Bài luận về hiện tượng chuyển giá, được viết bằng tiếng Anh nhằm giúp các bạn có cái nhìn mới mẻ hơn về hiện tượng chuyển giá trong điều kiện hội nhập toàn cầu, và ngày càng có nhiều công ty FDI đầu tư vào Việt Nam. Bài viết gồm 3 phần chính: lý thuyết, ví dụ và giải pháp. Hy vọng sẽ giúp ích cho các bạn
CONTENT: PREFACE At the press conference in the third quarter of 2015, Mr. Nguyen Dai Tri, the Deputy Director General of General Department of Taxation, indicated that within 9 months of 2015, the tax industry inspected and found out that 1,600 enterprises had signs of transfer pricing. This is a big number. For FDI enterprises, Mr. Tri showed that the General Department of Taxation was conducting checking to make it clear about the query of signs of transfer pricing towards Metro and Coca Cola. In discussion session about Vietnamese economy with affiliation at Global Investment Forum in 2015, the Minister of Ministry of Planning and Investment, Mr. Bui QuangVinh, didn’t agree with a corporate leader’s opinion blaming Coca Cola for transfer pricing without any evidence. Transfer pricing has appeared for a long time, but now it continues to emerge in Vietnam again. It is likely to say that on the time being, transfer pricing is a hot topic in Vietnam lately. So, what is transfer pricing? How does it occur in Vietnam, especially in Coca Cola? In order to make the problem clearer, our group has decided to choose the subject: “Transfer pricing in Coca Cola” for our research. However, this problem is quite new in Vietnam, it is not able to avoid mistakes in our report. Therefore, we hope that you will help us find out and correct them. Simultaneously, we also send our special thanks to Mrs. Tran Thi Thu Hien, who guided us enthusiastically so that we can complete this research well! 1 TRANSFER PRICING 1. Introduction to transfer pricing: 1.1 Definition: According to theory, transfer pricing is practicing the price policy towards goods, service and assets that are moved among members in a corporation of link group, but not following the market price in order to minimize the amount of tax belonging to corporations or link groups. In another word, transfer pricing is business subjects’ behaviors affecting the price to change the value of exchanging goods, services in relationship with sides of corporations or link groups. Transfer pricing occurs due to rights to make decisions freely in business. Subjects in the same corporation or link group have general benefits, so the difference of price doesn’t change the total benefit. Changing price doesn’t change the total benefit, but it change the total tax obligation because the tax duty is moved from a high regulated place to the lower one and contrarily. The nature of transfer pricing is a form of applying the price policy among sides having link relationship that does not follow normal exchange price in the market in order to minimize the number of payable tax belonging to all sides. Transfer pricing will lead to the increase in the number of payable tax of links origin in this country, at the same time reduce the amount of payable in other countries, but after all sides reduce the quantity of payable tax. However, it is very difficult to determine if a subject doing transfer pricing because there are states failing to collect tax, as well as other states collecting 2 bigger number of tax. In fact, international transactions are more worrisome than domestic ones because of the difference in tax policy among different countries. In addition to ways of transfer pricing based on tax policy above, transfer pricing can be based on preferred policies among countries. Income will be moved from subjects having lower preference to ones having more advantages about preference. 1.2 Signs: 1.2.1 Suspicious signs: Company measures and declares inaccurate revenue and costs, shows ongoing earnings losses for years as well as equity loss. However, they continue to operate, and even expand investment and producing. Price of goods and services the company sells to linked trading units is lower than when they sell to independent ones. Price of purchasing raw materials, goods and services from foreign parent company are higher than purchasing from other independent units, which leads to higher costs. Goods, services exported to foreign countries (mainly the ones that are output contracted through parent company) have a phenomenon of which their selling price and outsourcing price are lower than cost price. This leads to continuously loss in production and business operations for many years. To continue to operate, the company needs to use some form of financial aid, or loans without interest from parent company. Parent company allocates costs incurred overseas to its subsidiary several items such as advertising, marketing, researching and expanding market, interest expenses, copyright and some more, which actually must be paid by the parent company abroad. 