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1 INTRODUCTION Rationale of the study State management over transfer pricing of FDI enterprises plays an important role in economic development, contributing to ensuring the equality in fulfilling the obligation of tax payment among enterprises, ensuring the State budget revenue, creating competition between the economic sectors, improving the compliance with the law of FDI enterprises In the trend of globalization and opening of domestic market, the forms of transfer pricing are getting more and more complicated, and as a result, the economy of the investment recipient country faces the consequences In order to prevent and minimize the illegal transfer pricing, the tax authorities in many countries and international economic organizations have always considered the management of transfer price/ transfer pricing as one of the central issues of tax management The management of transfer pricing against the transfer of excessive income is a "topical" topic in the world tax forums of the Organization for Economic Cooperation and Development - OECD and Asian Tax Administration and Research- SGATAR In Vietnam, thanks to the policy of positive and proactive international economic integration, the international economic relations have been increasingly expanded Since Vietnam's accession to the WTO (January 2007), the FDI into Vietnam has dramatically increased This is an important resource that contributes to the rapid development of the economy The rate of budget revenue from the FDI enterprises has increased and grows stronger According to the statistics of Hanoi Department of Planning and Investment, in terms of FDI attraction across the country, Ha Noi City is ranked third to Ho Chi Minh City and Hai Phong at this moment However, in terms of tax management, the tax authority is facing a big problem that the loss declaration of FDI enterprises is becoming more and more popular and serious The annual loss declaration results of FDI enterprises operating in Hanoi city have recently accounted for over 57% A small number of FDI enterprises have declared profits, however, the profit-to-revenue ratio of these enterprises is negligible One of the main causes of the loss in FDI enterprises is that many of these companies carry out the transfer pricing policy In the context of expanded international economic integration, the high loss rate of FDI companies is a sign proving that transfer pricing is increasing and getting more popular, accordingly, a challenge is posed to the State management agencies in general and tax authorities in particular Although there have been a number of studies on transfer pricing and control of transfer pricing for FDI enterprises, however, it has been shown that in parallel with the development of global economy, there are more sophisticated and complicated forms of transfer pricing Therefore, for effective management of transfer pricing, the in-depth studies should be implemented to clearly explain, supplement and complete theories on transfer pricing and contents of State management over transfer pricing of FDI enterprises, assess the current situation of tax management in key locations where many FDI enterprises operate Through the study and survey of current situation of State management over transfer pricing of FDI enterprises in Hanoi city, the thesis author realizes that the State management over current transfer pricing in such locations, despite its successes, has certain limitations, such as: Legal bases for transfer pricing are insufficient and unclear; No detailed guidance documents have been issued, leading to many difficulties in the implementation process; A strict and deterrent sanctions against violations of market prices has not been developed; The database as a basis for determination of taxable income of an enterprise are unclear, which reduces the transparency and causes controversy between the taxpayer and tax authority; Tax authorities and enterprises have inconsistent opinions on the selection of independent objects for comparison as a basis for determination of transfer pricing; Human resources in charge of anti-transfer pricing inspections are insufficient and their qualification are not commensurate with the requirements of this task; There has not been a coordination mechanism or stipulations on responsibilities of the relevant authorities in Hanoi City related to the co-ordination with the tax authority, the support to verify the market value for ensuring objectivity in the handling of violations From the above-mentioned theoretical and practical bases, the thesis writer chooses to study the topic "State management over transfer pricing of foreign direct investment enterprises in Hanoi City” in order to contribute more scientific and practical foundations for partial resolution of the problems in reality Purposes and tasks of the study * Purposes of the study: The main and core purpose of the thesis is to study, develop and supplement theoretical issues on the State management over transfer pricing of FDI enterprises, and to propose some solutions with scientific foundation and consistence with the reality aimed at perfecting the State management over transfer pricing of FDI enterprises in Hanoi in the near future * Tasks of the study The main tasks of the thesis are: Firstly, to provide an overview of the research works related to transfer pricing, management, control of transfer pricing and show the gaps of the study, creating a basis for identification of the study object, scope and method of the thesis Secondly, to develop and supplement theoretical bases for transfer pricing and State management over transfer pricing of FDI enterprises To collect experiences of domestic and foreign transfer pricing management to draw lessons for the state management agencies on transfer pricing of FDI enterprises in general and Hanoi Tax Department in particular Thirdly, to analyze the current situation of State management situation over transfer pricing of FDI enterprises in Hanoi City To assess the achievements, focus on analyzing the limitations and causes of limitations in management of transfer pricing of FDI enterprises in the City over the past time Fourthly, to propose a system of professional solutions and general solutions, propose recommendations to the competent authorities for completing the State management over transfer pricing in Hanoi City in the coming time Object and scope of the study * Object of the study The object of the study is the theoretical and practical issues related to transfer pricing and State management over transfer pricing of FDI enterprises in Hanoi City * Scope of the study - Contents of the study: State management over transfer pricing of FDI enterprises is implemented by many functional agencies such as the Ministry of Finance, the inspection agency of the Ministry of Finance, the tax authority, the Customs, the related ministries and branches, etc Based on the introduction of the model of State management including many of the above subjects with the functions and tasks of each agency, the thesis focuses on in-depth study of management and control of tax authority - mainly Hanoi Tax Department determined as a key organ with the function of state management over transfer pricing of FDI enterprises in the City The study scope of the topic is quite broad, therefore, in order to ensure the depth and consistency with the limitation on the above-mentioned management subjects, the thesis is limited to study inspections conducted directly by the taxation authority (mainly inspections conducted by the Hanoi Tax Department), rather than inspections conducted by other agencies - Space of the study: The thesis only studies FDI enterprises in Hanoi city under direct management of Hanoi Tax Department - Period of the study: The thesis studies the current situation of transfer pricing and State management over transfer pricing of FDI