Losses reduced by more than 762 billion VND after inspection of Coca-Coca Vietnam

"Coca-Cola Vietnam is a typical case of handling transfer pricing to evade taxes of FDI enterprises through inspection and examination activities of tax authorities," the Tax Department (Ministry of Finance) shared information after a series of articles by VietNamNet newspaper.

Speaking to VietNamNet newspaper, a representative of the Tax Department said: During the period 2007-2015, Coca-Cola Vietnam had transactions with related parties regarding the purchase of raw materials, including flavors, concentrates, the purchase and sale of fixed assets, receiving services, borrowing capital, and the purchase and sale of goods which are soft drink products under the brand name of the Coca-Cola Group.

Coca-Cola Vietnam purchases flavors and concentrates from affiliates to produce finished beverage products for sale, distribution and marketing in the Vietnamese market under the Coca-Cola Group brand or licensed brands of the Coca-Cola Group.

"The formula for producing flavorings and concentrates is the exclusive production secret of the Coca-Cola Group. Coca-Cola Vietnam only uses flavorings and concentrates mixed with sugar, sweeteners, water and CO2 gas and bottles and cans them to create complete beverage products, or create beverages sold on-site in vending machines located in restaurants, fast food restaurants and cinemas," the Tax Department informed.

Most of the finished beverage products produced by Coca-Cola Vietnam are sold to independent customers in the Vietnamese market through sales channels such as distributors, supermarkets, restaurants, and cinemas.

"Coca-Cola Vietnam has declared and submitted related party transaction declarations and prepared documents to determine market prices for the fiscal years from 2007 to 2015. The data declared by Coca-Cola Vietnam reflects losses and loss transfers incurred in previous periods, leading to the fact that it only started paying corporate income tax in 2015," the Tax Department said.

The method of determining the price that this company applies is the profit comparison method. The results of the comparative analysis in the market price determination file with the subjects selected by Coca-Cola Vietnam itself show that, in 5 years (2007-2012), Coca-Cola Vietnam's business results were below the standard market price range formed from independent comparison subjects selected by Coca-Cola Vietnam itself.

Notably, according to the Tax Department, Coca-Cola Vietnam did not adjust its business results for years with results below the market price range.

From there, the inspection team determined that Coca-Cola Vietnam was in the case of fixing transfer pricing. Thereby increasing the taxable profit of this enterprise in the three years 2007, 2011 and 2012 by a total of nearly 362 billion VND, while reducing the loss incurred in the inspection year by more than 762 billion VND.

However, the Tax Department also admitted that handling transfer pricing behavior of FDI enterprises is complicated, difficult and often leads to complaints.

"Coca-Cola Vietnam does not agree with the inspection report and the tax authority is still in the process of resolving complaints at all levels and resolving lawsuits in court," said a source from the Tax Department.

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Transfer pricing tax avoidance behavior of FDI enterprises is increasingly sophisticated and complicated. Illustration photo: Nam Khanh

Many obstacles in handling transfer pricing behavior

According to the Tax Department, transfer pricing to avoid corporate income tax (CIT) occurs in many countries, including countries with developed economies.

Businesses may engage in this behavior due to differences in tax incentives or corporate income tax rates between countries.

The global minimum tax policy is being studied and applied by countries to prevent excessive preferential treatment for a locality, country or territory, which will limit transfer pricing.

However, this agency admits that the tax avoidance transfer pricing behavior of FDI enterprises is increasingly sophisticated and complicated, and is still a common challenge for tax authorities in many countries.

In reality, in Vietnam, civil servants who inspect related-party transactions are still lacking in both quantity and experience, and skills to fight against businesses that violate the law. Meanwhile, FDI enterprises with related-party transactions are often multinational corporations with experienced financial accounting teams, supported by auditing companies with financial accounting consulting to avoid taxes without violating the law.

One of the biggest difficulties facing tax authorities today is the lack of reliable data sources on cross-border transactions and financial information of parent companies and affiliates abroad to review transactions related to FDI enterprises in Vietnam.

“Tax inspection and examination of transfer pricing activities is a very complicated activity, consuming a lot of time and resources to collect a large amount of information, accounting data, then analyze and compare. However, the inspection time is limited according to the Inspection Law. This is an obstacle for tax officials when conducting inspections,” the representative of the Tax Department added.

FDI enterprises will find it difficult to transfer prices to avoid taxes.

According to the Tax Department, many countries, including Vietnam, have joined pillar 2 of the global minimum tax to prevent a race to the bottom in tax incentives, helping to limit multinational corporations from taking advantage of tax rate differences through incentives to shift profits.

“In the near future, when the Decree detailing a number of articles of Resolution 107/2023/QH15 on the application of additional corporate income tax under the provisions against global tax base erosion is issued and takes effect, FDI enterprises will find it difficult to use internal group pricing policies (transfer pricing) to arrange transactions between related parties to avoid corporate income tax,” said a representative of the Tax Department.

In the coming time, to prevent and limit transfer pricing and tax avoidance by businesses, the tax sector will continue to synchronously deploy many solutions.

Notably, sending officials working in the field of tax management for foreign-invested enterprises to participate in international experience exchange forums organized by OECD (Organization for Economic Cooperation and Development), JICA (Japan International Cooperation Agency), ADB (Asian Development Bank), etc.;

Research, collect international experience, synthesize practical problems compared to current regulations to make recommendations to perfect the tax management policy and institution for enterprises with related-party transactions in accordance with Vietnamese practice and the new situation;

Strengthen inspection and examination of enterprises with high risks of related-party transactions to prevent and handle tax avoidance transfer pricing;

Strengthen coordination with ministries, branches and localities to collect information on types of transactions, investments, incentives..., thereby improving the effectiveness of tax management for enterprises with related transactions.

Foreign enterprises in Vietnam lose nearly 1 million billion, what are the signs of 'fake loss, real profit'? More than 50% of FDI enterprises reported losses, 18,140 enterprises suffered accumulated losses, the total accumulated loss reached nearly 1 million billion VND. Experts warn that the problem of 'fake loss, real profit' causes tax loss and market distortion.
When foreign enterprises report losses of nearly a million billion, transfer pricing and domestic production costs are artificially pushed up, domestic enterprises are squeezed in terms of prices, raw material supply and access to export markets.