1.2.2 Signs on financial statements: 3 • Costs of goods and services are high: Costs of goods and services (COGS) are part of business’ costs (including COGS, management costs, sales costs, and financial costs). However, through examination, COGS in the company are generated very high (over 90%, even higher than the selling price). • Outsourcing process is done by other company: Production capacity in the company is limited by machinery, equipment, production ground, the number of employees and many more, but they still sign contracts with foreign customers that exceed their production capacity. With the reason of ensuring the volume of contracts they signed, these companies hire domestic firms to outsource their products. After consideration, the price of this is almost equal or even higher than price signed with foreign companies. However, rate of hiring domestic companies to outsourcing is very high (nearly 80% of production) and happened for many years. • Large advance payments from customer: Balance on report of payables and receivables is large in some companies (prepaid expenses of customers). The advance payment amount is very high, sometimes not stipulated in the contract. It does not comply • with any principles (such as based on the value of contract signed). Foreign loans: After years of continuous losses, to ensure balance of business capital, the firm decides to sign foreign loans contracts. These contracts are usually funded by the parent company or individual entrepreneur. Many contracts do not charge interest, not specify time of the loan. This is to avoid paying withholding tax on loan interest. • Increasing legal capital: After losing consecutively for years, some enterprises use the form of increasing legal capital, aim at expanding production scale and balance of capital on accounts. • Supporting outsourcing price: 4 To ensure balance and cope with management agencies, when parent companies abroad feel the loss is too big, they usually do not adjust the outsourcing price, but choose the solution of supporting the price to make up cost of subsidiary companies. These are the enterprises specialized in manufacturing, processing goods to export. Therefore, although the business continuously loses, incurs negligible tax liability (such as excise tax and personal income tax), but the tax that state budget must refund to the business (value-added tax of goods and services purchased) are great. 1.3 Forms: • Enhancing the value of contributed assets (venture investment): Raising the value of contributed assets will make contributed capital of parties that want to lift the value of capital contribution increase. Therefore, both the domination of decisions related to operation of joint venture projects and profit divided will increase. Moreover, this method makes the annual depreciation rate increase, so it also makes input costs • rise and income tax payable reduce. Enhancing the value of intangible assets (value of technology, brand name…): Accurate valuation of intangible assets of investors is very difficult to confirm, evenwhen multinational companies (MNCs) show the certificate of audit companies because its reliability is hard to confirm. Therefore, they deliberately inflate the capital contribution by brand, recipes, technology transfer ... in order to increase its equity. • Importing raw materials from the foreign parent company, or from partner companies in joint venture with high prices: This is a form of transferring profit abroad through the payment of imported goods. Besides,this method makes costs increase, so that income tax payable of FDI enterprises will decrease. • Raising the cost of administrative units and management: 5 The parent companies often use consulting contractsor hire intermediaries. Venture partners of these MNCs received experts or managers are forced to pay a very high cost (salary),whichhowever is resulted in low efficiency. • In some cases, MNCs make the transfer prices through overseas training form: Many firms select employees to study and practice in the parent company with the high cost. • Regulating the sale and purchase price of goods: If import tariffs are high, parent companies will sell materials and goods with low price to avoid import tax payment. In this case, they will strengthen the counseling, training, marketing support with high prices to offset or acquire products with low price. In opposite situation, if imported goods have low tax rates, the MNCs sign import contracts at high prices in • order to increase costs to avoid income tax payment. Sponsoring business loans of parent companies: In this way, the subsidiary generate capital structure and unreasonable capital such as using loans from parent company to finance fixed assets and long-term invested assets without increasing capital as well as equity to push costs of financing activities (foreign exchange costs, interest expenses...) higher. Then, they transfer a part of profits in form of interests, costs of loan guarantee to avoid tax and foreign exchange losses in the • future. Through Bill Renewable Center: Bill Renewable Center acts as an intermediary between the parent company and its subsidiaries. Goods on invoice vouchers are sold from the company produces goods through Bill Renewable Center, then this center again sell to distribution companies by invoicing and enclosed documents. This will help to reposition the currencies of both production units and the center. But in fact, the goods are delivered directly from manufacturer 6 through distribution companies without through the Bill Renewable Center. Therefore, the difference brings the amount of sales which is not taxed. 