enterprises in Hanoi in the 2011-2018 period (policies and management apparatus of the study up to 2019) The proposed solutions are applied to the medium-term period from 2020 to 2025, long-term vision up to 2030 New contributions of the thesis ❖ Academic and theoretical aspect: The thesis contributes to supplementation and development of theoretical framework of transfer pricing and State management over transfer pricing, specification of the contents of State management, evaluation criteria and influential factors of State management over a field, specifically, transfer pricing of FDI enterprises Based on the survey of State management experience in transfer pricing of foreign direct investment enterprises in some countries around the world such as the US, China, and Thailand, the thesis author has found out common characteristics and draws three lessons in consistence with the context of Vietnam and Hanoi City in the State management over transfer pricing of foreign direct investment enterprises in the current and future context ❖ Practical evaluation The thesis clarifies the current situation of state management over transfer pricing in FDI enterprises in Hanoi City according to the contents and evaluation criteria established in the chapter of theory; On this basis, some conclusions related to the results, limitations and reasons for limitations in State management over transfer pricing of FDI enterprises in Hanoi City in recent years are mentioned Some limitations and main reasons are presented as follows: Legal bases for transfer pricing are insufficient and unclear; A strict and deterrent sanctions against violations of market prices has not been developed; The database as a basis for assessment of taxable income of an enterprise are unclear, which reduces the transparency and causes controversy between the taxpayer and tax authority; Tax authorities and enterprises have inconsistent opinions on the selection of independent objects for comparison as a basis for determination of transfer pricing; Human resources for anti-transfer pricing inspections are insufficient and their qualification are not commensurate with the requirements of this task; There has not been a co-ordination mechanism or stipulations on responsibilities of the relevant authorities in Hanoi City in coordination with the tax authority, the support to verify the market value for ensuring objectivity in the handling of violations ❖ Solutions The thesis proposes groups of new specific solutions to perfect the state management over transfer pricing of FDI enterprises in Hanoi City in the 2020-2025 period, vision up to 2030 Specific tasks of each management agency are identified in each solution A number of key solutions should be focused to be solved, including the improvement of the policies and State management over transfer pricing, the completion and enhancement of professional measures, speeding up the implementation of mechanism of Advance Pricing Agreement (APA) Structure of the thesis Chapter 1: Overview and methods of the study Chapter 2: Theoretical basis for State management over transfer activities of foreign direct investment enterprises Chapter 3: Current situation of State management over transfer pricing of foreign direct investment enterprises in Hanoi city Chapter 4: Orientation and solutions for improvement of State management over transfer pricing of foreign direct investment enterprises in Hanoi city CHAPTER OVERVIEW AND METHODS OF THE STUDY 1.1 Overview of studies related to the thesis topic 1.1.1 Studies on transfer pricing and factors affecting transfer pricing of foreign direct investment enterprises In this part, the thesis summarizes and studies works: The study by Feldstein, Martin Hines, James R Hubbard, R Glenn on "The effects of taxation on multinational corporations", and " Taxation of Multinational Corporations"; The study by Gary Stone on "International transfer pricing"; The study by Dr Phan Dinh Nguyen on "The impacts of transfer pricing on income tax of FDI enterprises in Ho Chi Minh City"; The study by Dr Nguyen Khac Quoc Bao on "The relationship between tax reform and transfer pricing in Vietnam"; The study by by Richardson, Taylor and Lanis on Determinants of transfer pricing aggressiveness: Based on empirical evidence from Australian companies; writer Trong Hoang implemented the study "Economic losses caused by transfer pricing to FDI recipients"; the scientific article "Comparison of benefits and costs - An effective anti- transferring price measure" by the writer Lang Trinh Mai Huong, PhD thesis of Duong Van An (2016), with the topic "Transfer pricing in foreign direct investment (FDI) enterprises - international experience and lessons for Vietnam” 1.1.2 Studies on State management over transfer pricing of foreign direct investment enterprises *Studies on transfer pricing methods and avoidance of double taxation agreements, including: PhD thesis of Phan Hien Minh (2001) with the topic "Perfecting transfer pricing method in Vietnam’s tax policy"; The OECD’s study "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” and under continuous amendment, with the latest version in 2017 and the document "Dynamic pricing rules" of the World Trade Organization (WTO) (2007) * Studies on the analysis and identification of transfer pricing signs and State management and control methods, including (1) The document from the Modernization and Reform Board of General Department of Taxation “Assessment of current situation of tax and transfer pricing management in Vietnam in the 2006-2010 period and orientation to improve the effectiveness of tax management over this activity in the coming time”, (2)“ PhD thesis of Phan Thi Thanh Duong: “Law on control of transfer pricing in Hanoi City ”(2010); (3) “References to international experience on tax management” by Ministry of Finance (2011); (4) Assoc Prof Dr Le Xuan Truong (2011) with the study "Control of transfer pricing in Vietnam: Continuously perfecting the legal framework and implementation conditions"; (5) The study "Experience of anti- transfer pricing in FDI enterprises of Lam Dong Sub-Department of Taxation" by Nguyen Trong Thoan (6) Nguyen Quang Tien with the article "Tax management for transfer pricing: Current situation and solutions"; The ministerial-level scientific research project chaired by Assoc Prof Dr Nguyen Thi Phuong Hoa (2012): "Strengthening the State control over transfer pricing" The study by Prof Dr Ngo The Chi et al: "Solutions for restricting the tricks of transfer pricing in the current conditions of multinational companies in Vietnam" - The ministerial-level scientific research project 2012; (9) E.Baistrocchi and I.Roxan (2012) with the study "Resolving Transfer Pricing Disputes: Global Analysis" (Resolving transfer price disputes: Global analysis); (10) "Transfer Pricing Handbook: Guidance on the OECD Regulations" by Authors Feinschreiber, Robert and Kent, Margaret; (11) The study by Kratzer, Carsten and Blesgen, Martin: "Transfer Pricing in Germany (2012) "Transfer pricing in Germany: a translation of important laws and regulations"; the study by Feinschreiber, Robert and Kent, Margaret: "AsiaPacific Transfer Pricing Guide"; (13) the study by Assoc Prof Dr Le Xuan Truong: "Antitransfer pricing: A need to focus on overcoming the weakest links"; (14) Author Nguyen Van Phung with the study "The fight against transfer pricing and the participation of the State audit agency"; (15) Ngo Thi Ngoc Huyen (2014) et.al with the report "Studying on the transfer pricing issues of FDI enterprises in Ho Chi Minh City: Current situation and solutions” (16) One of the most prominent and highly practical studies has recently been the "Action Plan on Base Erosion and Profit Shifting- BEPS" under the approval of G20 Ministers and members of Organization for Economic Cooperation and Development dated October th, 2015; (18) PhD thesis titled "Transfer pricing and anti-transfer pricing in tax