Vietnam’s General Department of Taxation has asked local tax authorities to inspect foreign-owned retailers for tax avoidance through transfer pricing or profit shifting. The authorities will be auditing corporate tax, VAT, personal income tax, and foreign contractor tax for the period 2012-2016. Along with the direct and indirect taxes, the department is also planning to monitor franchising or ownership transfer of foreign retailers for unpaid taxes.
To ensure tax compliance, Vietnamese government released the Decree 20 earlier this year, which is in effect since May 1, 2017. It included changes in transfer pricing regulations, new documentation and declaration requirements, and guidance on the deductibility of related-party expenses and interest. Multinationals must assess the effects of the Decree on their operations in order to comply with tax regulations in near future, especially for companies conducting related party transactions.
Inspections in the past
Last year the hypermarket Big C Vietnam, was asked to pay VND 2 trillion (US$88 million) in taxes based on its capital gains tax obligations, after it was sold to Thailand’s Central Group by France’s Casino Group for 1 billion euros (US$ 1.14 billion).
Similarly Metro Cash & Carry, the German retailer was asked to pay VND 507 billion ($23.63 million) in tax arrears, after tax officials found that the multinational had engaged in transfer pricing. Metro Cash & Carry was also asked to pay VND 1.9 trillion ($85.25 million) in taxes, after its sale to Thai company Thailand’s Central Group in 2015.
Vietnam will continue to attract foreign-owned retailers, driven by growing middle class, increased spending, and a relatively young population. As per A.T. Kearney’s 2017 Global Retail Development Index, Vietnam ranked the sixth most attractive market for retailers. With the increasing dominance of foreign enterprises, tax officials will continue to ensure greater tax compliance.
As per government estimates, almost half of foreign-invested enterprises evade taxes by exploiting regulation loopholes. With the new Decree 20 in effect, the government has taken a significant step forward to plug existing loopholes and provide further clarity for multinationals. In addition to this, tax administration should also develop a global price database to assist in discovering transfer pricing manipulations.
Multinationals over the years in Vietnam, have declared successive losses even after expanding their business activities. Such firms will attract increased scrutiny from tax officials, like in the case of Metro Cash & Carry, who was accused of falsely reporting losses for 12 years in Vietnam, to avoid paying taxes.
Going forward, the frequency of audits and inspections are predicted to rise as part of the government’s initiative to bring down the government debt. Foreign corporations should continue to evaluate their operations and ensure compliance, to avoid tax arrears and penalties.
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