1.4 Influences: 1.4.1 • For multinational corporations: Positive: Transfer pricing makes sure that MNCs receives some kind of benefits, such as reducing tax duty, maximizing profit by using operating in country that has low taxes. Transfer pricing allow MNCs to easily move profit or financial investment to their own country or foreign ones. If MNCs make a financial contribution by machines and equipment, they can easily modernize technology by liquidating backward equipment and out-of-date technology with high price for company in which they • invest in foreign countries. Negative: If MNCs really do transfer pricing and be found out, they will suffer a big penalty, be dispossessed business license and their fame will be influenced. Furthermore, they will be administered closely when they invest in other countries. 1.4.2 • For countries receiving investment: For economy: Transfer pricing creates unfair competition environment between domestic firms and foreign ones. The FDI firms that own dominant position makes domestic economy depend on foreign firms. It also is one of the reasons that lead to trade deficit on facilities, materials, technology with high price while doing exportation with low price. • For government: - Reduce revenue from tax. 7 - Transfer pricing will break balance payments and economic plan of country receiving investment, so that if country receiving investment doesn’t control well, it will lead to depend on economy of parent - country, and in long term, it will lead to depend on politic. Government of the country receiving investment will meet troubles in pushing domestic companies when doing macroeconomic policy if they face transfer pricing. • For domestic firms: They will face lots of troubles when competing with MNCs. If they don’t prepare well, they will be rejected and controlled. • For customers: In long term, the benefit of customers is limited when FDI firms become monopoly. 1.4.3 • For countries exporting investment: Positive: Countries exporting finance will receive more foreign currencies. It will improve balance trade and balance payments. If MNCs run better, they will contribute more taxes for government and effect on society in a good way. Otherwise, investing in other countries will reduce pollution because of not producing in parent country. • Negative: If tax rate in countries receiving investment is less than parent country, it will cause imbalance in the parent country‘s tax plans due to loss revenue from taxes. Otherwise, they may face some problems about financial resources, because financial resources will flow into country receiving investment with low tax rate. 2. Example of transfer pricing: Coca Cola Vietnam 2.1 Vietnamese context: 8 Transfer pricing was and is an alarming situation in Vietnam today. While the developing countries have a lot of experience in fighting transfer pricing in MNCs, Vietnam still lacks experience in consulting this. Transfer pricing in Vietnam are controlled by general regulations on tax inspections, however, general test method lacks necessary depth to identify the forms of transfer pricing. Acts of transfer pricing violations are often sanctioned under the general provisions of Vietnam tax administration without separate regulations. Currently, the number of tax officials and auditors are very little, while the number of firms is a lot. The coordination between inspection, examination agencies and different levels, branches to exchange information, support professional, multisectoral coordination in the field of transfer pricing inspection, business losses many consecutive years is limited. Trade policy of border residents for enterprises that sell commodities temporarily imported for re-export are inadequate, and have large loopholes. MNCs’ information that tax agencies need to specify transfer pricing is usually a commercial secret or in other country. This makes it difficult and sometimes impossible to get the information. Acts of transfer pricing has taken place not only in foreign direct invested enterprises (FIEs), but also between affiliated parties in inland Vietnam. The reason for this phenomenon is because Vietnam still provides preferential policies on corporate income tax (CIT) according to business activities and investment areas. Taking advantage of these incentives, the domestic enterprises has established a number of subsidiary companies operating in the sectors or in geographical areas of preferential CIT, and sought to turn a pre-tax profit to the subsidiary companies to access tax incentives, or transferred pre-tax profit from profitable businesses to enterprises suffered losses to reconcile profit and loss in order to avoid CIT. 9 The way of managing payments through banks are not tight enough. This makes it difficult for tax and customs agencies to fight against the phenomenon in price fraud, transfer pricing. The sanctions against tax fraud case are still not strong enough. It reduces the effectiveness of inspection and examination activities. In reality, auditing in Vietnam is different from the world. Auditing activities in Vietnam is independent, so auditors only take professional responsibility on the work they done, they don’t have to be responsible for the audited figures whether if they are real or fake. In 2012, 1500 firms were found to have signs of transfer pricing in Vietnam.Among them, “the Big Man” Coca Cola is one of the typical cases that makes the papers waste a lot of ink. 2.2 Introduction to Coca Cola Vietnam: • • Name: Coca Cola Vietnam Headquarter: 485 Hanoi Street, LinhTrung Ward, Thu Duc District, Ho Chi Minh City, Vietnam. • Investment: 400 million USD in machines and factories 600.000 USD in education and society • Average revenue per year: 38.5 million USD • Employees: 1200 people. In this period, Coca Cola used to recruit about 2000 agents. It has more than 16000 workers that are created in related industries. • History of Coca Cola Viet Nam: - 1960: the fist time Coca Cola was introduced in Viet Nam. - 2/1994: Coca-Cola starts long-term investment in Viet Nam. - 8/1995: the first joint venture of Coca Cola and Vinafiniex in the - North of Viet Nam was established. 