management over foreign direct investment enterprises in Vietnam" (2017) by Le Quang Hung, (19) PhD thesis (2017) titled "Transfer pricing control in a branch of a multinational company in Vietnam" by Le Thanh Ha 1.1.3 Study on factors affecting State management and control over transfer pricing This part analyzes a research work known as a PhD thesis by Nguyen Van Phuong (2015), "State control over transfer pricing fraud in Vietnam" 1.2 Some conclusions from the overview of the study 1.2.1 Scientific and practical values of published studies to the thesis The oversea studies have mentioned the basic theories about transfer pricing and control of transfer pricing; the methods recommended by countries and international organizations to control transfer pricing; typical transfer pricing and recent trends in application of transfer pricing methods of multinational companies The domestic studies have fairly sufficiently demonstrated the theory of the nature of transfer pricing and transfer pricing tricks of multinational companies and studied transfer pricing of FDI enterprises and accordingly, some solutions for control of this activity are proposed These scientific and practical values are the basis for the research students’ reference as well further research and development in their theses 1.2.2 Limitations of published studies The review of the research works related to the thesis topic shows that the published works have the limitations and gaps as follows: - Firstly, the studies have not provided insights into transfer pricing carried out by FDI enterprises at all stages of the organization of investment activities and business execution Specifically, those include the stages: capital contribution, technology transfer, in borrowing purchase and sale of materials, machinery and equipment, and implementation of services of management consultancy, training, hiring experts, copyrights, brands, interests, etc Before the birth of the thesis, there have been many studies on the current situation of transfer pricing in Vietnam, however, all of them are limited to the study and evaluation in a general perspective; the in-depth analysis of the nature of transactions linkages between related parties has not been implemented - Secondly, in terms of theory, none of published studies mentioned about the State management model of transfer pricing, with the participation of the related state management agencies such as tax authority, the customs and investment licensing agencies The involvement of all such related agencies is required for management of transfer pricing Previous studies only focused on the subject of tax control over FDI enterprises, called the tax authority - Thirdly, the previous studies have not explained why the warnings of transfer pricing in Vietnam appeared in 1999 and 2000, however, the law on transfer pricing control has not been completed up to now The legal documents on transfer pricing control issued by the relevant Vietnamese authorities have revealed many shortcomings, however, few studies have mentioned about this issue The Government's Decree 20 on "regulating management of taxation for enterprises with associated transactions" and Circular 41/2017/TT-BTC guiding the implementation of Decree 20 with the effect from May st, 2017 have not deeply exploited the current situation of the economy, however, they have some limitations and “gaps” to be overcome early This is a practical issue to be studied and solved by the appropriate solutions in the thesis - Fourthly, there have been no in-depth studies and evaluation on the limitations of State management of relevant state management agencies over transfer pricing of FDI enterprises in Hanoi city over the past time The previous studies only focused on the contents of inspection, price transfer inspection - a function of the State management agencies, including general assessments, rather than in-depth analysis and comprehensive assessment of state management activities in a sufficient manner according to the management function (from development and promulgation of legal provisions to the organization of the apparatus to implement management, inspection, supervision and handling of transfer pricing acts) - Fifthly, the previous works have not studied the situations of transfer pricing inspection in order to draw typical violations and specific plans of transfer pricing management, ways of fighting and persuading the FDI enterprises to admit violations and commit to voluntarily complying with the associated transaction declaration - Sixthly, there has been no study to conduct a direct survey on FDI enterprises known as management subjects aimed at understanding the direct effects of management measures of the State management agencies over transfer pricing on the compliance of such enterprises The survey of FDI enterprises is very important because from the perspective of enterprises, they will give the most objective evaluation about the consistence of the State management solutions with the reality 1.2.3 Gaps of the study From the judgements on the limitations of previous studies, the following theoretical and practical issues have not been clarified or studied in the published domestic and foreign scientific works This is the gap for the thesis author to make a further study in his thesis His study contents include: Firstly, the motives, causes and forms of transfer pricing The contents of state management over transfer pricing of FDI enterprises (from the approach of economic management speciality), evaluation criteria and influential factors Secondly, national experiences and lessons for the state management over transfer pricing of FDI enterprises in Vietnam in general and Hanoi city in particular Thirdly, the current situation of state management over transfer pricing of FDI enterprises in Hanoi City in the 2011-2018 period- successes, limitations and causes Fourthly, the orientations, objectives and solutions for completion and enhancement of the State management in order to prevent and minimize transfer pricing of FDI enterprises in Hanoi City 1.3 Research process and methods of the study Based on the application of dialectical materialism and historical materialism, during information collection and processing for thesis implementation, the author used a combination of study methods as follows: 1.3.1 Research process Based on the Research Overview to find out the research gap of the topic, the author had identified the research problems, objectives and research questions to systematize and complete the theoretical basis The author then collects primary and secondary data to synthesize and report research results as well as suggestions for direction and solutions 1.3.2 Methods of information collection * Primary information In order to collect practical data on the State management over transfer pricing of FDI enterprises in Hanoi City, the thesis author designed two survey forms with the tax authorities (officials in charge of inspection at 10 inspection departments at the Office of Hanoi Tax Department and 24 tax sub-departments of districts and towns and tax sub-departments in regions) and with FDI enterprises (the subsidiaries of multinational companies) in Hanoi City under the management of the Hanoi Tax Department No Surveyed respondents Delivered forms Collected forms Rate FDI enterprises 225 200 89% Tax authorities 205 190 93% Total 430 390 91% In addition, in order to provide more practical foundation for the judgments, assessments, conclusions in the thesis, the author consulted the experts known as some managers from the State management agencies related to the field of the thesis research such as: Tax authorities, the Customs, Ministry of Finance Inspectorate, Audit agencies * Secondary information and data The information used by the thesis author is mainly secondary materials Those include the data of Hanoi Tax Department, General Department of Taxation, Department of