Foreign direct investment (FDI) enterprises have continuously played an important position in the economy and significantly contributed to the country’s economic development in the past years. However, FDI enterprise management mechanisms have shown a lot of shortcomings.
According to experts, transfer pricing and tax evasion are major concerns in administering FDI firms.
Benefits
Shortcomings in FDI enterprise management are puzzling the Government and relevant authorities in handling emerging issues in this business sector. When the Hanoi Customs Department and its Vinh Phuc Customs Branch decided to retrospectively collect VND182 billion of taxes from Honda Vietnam Company in 2011 after they performed an inspection, this company immediately announced a review of its future production and business operations in Vietnam.
Like the case with Honda Vietnam, Metro Cash & Carry Group had operated in Vietnam for 13 years and opened 19 operating wholesale centres across the country. After the inspection by tax authorities, Metro was imposed a retrospective tax collection of VND507 billion. The clearest act of violation committed by Metro was transfer pricing with its parent company in Germany. The unfounded loss Metro had to decrease after the inspection was VND335 billion.
While violations committed by Honda Vietnam and Metro are being processed, Toyota Vietnam, one of the largest FDI companies in the country, sent a petition to the Government of Vietnam for supports in pricing policy to continue its production operations in Vietnam otherwise it would have to move to other countries. The Japanese automaker presented a calculation sheet with policy proposals and forecast scenarios based on its production data in order to retain its manufacturing operations in Vietnam after 2018. The firm affirmed that if it does not receive the support by 2018, it will slash the annual output from current 40,000 units to 13,000 units in 2020 and the localisation rate will be unlikely to be raised. It will terminate its production operations in Vietnam by 2025.
Indeed, this is a hard puzzle for Vietnamese authorities as these FDI companies have made considerable contributions to Vietnam’s economic development. If they end production operations in Vietnam, they will leave negative impacts on the economy and supporting industries of Vietnam.
Incentives
Currently, to draw external capital, Vietnam is granting more incentives to FDI enterprises than domestic ones but the inappropriate management caused the Vietnamese economy to drop a huge tax value when they attempt tax evasion and transfer pricing.
After 13 years of operation in Vietnam with 19 big wholesale centres, Metro had not paid a single penny of tax. Honda Vietnam evaded nearly VND200 billion of tax while Toyota, with a lot of existing incentives though, threatened to close its production operations if the Government failed to meet its demand.
According to the Ministry of Planning and Investment, although the priority objective in FDI attraction policy is to draw high tech fields, most of technologies transferred into Vietnam are at the average level of the world (80 percent) or even obsolete (14 percent). High tech accounts for only 6 percent. Even world-leading corporations such as Samsung and Canon only apply final stages like assembly in Vietnam while these stages do not require high-quality labour or advanced technologies.
An official from the Ministry of Planning and Investment said technologies used in Vietnam by FDI firms are to meet their interests rather than the demand from Vietnam.
In fact, after more than 25 years of attracting FDI capital, the target of forming a high-tech economy is missed. Even, some FDI projects have brought environment-polluting backward technologies to Vietnam like Vedan and Tung Kuang.
Still an important economic sector
In the past years, a lot of conferences and solution-finding meetings for the sake of improving FDI attraction in the next stages have been carried out.
According to Mr Nguyen Huu Thang, former Director of the Foreign Investment Agency (FIA), not all FDI companies seek to evade tax or perform transfer pricing. A lot of FDI firms are operating efficiently and paying big taxes to the State budget. But, these good deeds and contributions are seemingly ignored while bad deeds, a few though, spread very fast.
The cause is apparently not the source of capital itself but the administration apparatus which allowed the occurrence of environmental pollution, transfer pricing, tax evasion, labour abuse, waste of resources and planning failure. These violations are not contained and processed in a timely manner.
Now, FDI capital is playing a very important role in Vietnam's economy. Improving efficiency and ripple effect of capital flows employed in the economy to leverage the growth of domestic supporting industries is extremely necessary. This will be the foundation for Vietnam’s industry to take greater part in global value chains and put a stop to transfer pricing.
Si Son
Vietnamese