9/1995: the next joint venture called “Coca Cola Chuong Duong - Beverage Company”. 1/1998: Coca-Cola signed contract with Da Nang Beverage Company. 10 - 10/1998: Vietnamese government allows joint ventures to become 100% foreign investment. Every joint ventures of Coca-Cola step by step become totally controlled and the fist company was Coca-Cola - Chuong Duong. 3/8/1999: joint venture in Da Nang became the same situation. 6/2001: with permission of Vietnamese government, all of their venture companies in Vietnam unified and were managed by Coca Cola Vietnam. Headquarter was decided to be placed in Thu Duc • • • 2.3 District, Ho Chi Minh City. Telephone number: (84.8) 896 3519 - 829 8787 Fax : (84.8) 896 3516 Website: http://www.cocacola.com.vn/ Signs: (Resource: Ho Chi Minh department of taxation) • Coca Cola Vietnam has never been declaring a profit since the establishment (2/1994), despite their revenue has been increasing each year: - From the beginning to now, Coca-Cola Viet Nam has not had any year with profit even when their revenue is increasingevery single year. In 2004, the revenue was 728 billion VNDs and the lost was 110 billion VNDs. In 2006, the revenuejumped up to 1026 billion - VNDs but the lost was more than twice the number of 2004. In 2010, the revenue of Coca-Cola was 2529 billion VNDs but the total cost was 2717 billion VNDs, so it means that the lost was 188 billion VNDs. Accumulated lost was combined to 3768 billion - VNDs, exeed investment which was 2950 billion VNDs. The least lost was in 2009 with 39 billion VNDs, the highest lost was in 2006 with 253 billion VNDs. 11 • The losses are declared to due to the price of materials, which are mainly directedly imported from parent companyat a very high price: - Mr Le Duy Minh, the manager of the tax office number 1, the “key” helped this company to consecutively notify lost is high price for - additives from USA. Averagely, the cost for additives contained more than 70% the cost of goodssold, individually in 2006-2007 it took 80-85%. In 2009, Coca Cola paid 1065 billion VNDs for this cost, and in 2010, the number was 1671 billion VNDs. • Coca Cola has been continuing to expand production and market share, building factories,...despite they have been declaring losses every year: - Despite of getting lost every year, the parent company decided to invest more than 300 million USD in Coca Cola Viet Nam in the next 3 years. In late 2012, the chief manager office came to Viet - Nam and declared investing more money in this company. The owner believed in a safe improvement in Viet Nam with many years got lost. • Coca Cola Viet Nam operates mainly by loan capital: - With the research of taxation office, Coca Cola’s equity was “negative” 818 billion VNDs. Everyone can realize that it is an unbelievable number for a foreign company operated in beverage - industry. More than this, Coca-Cola Viet Nam took short-term loans which are 2020 billion VNDs with the parent company while the other loans are 343 billion VNDs. The debt with the parent company is more than six times the others loans. 12 In Viet Nam, Coca-Cola has a huge market share with many products. It is a big company with faith of consumers. In comparison with Chuong Duong Company, although they had small marketshare on beverage market, Chuong Duong got revenue at 422 billion VND but the profit before tax and dividend was 30 billion VNDs, so they spent 7.5 billion VNDs in corporate income tax. 2.4 Process: • Raising the price of their exclusive materials which are directedly imported from parent company: Here are the components in a Coke. 1. 2. 3. 4. 5. 6. 7. 8. Water CO2 Sugar Coca Vanilla Cinnamon Caramel Syrup Except coca leaves, all of those components are normal materials which can appear in any soda. The main components create the value of 13 Coke is coca leaves. This table below will show the price of one kilogram coca leaves and one kilogram sugar in the market. 1. Fresh coca leaf 2. Dried coca leaf 3. Sugar 1.3$/kg 3.00$/kg 0.4$/kg When Coca Cola Vietnam buys those materials from parent company, they have much higher price than the price on the market. Explain for this, Coca Viet Nam said that: “The reason why the raw materials are so high is because this is a long-standing formula. It includes not only the cost of grey matter, but also cultural”. • Sellingproducts at a low price: In spite of “the high price of raw materials”, the price of a Coke is quite cheap. Coca Viet Nam declared losses for nearly 20 years (1994 – 2012). And the reason for this situation is because the revenue can’t cover the cost of raw materials. This table below will show you the revenues and losses of Coca Cola Viet Nam from 2004 to 2010. 