Planning and Investment, Investigation results of General Department of Taxation and Departments of Taxation in some localities; Survey results of the group of experts from universities and research institutes; Statistical survey results of the General Department of Taxation; Transfer pricing inspection documents of Hanoi Tax Department, financial statements of FDI enterprises in Hanoi City; Reports on inspection results of FDI enterprises by the Hanoi Tax Department; Relevant legal documents, reports, schemes and programs of the General Department of Taxation and Hanoi Tax Department Furthermore, the authors applied references from the scientific research projects at levels, PhD theses in Economics, domestic and oversea scientific articles related to FDI enterprises and their transfer pricing 1.3.2 Methods of information and data processing - Method of systematization and synthesis - Method of analysis - Method of comparison - The case study method 10 CHAPTER RATIONALE OF STATE MANAGEMENT OVER TRANSFER PRICING OF FOREIGN DIRECT INVESTMENT ENTERPRISES 2.1 The foreign direct investment enterprises and transfer pricing of foreign direct investment enterprises 2.1.1 The foreign direct investment enterprises 2.1.1.1 Organizational forms of foreign direct investment enterprises In this part, the thesis presents the concept of Foreign Direct Investment and two popular types of FDI enterprises are: joint-venture enterprises and enterprises with 100% foreign capital 2.1.1.2 The impacts of foreign direct investment enterprises on the investment recipient Firstly, the foreign direct investment enterprises contribute to promoting economic growth, improving the efficiency of using domestic resources; Secondly, the FDI enterprises contribute to promoting economic restructuring towards industrialization-modernization; Thirdly, the foreign direct investment enterprises support to solve labor issues, improve the quality of human resources and change the labor structure Fourthly, the FDI enterprises are an important channel of technology transfer, contributing to improving the technological qualification of the economy; Fifthly, the foreign direct investment enterprises have the impact of improving competitiveness at all three levels: the country, business and products; Sixthly, the foreign direct investment enterprises contribute to improving the capacity of economic management, corporate governance, creating more pressure on improving the competitive environment; Seventhly, FDI enterprises are important subjects who directly promote the process of international integration of countries 2.1.2 The concept, characteristics, motivations and causes of transfer pricing implementation of the foreign direct investment enterprises 2.1.2.1 Concept and characteristics of transfer pricing Transfer pricing means implementation of a price policy for goods, services as well as assets traded between members of a group or between interconnected companies without following market price standards Its purpose is to minimize the amount of income tax payable by the corporation or the group of associated companies Transfer pricing has the following characteristics: Firstly, transfer pricing only occurs in the following cases: (i) between entities operating in the same associated group; (ii) between the entities that are independent but share mutual benefits Secondly, the prices in transfer transactions are not based on market prices, but fixed by the managers of the business or the parties of common interests; Thirdly, price transfer does not change total value formed in society but re-distribute or transfer of benefits from one subject to another; Fourthly, the basic purpose of transfer pricing is to minimize the tax liability of the entire corporation Fifthly, the transfer pricing on the basis of the internal transfer pricing is basically associated with the right of business freedom of enterprises, which is recognized by most countries, therefore, it is usually 16 Decree 20 takes effect); the changes of Tax Administration Law No 38/2019/QH14 and current regulations on handling violations of transfer pricing 3.2.2 Current situation of organization of state management apparatus over transfer pricing In this part, after presentation of overall model of the state management apparatus over transfer pricing of FD1 enterprises along with the responsibilities and duties of each agency (Government, Ministry of Finance, tax authorities, relevant ministries and branches), the thesis analyzes the current situation of establishing the tax management apparatus over the transfer pricing of FDI enterprises in Hanoi City In 2011 and earlier, Hanoi Tax Department has not established a specialized unit on transfer pricing In 2012, the Department established a Task Force to implement transfer price management for real estate and construction In 2014, the Department established the Inspection Team of associated enterprises with signs of transfer pricing In November 2015, the Department established the Transfer Price Inspection Division (including 14 members and by August 2018, up to 17 members), including personnel from the departments of inspection, tax declaration, accounting and tax accounting, taxpayers support propaganda, tax debt management and enforcement 3.2.3 Current situation of implementation of management operations 3.2.3.1 Supervision of associated transactions declaration The supervision of associated transactions declaration of FDI enterprises in Hanoi City has recently been the main responsibility of the departments of tax inspection, tax declaration and tax accounting, and examination- inspection department/ Inspection team Table 3.5: Statistics of enterprises subject to the declaration of associated transactions Years Number of enterprises subject to the declaration of associated transactions The number of enterprises that submitted the declaration of associated transactions Ratio of enterprises that submitted the declaration of associated / the enterprises required to submit 2011 1,271 745 58.62% 2012 1,564 820 52.40% 2013 1,754 901 51.41% 2014 1,977 992 50.16% 2015 2016 2,234 2,590 1,190 1,487 53.28% 57.43% 2017 2018 3,000 3,212 1,934 2,417 64.46% 75.26% Total 17,600 10,485 59.58% 17 Source: Hanoi Tax Department 3.2.3.2 Propagating and supporting enterprises with associated relations Propaganda is carried out at the headquarters of tax authorities and through the system of press and television agencies, through the system of mails for exchanging information, urging and guiding the enterprises to declare and adequately submit all related transaction declaration documents Issuing leaflets on the contents of Circular 66, Decree 20, Circular 41 to related units, placing them at the shelves for leaflets at the One-stop Section of the Tax Department and Tax Sub-departments in Hanoi City; sending documents via email of the enterprises; Posting information on electronic letter boards; Propagating on the official newspapers “Tax policy and life” and Capital Tax, New Hanoi Newspaper, Financial Times, Tax Magazine, etc 3.2.3.3 Establishment of databases on enterprises Department of data collection and establishment of profit ratio by sectors with 02 databases of the nation and Hanoi City After obtaining the approved databases of profit ratio (including sectors), the tax inspection and examination divisions will use the information of gross profit ratio in accordance with the scale and nature of operations to fix tax obligations Table 3.8: Number of enterprises in the databases of profit ratio calculation at Hanoi Tax Department in the 2011-2018 period Years Number of enterprises Growth rate against previous year 2011 205,136 109.0% 2012 230,778 112.5% 2013 ,257,317 111.5% 2014 275,329 107.0% 2015 344,162 125.0% 2016 423,319 123.0% 2017 482,584 114.0% 2018 583,926 121.0% (Source: Hanoi Tax Department) 3.2.3.4 Risk analysis for determination of transfer pricing signs The risk analysis for