Coca-Cola Vietnam reduces losses by over 762 billion VND after inspection.

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

Speaking to VietNamNet newspaper, a representative from the Tax Department stated: During the period 2007-2015, Coca-Cola Vietnam had transactions with related parties regarding the purchase of raw materials, including flavorings and concentrates; the purchase and sale of fixed assets; the receipt of services; loans; and the purchase and sale of goods, specifically beverage products bearing the Coca-Cola Group's brand.

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

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

The majority of finished beverage products manufactured 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 market price determination documents for the fiscal years from 2007 to 2015. The data declared by Coca-Cola Vietnam reflects losses and carried-forward losses incurred in the previous period, resulting in the company only starting to pay corporate income tax in 2015," the Tax Department stated.

The pricing method applied by this company is the profit comparison method. The comparative analysis results in the market pricing documents with benchmarks selected by Coca-Cola Vietnam show that, over the five years (2007-2012), Coca-Cola Vietnam's business results fell below the standard market price range formed from independent benchmarks chosen by Coca-Cola Vietnam itself.

Notably, according to the Tax Department, Coca-Cola Vietnam did not adjust its business results for the years in which the results fell below market price margins.

Consequently, the inspection team determined that Coca-Cola Vietnam was involved in transfer pricing. This resulted in an increase in the company's taxable profit for the three years 2007, 2011, and 2012 by a total of nearly 362 billion VND, while simultaneously reducing the losses incurred during the audited period by more than 762 billion VND.

However, the Tax Department also acknowledges that dealing with transfer pricing practices by FDI enterprises is complex, difficult, and often leads to lawsuits.

"Coca-Cola Vietnam disagrees with the inspection report, and the tax authorities are currently continuing the process of resolving the complaint at various levels and handling the lawsuit in court," a source from the Tax Department said.

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The practice of transfer pricing to avoid taxes by FDI enterprises is becoming increasingly sophisticated and complex. (Illustration: Nam Khánh)

Many obstacles exist when dealing with transfer pricing practices.

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

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

Global minimum tax policies, which countries are studying and implementing to prevent excessive preferential treatment for a particular area, country, or territory, will limit transfer pricing.

However, the agency acknowledges that the practice of transfer pricing to avoid taxes by FDI enterprises is becoming increasingly sophisticated and complex, and remains a common challenge for tax authorities in many countries.

In reality, in Vietnam, there is a shortage of civil servants inspecting related-party transactions, both in terms of quantity and experience, as well as the skills to combat businesses engaging in violations. Meanwhile, FDI businesses with related-party transactions are often multinational corporations with experienced accounting and finance teams, supported by auditing firms providing financial and accounting advice to avoid taxes without violating the law.

One of the biggest challenges currently facing tax authorities is the lack of reliable data sources on cross-border transactions and financial information of parent and affiliated companies abroad, which is crucial for reviewing transactions related to FDI enterprises in Vietnam.

"Tax audits and inspections of transfer pricing activities are very complex, time-consuming, and resource-intensive, requiring significant effort to collect large amounts of information, accounting data, and then analyze and compare them. However, the time allotted for audits is limited by the Law on Tax Inspection. This is a significant obstacle for tax officials when conducting audits," a representative from the Tax Department further shared.

FDI enterprises will find it difficult to use transfer pricing to avoid taxes.

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

"In the near future, when the Decree detailing certain provisions of Resolution 107/2023/QH15 on the application of supplementary corporate income tax under the global anti-base erosion regulations is issued and comes into 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," a representative from the Tax Department stated.

In the coming period, to prevent and limit transfer pricing and tax avoidance by businesses, the tax authorities will continue to implement a comprehensive set of solutions.

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

Research, gather international experience, and synthesize practical difficulties compared with current regulations to propose improvements to the institutional and policy framework for tax management of enterprises with related-party transactions, in accordance with Vietnamese practice and the new situation;

Strengthen inspection and auditing of enterprises with high risks of related-party transactions to prevent and address transfer pricing practices to avoid taxes;

Strengthening coordination with ministries, sectors, and localities to collect information on various types of transactions, investments, incentives, etc., thereby improving the effectiveness of tax management for enterprises with related-party transactions.

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