14 According to the report in 2011, the total loss of Coca Cola Viet Nam is 3.268 billion VNDs. This number far exceeds the initial investment – 2950 billion dongs. Coca Cola Viet Nam loses 100 billion VNDs each year. The big question here is why Coca Cola still invests in Viet Nam? Because of losing for many years, in spite of working in Viet Nam market more than a decade, Coca Cola Vietnam doesn’t have to pay any taxes except value – added tax and business tax. • Transferring the profit to parent company in form of materials cost: Mr. Le Duy Minh – Provincial Tax Department representative said that:“We can compare between Coca Cola Viet Nam and Chuong Duong – a Vietnamese company to see clearly revenue and loss of Coca Cola. Chuong Duong is a small company, and although they only produce soda and sassafras, their profit was up to 30 billion VNDs with the number of tax paid to government up to 7.5 billion VNDs”. Thus, we can easily see that behind the figure of Coca Cola loss, there can be a very large profit flows back to the parent company in the form of material costs. • Expanding production in spite of declaring losses: It is ridiculous that in spite of declaring losses for many years, Coca Cola Viet Nam still decides to expand production. Specifically, in 10/2012 chairman and chief executive of Coca Cola claimed that Coca Cola will pour 300 million dongs into the company in Viet Nam in the next three years. In 2012, Coca Cola Viet Nam had 9 production lines. In 2014, company decided to add another four production lines in operation. In the next 10 years, Coca Cola Viet Nam will recruit more than 4000 employees. 2.5 Influences: • For Viet Nam: - Reduce revenue from tax. - Causing the unfair competition between enterprises. 15 It is very difficult for domestic company to compete with Coca Cola if they really make transfer pricing. Fox example, if Coca Cola Viet Nam uses transfer pricing to maximize profit for parent company while declaring loss in Viet Nam to avoid tax duty, Coca Cola Viet Nam will have more financial resource to invest in marketing and advertising. Meanwhile domestic companies have to do tax duty so they will have less advantage to compete with Coca • Cola. For Coca Cola Viet Nam: Transfer pricing not only causes a negative impact on the economy, but also directly affects the company: - Suffering a big penalty: If Coca Cola Viet Nam really does transfer pricing, they will have to restore all taxes that they have owed government for many years. Furthermore, they have to be accused of cheating and face with law for that. It is ashamed that Coca Cola uses Vietnamese employees and land, but not paying any taxes. We need to punish - Coca Cola as an example to others. Dispossessing business license: Dispossessing business license is the highest punish for Coca Cola. We need to consider about Coca Cola case to make right - decision. Facing with being boycotted by Vietnamese consumers: After the information about transfer pricing of Coca Cola Viet Nam had leaked out, there were lots of bad articles about dangerous effects of Coca Cola appeared. Da Nang city declared that they wouldn’t allow Coca Cola to lease any lands to open operation. Lots of Vietnamese consumers say that they will boycott Coca Cola if they do transfer pricing. 16 3. Solutions: Solutions to identify transfer pricing: 3.1. The tax agencies must identify the methods and factors often used for purposes of setting transfer price fraud. That makes it easier to realize transfer pricing activities of FDI enterprises. There are 3 common methods in Vietnamese market: • Comparable Uncontrolled Price Method – CUP: By comparing the transfer price with price in free market based on information and data system about price in international market, the tax agencies can find out if the costs incurred are reasonable when MNCs trade with foreign • partners. Resale Price Method – RPM: This method is about using purchase prices to determine sale prices. Especially, this method is suitable for the commercial sector. The main principle is determination about the rate of return on average revenue used to calculate logical deduction. The tax agencies can realize the real profit of FDI companies. • Cost Plus Method - CPM: This method is suitable for manufacturing or service providing enterprises. The transaction price is determined by adding the cost for manufacturing or service providing to raise the price. The tax agencies must concern about the allocation of costs is appropriate for transferring sales or not. Improving information and data system: 3.2. • One way to expand source of information is by improving professional activities of tax agencies, especially forming a tax intelligence agency. The Government should establish an agency within the Ministry of Finance, 17 which have mission to monitor business activities, earnings, and trading activities with foreign companies of FDI enterprises. • Classification of FDI enterprises bases on the data, which are reported to the Ministry of Finance by local authorities. The criteria to classify are net income, revenue, equity, preferential policy from government, labors, investment… Basing on classification, the enterprises, which have suffered losses but still continue to invest in expanding production scaleor had • inexplicit business report, will be inspected firstly. Pushing on founding e - Government to ensure the connection and transfer information between General Department of Taxation and other departments: Public security, Procuracy, Customs, Planning and Investment Department… And mutually supporting in management and supervision, especially about