determination of transfer pricing signs is carried out according to risk criteria The identification of transfer pricing signs of enterprises is implemented right from the stage of information collection of enterprises, actual basis of the enterprises' declarations 18 such as: Analysis of information about taxpayers based on database and actual situation of tax management of Hanoi Tax Department over inspected company; Declaration of associated transactions according to the stipulated forms submitted to the tax authority; Review of capital sources and capital structure of the enterprises through information on: capital owner, founder, registered capital structure, etc 3.2.2.5 Inspection and examination of transfer pricing and handling of violations a Process of transfer pricing inspection Basically, the process of a transfer pricing inspection follows the process of a common inspection applied under Decision No 1404 /QD-TCT dated July 28 th, 2015, including: Step 1: Analyzing the tax declaration at the head-office of tax authority; Step 2: Conducting inspections at enterprises; Step 3: Completion of the transfer pricing inspection; Step 4: Resolving complaints b Development and organization of implementation of inspection and examination plans Table 3.9: Plans and results of implementation of transfer pricing inspection plan at Hanoi Tax Department for the 2012-2018 period Number of enterprises inspected Years on transfer pricing as planned Number of enterprises under conclusion of transfer pricing after collection of tax arrears Amount Fine+ Loss of tax Late payment reduction arrear (billion (billion (billion dong) dong) dong) Average arrears + Average loss fine + late reduction payment (billion dong) (billion dong) 2012 88 80 30 10 59 0.50 0.74 2013 72 52 110 55 63 3.17 1.21 2014 102 99 120 47 179 1.69 1.81 2015 107 46 42 16 194 1.26 4.22 2016 45 48 62 21 225 1.73 4.69 2017 119 32 83 27 718 3.44 22.44 2018 85 90 220 69 1.303 3.21 14.48 19 (Source: The thesis author synthesized data from the reports of transfer pricing inspection, 20122018 by Hanoi Tax Department) Some typical cases of transfer pricing inspection: in 2013 (Keangnam Vina Co., Ltd; Viet Pacific Apparel Co., Ltd); 2014 (Arksun-Vietnam Joint Stock Company; Tokyo Micro Vietnam Co., Ltd.); 2015 (JGC Vietnam Co., Ltd; Tamron Optical Vietnam Co., Ltd); 2016 (Hanoi Steel Center Company Limited; TNT-Vietrans Express Worldwide (Vietnam) Company Limited; 2017 (Smartviet Service And Trading Company Limited; KUME Design Asia Co., Ltd); 2018 (Standard Chartered Bank; Heineken Vietnam Brewery Limited Company) 3.3 General assessment of the State management over transfer pricing of foreign direct investment enterprises in Hanoi city 3.3.1 Achievements Through analysis of current situation of State management over transfer pricing of FDI enterprises in Hanoi City, combination of comments and evaluation of experts, tax inspectors, FDI enterprises, the thesis author draws conclusions about the strengths of current situation of state management over transfer pricing as follows: Firstly, the State always pays attention to the policy of State management over transfer pricing of FDI enterprises and make suitable adjustments to ensure the convenience for taxpayers in declaring, preparing dossiers, ensuring healthy competition, and harmoniously resolving the interests between the State and FDI enterprises Secondly, the organization of implementation of management operations has been organized in a professional manner, especially the activities of transfer pricing inspection Some of the main successes in the organization of the management operation are presented as follows: Firstly, establishing a sequence of steps to be performed when conducting a transfer pricing inspection; Secondly, through the data reported in inspection forms, the inspectors identified the focal issues when inspecting at the enterprises, ensuring the time and quality of the anti-specialized price inspection; Thirdly, after 2016, Hanoi Tax Department has taken the initiative in its own database; Promote, attaching great importance to analyzing basic transactions; Fifthly, focusing on examining whether the selection of the methods of market price determination, the use of comparative data of enterprises are in compliance with the regulations Thirdly, the results of State management over transfer pricing of FDI enterprises in Hanoi city tend to be increasingly improved 3.3.2 Limitations In addition to the achieved results, the state management over transfer pricing of FDI enterprises in Hanoi City still has certain limitations * Regarding policies: Legal bases for anti-transfer pricing are actually incomplete and unclear; Decree 20 poses the relatively big challenges for enterprises in compliance; A strict and deterrent sanctions against violations of market prices has not been developed; the tax authority 20 has no tax investigation function, therefore, it cannot handle the complicated violations in a wide range, beyond the territory of Vietnam * Organization of management structure: In recent years, the State management over transfer pricing of FDI enterprises mainly focused on tax authorities; the coordination of related agencies (ministries, branches and localities) is consistent and regular, therefore, the efficiency of fighting against transfer pricing is not high The anti-transfer inspection force of the whole country in general and Hanoi city in particular is limited The merger of inspection departments into examination departments under the new organizational structure of tax sector has reduced the efficiency of transfer pricing inspection * Regarding the propaganda, dissemination of policies and urging enterprises to declare associated transactions: The popular propaganda for enterprises on the documents related to specialized transfer pricing is limited and not strict Urging enterprises to declare associated transactions in accordance with the regulations is still limited where the taxpayer is not selfconscious * Database: Database for the management of declaration, inspection and examination of transfer pricing is inadequate, non-synchronous and has not met the requirements of the task; The tax authority has not announced the data related to the profit and price ratio to support enterprises in selection and declaration of information about market prices * Regarding the analysis of transfer pricing risks: In recent years, the quality of risk analysis, identification of enterprises in associated relations with the signs of market price violations has not generally met expectations The number of enterprises detected to have make violations through inspection is low * Inspection and examination of transfer pricing: There is no separate inspection process in line with the characteristics of transfer pricing inspection; There are few groups of inspectors; Making conclusions of inspection and handling of violations face many difficulties due to the lack of basis and database on prices * Regarding the results of the Advance Pricing Agreements: Up to now, in Hanoi City, the state management agencies have not implemented an APA with FDI enterprises At present, the responsibility of APA negotiation still belongs to the General Department of Taxation while local tax agencies such as Hanoi Tax Department only play an additional role because the local tax department is not permitted to independently implement APA negotiation activities, in terms of resources and database 3.3.3 Causes of the limitations 3.3.3.1 Causes from State management agencies Firstly, the database as a basis for determination of taxable income of an enterprise are unclear, which reduces the transparency and causes controversy between the taxpayer and tax authority; 21 Secondly, tax authorities and enterprises have inconsistent opinions on the selection of independent objects for comparison as a basis for determination of transfer pricing; Thirdly, human resources for