. Group discussion related to the transfer pricing phenomenon of intangible and tangible fixed assets as recorded and analyzed by the author - For the transfer pricing phenomenon relevant to tangible fixed assets Tangible fixed assets transfer from a foreign company to foreign investment capital contributed enterprise in Vietnam is carried out in the popular ways: joint venture capital contribution, transfer of asset to form the fixed assets of enterprise, purchase or rent again the asset to operate production, processing work. In principle, profession of transferring goods or tangible assets must be agreed by both of joint venture partners. In case, there is no agreement from one of parties, such assets ,must be appraised by the competent authority. However, in fact that defining the price of capital contributing assets is no simple and carried out rightly according to the regulation. According to some specialists, many foreign partners have an intention to count the price very high with real value for machines and equipment imported by them in Vietnam to contribute the joint venture capital. For the case that foreign enterprises enhance the value of importing asset value to contribute the investment capital occurred quite popular. This trick brings back a lot of profits for companies such as increasing the gradually capital contribution to override the right to coordinate the joint 855 venture and divided at the high interest rate; increase the rate of counting the annual depreciation from then to increase the cost price of product. In addition, joint venture is lost in extension will cause the State to lose the tax revenue that makes the joint venture to become a company with its 100% foreign capital - For the phenomenon of transfer pricing relevant to the intangible fixed assets However, according to the interview tax officers has shown the most difficult to the tax authority, it is difficult for customs office to define the logic of expenses for subsidiary company of Vietnam to pay for parent company in foreign country on transferring the intangible assets. Due to the value of intangible asset value is very complicated problem, it is difficult to define because the most of highly monopoly feature, depending on the subjective calculation of mother company, so it has not the market value to compare, adjust. When asking the specialists relevant to the intangible assets problem such as land, trademark has any problem in inspection and checking the price, the specialist has shown that some of small provinces has not many FDI companies such as Khanh Hoa, fixing a price has also a lot of difficulties. Most of officersshowed that Vietnam has not built the data base on price for the types of fixed asset that caused difficulties to inspect, check the operation of transfer pricing of companies Some of tax officers showed that foreign companies in fact have transferred to the subsidiary companies of Vietnam with a lot of old technology, out of date and semiautomatic, for example as in a tea processing company of Taiwan. This caused to the consequence as: one aspect, we still have to use the old technology, out of date, the use caused influence to the environment; in other words, we must pay for copyright fees for technology transfer is very high compared with its real value. The cause of this status is due to take part in the joint venture, the side of Vietnam has not a good preparation in negotiation, so drafting the contract has been made in available by the foreign partner. Therefore, technology transfer cost has been imposed by the side of foreign country at very high price level. As deciding the price of intangbile assets, in addition to consider the technical features, legality, economics, transacting price in the market, investment expenditure, policies of encouraging the commericialization,... it is necessary to consider more the specific element of this asset like: protecting situation; protecting scope; remained time in the protective term as written in the protective degree; risk ability happened in the process of using the patent, for example: the ability is cancelled in validity, encroached; difficulties, obstacle to economy, technique in use, exploitation, commercialization By means of interviewing the tax cadres, customs officersin some provinces interviewed have shown that transfer pricing is very complicated, so it is necessary to coordinate with many office, branch to check. In addition, some officer shave felt that penalty on companies related to FDI is not strong enough. Therefore, in addition to increase the penalty level related to transfer pricing, so it is necessary to have a law relevant to transfer pricing. Law can be adjusted only in some areas, bear the price intensive. If it is not carried out early, transfer pricing has been becoming more serious 4. Conclusions and Policy Implications. 856 FDI Companies are often big tax payers due to the transfer pricing activities have influence on the State budget sources. Therefore, management authorities need to have the solutions to restrict on the transfer pricing of FDI companies in general meanwhile there are professions related to the fixed assets of companies • First point, increasing the combination in the management operation of transfer pricing between the State authorities Transfer pricing has a lot of purposes to reduce the direct tax, indirect, beneficiary from the dividend, Associating transaction activities of companies are not in a province that is related to many different sectors, related to many different nations, so it is difficult to control without any combination between the departments and different locals. In addition, according to the Decree No 20/2017/NĐ-CP on regulating the tax management for the companies with associated transaction to grasp the associated relationships that is necessary to grasp in fact transaction of enterprises, personal relationship of transacting parties. So, in the operation of supervising, inspecting that is necessary to have a cooperation of relevant parties in State Management such as General Department of Taxation, General Department of Customs, State Auditing, Bank, Appraisal Offices,.... • Second point, completing the systems of legal documents relevant to transfer pricing On 24/2/2017, the Government has promulgated the Decree No 20/2017/NĐ-CP to regulate the tax management on the associated transaction companies. Decree No 20 is valid to implement from 1/5/2017. This decree is used to replace for the Circular No 66/2010/TT-BTC on 22/4/2010 of the Ministry of Finance. This is regarded as a great improvement for the transfer pricing operation of companies. However, Decree No 20 has not put forward the penalty level specifically for the transfer pricing of companies. Strict penalty level has an advantage of transfer pricing restriction. Additionally in future, by means of interviewing many opiuniosn has given the opinions that Ministry of Finance has also researched the promulgation of Pricing Transfer Law to make a basis for promulgating the regulations of control and dealing with the effect of transfer pricing operation to the economy • Thirdly, building the data base on price for transactions By means of making a survey on the functional authorities such as tax office, customs the problem on controlling the main transfer pricing lack of database on the price of transacting goods. Database on providing the information on market price can be compared, creating a condition for evaluating the associated transactions as enumerated. As evaluating an internal profession of purchase and sale, the authorities have difficulty in finding the reference price to compare. The problem is more complicated in comparison with the types of goods like auto that transfer pricing is dependent on the option of customer, attached accessories to the automobile caused the definition of transfer pricing is very complicated if there is no enough database For a database on price is accurate, the Sate has to upgrade frequently, continuously 857 and supplemented from the different sources of trustworthy information. At present, there are a lot of pricing database systems such as Onesource, Osiris, Oriana used broadly in countries supported selecting the compared sample to become much more simply (OECD, 2017). In order to meet the requirement of integration as well as saving costs, authorites in Vietnam has early specific instruction to these databases to be recognized to use in Vietnam or not; and if in case of conformity, so it is necessary to have a mechanism of purchasing data of big auditing companies • And so on, building more the method of negotiation prior to fix a price In case that is difficult to define on price according to the traditional method, some specialists have petition on applying with the previous method of negotiation on defining the price (APA). APA is a negotiation in text carried out before this associated transaction happened. This is a voluntary method, appreciating a cooperation between the parties and APA is able to support for the company to be active in making a business plan, using the source efficiently. However, the implementation of APA required a lot of database source for appraising. Method of pre-negotiation on defining the price has been applied conformably in developing countries Preventing and anti-transfer pricing has always been a complicated issue for almost countries including Vietnam. If the company has taken advantage of transfer professions to reduce the tax amount payable and synonym with the State Bank has a loss of revenue and create an unequal competitive environment between the companies. The State has to build a legal system, build a data base as well as increasing the coordination between the management authorities on the transfer pricing operation, to minimize the possibility that Company will abuse the tax preferential polices. For the cases difficult to define on the transfer price, the State authority is able to apply according to the method of pre-negotiation on defining the price. Researchers continue to look for signs of price transfer, as well as price transfer for domestic companies. 5. References Ministry of Finance (2010). 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