the cost of contracts with foreign partners. Perfecting the legal and policy system: 3.3. • Regulations: To overcome the existence emerging in the sensitive field related to the international foreign activities as well as the policy of attracting foreign investment into Vietnam, there need to be management from the central class. Firstly, the state need to have statutes defining the specific missions for the related industries such as: tax organ, customs, investment management, police, court of investigation, court, banks and many more, to detect timely as well as handle strictly the behaviors of breaching laws in the linking transaction activities and transfer pricing of FDI enterprises. Thus, the tax management organ has rights to apply measures of pausing refunding the VAT to the enterprises that report their business results getting loss until the enterprises overcome the statute of enumerating loss continually. This is both suitable for the international routine and 18 synchronous with the Vietnamese Civil Law that defines conditions of the existence of economic legal personality. In order to manage tax towards the transfer pricing, the tax management Law needs to be added with the trend of stronger legal frame like applying APA towards the enterprises. This is a tool helping resist the transfer pricing in Vietnam. This will be mentioned in details following. In the long run, the government needsto set up a law of resisting transfer pricing, and edit the related legal document such as Enterprise Law, Investment Law, Trading Law, Competition Law, Income Tax Law, and Civil Law. The government also needsto establish the specialized and responsible organsagainst transfer pricing in the central, provincial and urban class in order to supply concrete guidance in practice. The period of inspection towards the transfer pricing must be set longer compared to the normal ones so that it can guarantee quality and efficiency of the inspection. These specialized and responsible organs have to assure the work is done strictly in the inspecting and controlling business activities of the corporation, especially importation and exportation activities. Besides issuing and adding the law inside the country, linking other countries about resisting transfer pricing is also very important. It comes from the basic reason that corporations having parent company abroad and invest in other countries. Therefore, Vietnam must have general agreements with countries in the area and in the world about activities against transfer pricing. Narrowing and restricting step by step tax preferences for FDI enterprises due to how they take advantages of preferred policies of the government to do transfer pricing. Therefore, tax preferences are just used when they have more benefits than others such as price support, support to • develop the infrastructure… Punishment: Vietnam has just issued Circular 66/2010TT-BTC, which guides determining the market price in business transaction among the members 19 having linking relationship. Thus, when having the agreement in advance about the market price in the linking transaction, if FDI enterprises break the law, they can’t deny it. In addition, the penal code defines the crime of tax evasion with 3 different punishment frames at Clause 161, at which the highest level is that criminals avoiding tax can be punished with up to 7 – year confinement and fined 3 times as much as the money of tax evasion. There has not been any agreement guiding specifically levels of punishment or ways to punish towards the tax evasion. Therefore, the government needs to issue specific regulars of punishment for situations finding out the transfer pricing and diffuse widely for every economic component and investors to know and follow. Specializing ways and levels of punishment will create equality and efficiency in inspecting and handling cases of breaching, simultaneously reducing negatives that are able to occur in process of inspecting. Based on applying measures of determining the market price according to Circular 66/2010, if tax organs find out the difference between the price enterprises enumerate and the market price, at the same time enterprises don’t demonstrate the relevant reasons for this difference, it can apply level of punishment from 20% to 40% of the money of tax evasion or levels of confinement. This depends on the level of difference, much or little. The sanction for tax evasion must be strong enough to guarantee the strictness for case of breaching law in purpose. The levels of punishment can raise the period of penalty up to 10 – year confinement or fine 5 times as much as the money of tax evasion. After inspecting, if the tax organs find out that the agreement price doesn’t follow the market price, it will implement collecting tax retrospectively within 10 years (from the time of conducting inspection). Especially, tax officers who breach law in purpose and combine with enterprises to help them do transfer pricing must be punished seriously. For this crime, the period of punishment could be up to 20 7 or 10 – year confinement, together with confiscating personal assets. Besides strict punishment, there need to be clear regulars to commend and reward those who do well their jobs, especially people who figure out negative signs. • Tax rate: One of the reasons promoting motivation of transfer pricing of FDI enterprises is the difference of corporate