anti-transfer pricing inspections are insufficient and their qualification are not commensurate with the requirements of this task; Fourthly, the co-ordination in transfer pricing control is limited 3.3.3.2 Causes from the management environment Firstly, there is a difference between Vietnam's corporate income tax rate (2011-2013: 25%; 2014-2015: 22% and from 2016 until now: 20%) and that of many countries around the world Secondly, the implementation of the audit reporting regime of auditing enterprises does not fully reflect the required information Thirdly, the coordination of inter-sectoral agencies is limited Fourthly, there are no regulations on the range of reasonable prices or profits for each economic sector so that businesses can determine the price policy in a reasonable manner 3.3.3.3 Causes from the enterprises Firstly, a number of enterprises in associated relations - are huge and large-scale FDI enterprises with a lot of experiences to "dodge" and evade taxes During the operation of large FDI enterprises with transfer prices, there is the participation of a well-known international auditing company and they often use tax advisory services, declaration of taxable income related to associated transactions from the top four auditors in the world Secondly, a number of FDI enterprises, when being inspected on transfer pricing, not often sign the inspection minutes in a deliberate manner 22 CHAPTER ORIENTATION AND SOLUTIONS FOR PERFECTING STATE MANAGEMENT OVER TRANSFER PRICING OF FOREIGN DIRECT INVESTMENT ENTERPRISES IN HANOI CITY 4.1 Orientation and objectives of perfecting State management over transfer pricing of foreign direct investment enterprises in Hanoi city 4.1.1 Forecast of development trend of foreign direct investment enterprises in Hanoi City Thanks to the potentials, the pioneering commitment in creating a favorable investment and business environment of the Government and Hanoi City's FDI attraction strategy, it is forecast that Hanoi remains one of leading FDI attracting cities of Vietnam in the 2020-2025 period 4.1.2 Advantages and disadvantages in state management over transfer pricing of FDI enterprises in the coming time 4.1.2.1 Advantages - Introduction of Decree 20, Law on Tax Administration No 38 improves legal nature and validity of the state management documents on transfer pricing - The support and participation of the General Department of Taxation, the Organization for Economic Co-operation and Development (OECD) and World Bank (WB) to the tax authorities - The majority of FDI enterprises in Vietnam grasped the regulations on declaration of associated transactions, preparation of documents for determination of market prices, and make automatic adjustments when the business results show prolonged losses, losses exceeding equity 4.1.2.2 Disadvantages - The transfer pricing behavior of FDI enterprises in Vietnam is increasingly common, sophisticated and complicated - Business environment is always volatile and it is very difficult to control market prices, as a result, the determination of "market prices" faces difficulties - Difficulties in fixing costs; application of price determination method, data comparison and APA application 4.1.3 Orientations toward improvement of the State management over transfer pricing of foreign direct investment enterprises Firstly, improving the legality of current regulations; Secondly, in terms of organizational structure, it is necessary to direct toward a specialized model on transfer pricing, arrange the separate regular forces in charge of fighting against transfer pricing at relevant state management agencies; Thirdly, organizing the effective implementation of State management operations of 23 the Hanoi Tax Department; Fourthly, strengthening coordination with relevant central agencies and localities in Hanoi; Fifthly, strengthening coordination with foreign agencies 4.1.4 Objectives of State management toward the transfer pricing of foreign direct investment enterprises Focusing on establishing enterprise database to serve the inspection and examination in general; Studying to develop a set of criteria for risks analysis and evaluation, selection of enterprises with high risks of transfer pricing; Continuing to improve the transfer price inspection outline; Well performing the task of tax losses prevention and state management of transfer pricing; Continuing to expand the scope of inspection of transfer pricing to various fields Inspection of transfer pricing account for at least 20% of inspections in a year Urging 100% of enterprises with associated relations and arising associated relations to make declaration of forms under the provisions of the current Circulars and Decrees 4.2 Solutions for perfecting state management over transfer pricing of foreign direct investment enterprises in Hanoi City 4.2.1 Perfecting the relevant laws 4.2.1.1 In the Government’s part The Government should be transparent and clear about tax incentives for FDI enterprises; The Government and functional agencies should review and adjust in the direction of narrowing the gap of tax incentives among branches, fields, regions and localities; The Government should not grant the massive tax incentives; Legalizing the use of information collected by tax authorities in tax management in general, State management on transfer pricing in particular; Modifying the methods of determining market transaction prices in the direction of few methods, easy understanding, easy implementation with grounds; promulgating a mechanism to deduct a portion of tax arrears collected from transfer pricing into the funds for anti-transfer pricing (information purchase) and enhancing the authority of the hired inspectors In addition, The Government should study to establish clear regulations on the sanctions so that they are strict and deterrent 4.2.1.2 In the part of Ministry of Finance Studying to draft tax policies and providing proposals to improve the legality of tax policies for enterprises with associated transactions In addition to the tax assessment operation, there must be regulations on information collection and relationship among relevant sectors, including local government; Studying to impose sanctions for a number of cases where FDI enterprises declare that their business results suffer from loss exceeding equity, they will not be entitled to preferential treatment and the refund of value added tax shall be temporarily suspended Sanctions should be strictly applied (penalty of false declaration, late payment) to form deterrence; 24 Studying to build a "threshold" for declaration of associated transaction information to simplify for enterprises in the declaration; Revising the system of accounting standards in accordance with international requirements 4.2.1.3 In the part of General Department of Taxation The General Department of Taxation should propose the Ministry of Finance to complete documents guiding inspection and examination of transfer pricing; Studying to increase the duration of inspection over the transfer pricing to solve the complexity of this task; Studying and developing the implementation process and skills for inspection operation over transfer pricing Developing a set of criteria for analysis, risk assessment, selection of enterprises to inspect the transfer pricing for consistent application across the country 4.2.2 Perfecting the structure of state management over transfer pricing of foreign direct investment enterprises Re-establishing the division specialized in transfer pricing under the Office of Inspection - Examination at the General Department of Taxation and the Offices of Tax Inspection and Inspection at local tax departments where many FDI enterprises are operating Other agencies, depending on the degree of relevance, should take certain responsibilities in state management over transfer pricing of FDI enterprises 4.2.2.1 In the part of the Government and the Ministry of Finance A