income tax (CIT) rate which helps corporations reach their goal of maximizing profits. Thus, this asks the government to adjust the CIT rate for FDI enterprises so that the distance of levels of CIT rate in countries is shortened. Vietnamese government needsto combine with others to consider the CIT rate in order to reduce motivation to encourage transfer pricing in FDI enterprises. Adjusting the CIT rate is not easy for the government because conditions to do business in different countries are different. Therefore, beside of adjusting CIT rate, Vietnamese government can offer different expenses for FDI enterprises respectively with short or long distance of CIT rate in countries. Hence, the government needsto have more time to consider these expenses to reduce the ability to do transfer pricing in other countries. Advance Pricing Agreement mechanism (APA): 3.4. • Theoretical basis: An advance pricing agreement (APA) is an ahead of time agreement between a taxpayer and a taxing authority on an appropriate transfer pricing methodology (TPM) for some set of transactions at issue over a fixed period of time (called "Covered Transactions") (according to Wikipedia) The APA mechanism will allow companies to enter into agreements with the tax authorities to prevent future disputes with regard to pricing of products and services for the purpose of cross-border trade between related 21 entities. It is treated as an effective tool to achieve certainty on transfer pricing matters. There are 2 types of APAs: Bilateral and multilateral APAs and Unilateral APAs. Bilateral and multilateral APAs include agreements between the taxpayer and one or more foreign tax administrations under the authority of the mutual agreement procedure (MAP) specified in income tax treaties. Unilateral APAs involve only the taxpayer and the tax authorities. In this case, the two parties negotiate an appropriate TPM for tax purposes. The APA program allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement, generally covering at least five tax years, on the taxpayer's transfer prices.Each APA is handled by an APA team. One of the APA Program's designated team leaders is responsible for assembling the team, and it will generally consist of an economist, an international examiner, Large and Mid-size business (LMSB) field counsel. • Vietnam in applying the APA: Advance Pricing Agreement mechanism was applied in Vietnam, according to modified law on tax management. From July 1st 2013, Vietnamese tax agencies applied APA to resolve potential transfer pricing dispute. The Ministry of finance promulgated circular 201/2013/TT-BTC to guide the enterprises about implementation process when applying APA, including: legal framework, process, roles, responsibilities and expectations of taxpayers and tax authorities about submission and negotiating to sign APA. That circular was effective from February 5th 2014. APAs are negotiated in cooperation when Vietnamese tax authorities and taxpayers have consensus about method of determining the Vietnam’s market price, then obtain an independent transaction price. There are 4 stages to apply APA: 1. Consultation phase 2. Official APA submission 22 3. Evaluation and assessment 4. Negotiation phase The companies can waste 9 months to apply APA during 2 first-stages. However, the taxpayers will not pay fees for this process. In the period of applying APA, the taxpayers must submit the annual report about APA at • the same time submitting income tax declaration of enterprises. Advantages and Disadvantages: - Advantages: Government and tax authorities: They should facilitate the activities of tax management, avoid double taxation (according some conventions about avoiding double taxation, which were signed by Vietnamese government and other nations), and prevent tax evasion, so that the government will have steady revenue source for state budget. Multinational companies: They should reduce the uncertainty of whether transfer pricing policy will be accepted by tax authority or whether there will be any double taxation. With this certainty, the taxpayer is more confident about future transactions, and then can focus on its business rather than dealing with the uncertainty. They should also previously calculate the price of transactions between related parties to adjust actively, because they specify the tax bases and - methods of determining taxable price. Disadvantages: In order to have agreement between tax authorities and MNCs about applying transaction prices in the future, both of them spend a lot of resources, time. Meanwhile, the tax agencies have limited resources, and there are so many small and medium enterprises operating in Vietnam. Despite earning profit or not, the enterprises still pay the tax was agreed. However, if the enterprises get more registered profit, the tax agencies will collect the income tax base on the excess over. 23 Identifying transactions of goods and services with prices closer to market or not, there must be audit information. However, getting that information from foreign tax agencies is not easy. Because they need more time to search the information, and another reason isthat they will protect their MNCs from tax investigation. 3.5. Advancing the professional knowledge for the tax management department: To follow all regulations of the government as well as assure the work efficiency, the most basic and important thing is human, especially tax officer, customs, other Vietnamese officers working in FDI enterprises. Tax industry need advance the quality of human resources from the process of recruitment.Applicants have to meet all standards the recruiters offer like professional knowledge, understanding international laws, qualification of foreign language and computing… In addition, the tax industry also holds training courses including economic knowledge, create conditions for officers to travel to other countries having experience in resisting the transfer pricing. Practice waves should be opened for officers to experience different situations in order to identify actively means of transfer pricing and handle them. Equipping enough knowledge is just necessary condition, but not yet sufficient one so that officers can do their jobs perfectly. Therefore, advancing consciousness and responsibility of officers is very essential. They have to know what their missions are. They must be both honest and strict when counseling legally FDI enterprises instead of guiding them how to avoid tax and law. 3.6. Keeping stable value of VND: 24 Foreign investors usually worry about the devaluation of the Vietnamese currency compared to the other strong currencies. That is one of the reasons why MNCs do transfer pricing when they invest in Vietnam. Therefore, keeping stable value of VND is a solution to restrict motivated transfer pricing of FDI enterprises in Vietnam. Keeping stable value of VND is the main target of monetary policy, which is an important policy in macroeconomic (not only the solution to against transfer pricing). That bases on adjusting money supply and interest rate of government and the central bank. However, this policy is very difficult to implement effectively. Learning about resisting the transfer pricing of other 3.7. countries: • In America: Multination corporations indicate that their profit in the US is taxed too high (40%) or their costs are not examined completely. In that case, they will try to minimize their taxable profit in America by moving their profit out of the US and declare the increase in costs of activities there. Another popular way of transfer pricing is that they invest in pharmaceutical or electric companies which have their branches in developing countries. Then, they transfer their most valuable assets such as patent, trade secret…to activities in developing countries. By that way, they can report that a large part of their profit that they earn is created in developing countries, so they can avoid income tax they have to pay. IRS Sec.482 is the most basic and sufficient law against transfer pricing in the US. It defines basic regulars that the market price is foundation to conduct setting transaction price among multination corporations. • In China: 25 According to Chinese government, by investment activities in business production, some FDI enterprises are using artifices of transfer pricing in order to reduce or avoid the obligation of tax payment. Although there are many foreign corporations reporting continuously, they increasingly expand activities in China. Chinese government is promoting inspecting activities of multination corporations, especially practicing toughly the problems of transfer pricing. China has issued the law against transfer pricing and special auditing plans. Simultaneously, China also trains more than 500 customs tariff officers to conduct inspection of transfer pricing. • In Japan: Japanese taxation bureau has considered status of transfer pricing with another direction by conducting a lot of tax estimation, mainly focusing on mother companies in Japan. In 2005, its activities aimed at and found out transfer pricing in Japan like Sony, Takeda, Mazda, Mitsui, Mitsubishi and many more. Japanese taxation organ conducted controlling twice as large as in 2001. There are reshuffles in instructions of tax management bureau based on transfer pricing activities and cases about applying tax rate to set the transfer price public on October 22nd, 2008. It includes clauses aiming at entities such as management cost, intangible assets, services... SUMMARY By researching the topic “Transfer pricing in Coca Cola”, it makes us understand more deeply about what transfer pricing is. What ways do FDI enterprises, especially Coca Cola, do transfer pricing? In comparison with other countries, Vietnam still has many shortcomings when issuing laws as well as controlling transfer pricing. Although 26 Circular 66/2010/TT – BTC was issued, it is not enough to prevent thoroughly from motivation to promote transfer pricing. Thus, transfer pricing is the worrying problem while Vietnam is in the process of integration and development. Signing and joining into international economic organizations gives Vietnam more opportunities to grow. Besides, if transfer pricing happens, the government get “zero” return even if more investment. Hence, this offers Vietnamese government challenges that there must be more solutions to prevent transfer pricing from happening. Simultaneously, we should learn experiences from countries in the world to fight transfer pricing well. APA mechanism is one of the important bases that help us to resist transfer pricing. The content is based on our research about transfer pricing. Because our time and knowledge are limited, the report may have some shortcomings. We expect that you will help us correct it. Thank you so much! 27