complete and strong anti-transfer pricing mechanism is required There should be a national anti- transfer pricing organization under the Government’s agency or at higher level than the General Department of Taxation, otherwise, it should be under the Ministry of Finance so that it obtains the authority to effectively resolve the problems related to the transfer pricing control 25 Ministry of planning and investment (Foreign Investment Agency) Ministry of Finance General Department of Taxation-Department of Inspection-Examination, Department of international Co-operation Department of large enterprises management Department of State management on transfer pricing Specialized Ministry of Finance Inspectorate Provinces and cities under the central government General Department of Vietnam Customs (The Customs Inspection Department) Local tax departments (Department of transfer pricing inspection- examination) FDI ENTERPRISES 4.2.2.2 In the part of the General Department of Taxation The General Department of Taxation should study to upgrade the Department of Tax Inspection Examination into the Agency of Tax Inspection - Examination that independently operates from the tax management over enterprises, the tax intelligence department to access information on prices in countries and in the FDI enterprises, supplementing enough experienced staff to actively support the local tax departments, including Hanoi City 4.2.2.3 In the part of Hanoi Tax Department The Hanoi Tax Department should rearrange the structure of inspection and examination; establish a specialized department towards concentrating on professional aspect (professional connection) while distributing (opening) towards the organization of operation, implementation, inspection and established at offices and tax department 4.2.3 Completing and strengthening the state management operations over transfer pricing 4.2.3.1 Strengthening the management of associated transactions declaration and accelerating the propagation and assistance to taxpayers - Enhancing the management of associated transaction declaration: Attaching great importance to reviewing, making a list and closely monitoring enterprises required to declare associated transaction information as well as simplifying forms so that enterprises can easily 26 perform aimed at sufficiently providing information; promptly urging, reminding and applying sanctions to enterprises failing to comply with their obligations in declaring associated transaction information - Promoting the propaganda and support for taxpayers: It is necessary to identify and classify the targets to be propagated aimed at thematically focusing on the targets subject to adjustments under Decree 20 and Circular 41 The propaganda documents should be edited in a concise, simple and understandable way so that both tax officers and enterprises can easily grasp and implement 4.2.3.2 Developing a database of the whole sector for transfer pricing management The General Department of Taxation shall be a leading unit and out local tax departments, including Hanoi Tax Department, are responsible for participating in the development of this database Special attention should be given to the database, including: (i) Data proving that the enterprises declared associated transactions and data about contents of associated transactions declared (transaction contents, transaction value, method of determining market prices); (ii) Data on profit ratio by sectors and trades: this data should be regularly updated to serve the needs of each transfer pricing inspection In the short-term, it is necessary to focus on the average profit rate of listed companies, public companies, companies that have been inspected and examined, etc); At the same time, there should be a nationwide database to provide information on prices and rates and the purchase and exchange of information with foreign countries should be combined 4.2.3.3 Completing and improving the quality of transfer pricing inspection and examination Continuing to study and develop criteria to identify enterprises with signs of violations of transfer pricing to select enterprises to be inspected Focusing on the analysis of enterprise data, collection of information related to the determination of tax obligations of enterprises; It is necessary to deeply study the market price determination report to find out the causes, the fallacious arguments for the causes of big losses or negligible profits The skill of rejecting market valuation records is one of the most important skills that should be grasped by transfer pricing inspectors Implementing in-depth inspection of the purchase and sale of goods and services of related parties to show the quantity, type, unit price, conditions for purchase, sale and preferential policies Completing the transfer pricing inspection process: Mapping the business organization model of the enterprise, identifying the business activities of the enterprises; Identifying the basic industry characteristics in Vietnam; Analyzing characteristics and functions of enterprises; Analysis of transfer pricing factors in associated transactions; Redefining transfer price Promulgating the transfer pricing inspection manuals according to each item of transfer pricing (Transfer pricing of losses - transfer pricing of profits- transfer pricing according to 27 fields, industries, transfer pricing through unrealistic expenses, etc) to be applied for officials in charge of inspection and examination 4.2.3.4 Application of Advance Pricing Agreement Tax authorities, after receiving the request for APA application from the enterprises, should make a plan to thoroughly study about taxpayers through economic reports, business and production activities, and the process of tax obligations performance of the enterprises On that basis, the negotiation plans shall be made, including principles, objectives and price bases to protect the reasonable calculation price/ each transaction 4.2.4 Improving the quality of human resources in charge of state management over transfer pricing * In the part of General Department of Taxation: Enhancing the training for civil servants on transfer pricing management skills and providing the specific case exercises associated with the reality of Vietnam Organizing a number of comprehensive tax inspections for FDI enterprises based on risk analysis to draw lessons and disseminate knowledge for tax officers to grasp and apply them into practical situation in each locality Creating favorable conditions for tax departments' officers to participate in survey missions, learn from the experiences of inspection and examination of transfer prices in foreign countries, especially countries with extensive experience in tax management over transfer pricing * In the part of the Hanoi Tax Department: The Department should focus on developing and organizing the implementation of the human resource development program in the direction of: strengthening intensive skills training, developing detailed professional guidance documents, fostering knowledge of economics, increasing experience sharing among tax authorities, tax officers, etc Training the cadres and civil servants in inspection and examination departments and a number of relevant departments (tax declaration and accounting) in the field of transfer pricing inspection and attaching great importance to the skills training 4.2.5 Strengthening international cooperation on transfer pricing The Ministry of Finance should strengthen international cooperation, especially the exchange of information, experiences, and take advantage of the assistance of international partners to improve domestic capacity and meet integration requirements, especially in tax management, transfer pricing management Strengthening international cooperation, including the purchase of the intelligence related to transfer pricing and participation in international antitransfer pricing alliances 4.3 Other support solutions 4.3.1 Solutions from Hanoi People's Committee and Hanoi Department of Planning and Investment 4.3.1.1 In the part of Hanoi People's Committee 28 Directing the agencies (Department of Planning and Investment, Department of Finance, etc), departments and local authorities to coordinate with the Hanoi Tax Department in tax management Directing the appraisal and licensing agencies to strengthen the review of the quality and efficiency of the projects in consistence with the objectives of the Capital's socio-economic development strategy and especially, the Committee should carefully appraise the real capacity of investor in terms of capital and human resources in big projects Studying and submitting to the Government the strategy of calling for investment Only calling for investment in industries needed by Hanoi City 4.3.1.2 In the part of Hanoi Department of Planning and Investment Strengthening the evaluation of current investment incentive policies for industrial zones and export processing zones in the area to study and propose mechanisms and policies for attracting investment in the coming period; In addition to increasing the attraction of FDI capital, it is necessary to improve the efficiency of the project appraisal process to promptly detect transfer pricing behavior by increasing the value of contributed capital of FDI enterprises; Strengthening investment management, by effective control of the implementation of investment projects and application of sanctions to the projects dissatisfying the established objectives (business results show huge losses and conditions are not ensure to continue operating) 4.3.2 Solutions from Ministry of Finance Conducting serious dialogues with auditing companies, tax advisory firms to warn, deter and prevent these companies from conducting illegal activities It is recommended to apply severe sanctions so that these companies better comply with the tax law in Vietnam Strengthening the control of quality of audit services; Inspection, examination and resolution of complaints and denunciations and handling violations of law on independent accounting; Inspection, examination the independent audit of auditing professional organizations, etc 4.3.3 Solutions from the foreign direct investment enterprises Implementing the full, timely and accurate declarations of associated transactions in the annual form of declaration of associated transactions Encouraging FDI enterprises to select the method of Advance Pricing Agreement will help FDI enterprises save time to prepare the documents of tax declaration, payment and documents for determination of associated transaction price Enterprises with associated transactions have the obligation and responsibility to keep information, documents and vouchers as a basis for applying the methods of market price determination FDI enterprises should co-operate with tax authorities during the process of transfer pricing inspection 29 CONCLUSION State management over transfer pricing of FDI enterprises is considered as a very difficult, arduous and costly task due to the diversity and sophistication of transfer pricing forms This is a complex issue not only for Vietnam but also for most countries where FDI enterprises and multinational companies are operating Hanoi is one of the cities which are strongly attracting foreign direct investment The State management over transfer pricing may affect the attraction of foreign investment into the City in the short term in the direction of reducing the number of projects and investment capital, however, in the long term, the quality shall be improved by restricting inefficient investors, attracting reputable investors, accordingly, the investment environment in Vietnam will develop in a more positive and healthier manner The management over transfer pricing of FDI enterprises requires great efforts of relevant ministries, especially the tax authority The thinking of management over transfer pricing should be changed from control of transfer pricing into creation of conditions for FDI enterprises to comply with the law, while helping the relevant agencies to enhance the management efficiency and reduce collection costs Based on combination of study methods, the thesis author has achieved the objectives and tasks of the study as follows: - Analyzing and commenting on a number of research works related to the thesis topic, thereby, determining research gaps in theory and practice, creating a basis for identification of the study objects and scope of the thesis - Establishing a theoretical basis for state management over transfer pricing of FDI enterprises, including theoretical issues on transfer pricing, the contents of state management over transfer pricing according to the approach of economic management speciality, management performance evaluation criteria and influencing factors - Based on the experiences of state management over transfer pricing of FDI enterprises in some countries with developed economies, or similar conditions to Vietnam such as the US, China, Thailand, the thesis has drawn a number of lessons on development and promulgation of policies, organizational structure and professional activities in management - Based on primary and secondary information sources, the author has analyzed the current situation of state management over transfer pricing of FDI enterprises in Hanoi City in the 2011-2018 period according to the contents and criteria of assessment established in the chapter of theory, clarifying the achievements, limitations and causes, contributing to the establishment of practical foundation for the proposed solutions - Based on theory and lessons, conclusions from practical study and forecast of development trends, orientations and objectives of perfecting state management, the thesis author has proposed five the group of solutions to perfect state management and transfer pricing of FDI enterprises in Hanoi city in the coming time Specific tasks of each management agency is determined in each solution The focal point of some key solutions is perfecting the policy and 30 mechanism of state management over transfer pricing, quickly promoting the implementation of the mechanism of advance pricing agreement, completion and enhancement of implementation of professional measures, enhancement of the coordination of relevant agencies such as: Tax authority, the customs, departments of planning and investment, etc In addition to the above-mentioned results, the thesis has certain limitations as follows: - The State management over transfer pricing of FDI enterprises is a very sensitive issue, therefore, the thesis author could not collect sufficient information on the results of state management over this activity Some information, at the request of the supplier, the thesis author could not specify the source, the name of the enterprise with signs of violations, etc - The thesis study process is mainly conducted by qualitative research method Without quantitative research methods, it is impossible to make conclusions about the impacts of management on the efficiency of FDI attraction or direction and degree of impact of factors over state management activities, etc The above are the problems posed to the thesis author during the implementation of subsequent studies ... targets, including: (1) Percentage of FDI enterprises submitting the related transaction declarations; (2) Percentage of FDI enterprises submitting their declarations of associated transactions on... analyzes some new contents prescribed in Decree 20/2017/ND-CP and Circular 41/2017 /TT- BTC against Circular 66/2010 /TT- BTC (applied to the period before 16 Decree 20 takes effect); the changes of... associated transactions The number of enterprises that submitted the declaration of associated transactions Ratio of enterprises that submitted the declaration of associated / the enterprises required

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