Multinational tax management: transfer pricing

Kad industrial SA Vietnam Co., Ltd is a entity which has produced clothes to fulfill contracts which parent company in U.S has signed with other foreign partners. This project has generated nearly 14.4 billion accumulated loss which causes the loss is determined by the price below the cost of outsourcing. Analyses of data records, the losses are mainly formed by the depreciation of machinery and equipment in production costs 1.5 times compare to plan. Through the actual inspection process, Da Nang Taxation Department identifies all machinery and equipment of this plant is imported from an old production facility in the U.S. and is included in the value of capital contribution by the parent company. Clearly, productive machinery and equipment is not as declared by the company, but the tax office is difficult to clarify the "suspected case" unit prices below the cost of outsourcing business, because not determine the market price the number of contribution of capital equipment.

Transfer pricing is easily mistaken as cheating on prices they are two different behaviors. However, I think transfer pricing is considered as more sophisticated price cheating because result of the two behavior of fraudulent transfer pricing and prices are leading to the determination of tax liability for state which does not comply with the provisions of the law. However, the price cheating is a fraud which company itself may conduct but transfer pricing can only be done by more than one parties. Inform lower import prices compare to actual prices to evade import tax rates or higher sales prices than sales invoices, revenue accounting to evasion of value added tax (VAT) evasion that corporate income tax (CIT). This  is considered as the price fraud.

The main reason leading Kad company to conduct transfer pricing is related to profit maximization. Business in general, multinational corporations in particular, never give up opportunities to maximize profit, including behavior change price, price fraud, commercial fraud, ... Transferring price of goods, services, capital investment across borders will be harder to detect than the others and even fraud cases detected is not easy to dispose because by government of each country often tend to protect their businesses as the national interest. However, maximize profit does not mean maximizing shareholders’’ wealth (Arnold, 2008). Managers might conduct transfer-pricing base on their own benefits. Transfer pricing is conduct in term of the differences in investment climate, business differences on policies, laws and regulations between countries, etc. also create opportunities for the multinational corporations to develop and implement their transfer pricing. The differences in tax policy; especially tax incentives are the main reason. Almost of developing countries are using the main tax incentives is one tool to attract foreign direct investment. However, is attracting FDI good for country’s economics, for instance, in case of Vietnam Kad industrial SA Ltd?  

As stated above, the objective of transfer pricing is to maximize the profit of a corporation based on minimizing tax obligations. For headquarter of SA industrial firm, transfer pricing to ensure that they achieve benefits such as reducing tax liabilities, maximize profits by allowing them to easily transfer their investment capital or profits of the country or moving abroad (even in cases they are holding loss statement).

In addition, the US parent company contributed investment capital by equipment and machines from their US old facilities; the company headquarters also easily change and modernization of technology through the disposal of outdated equipment, obsolete technology for Vietnam firm at high price. Transfer pricing is conducted through the company and overseas partners, so it also allows the US headquarters reduced the risk of product markets, exchange rate risk, etc. Enterprise benefits by shortening the payback period of investment and interest income even in the period the Vietnam subsidiary is the basis of their investment are reporting losses.

In contrast, transfer pricing not only causes damage to the budget of the country receiving the investment, but also distorts the business environment, and detriment Vietnam domestics firms. In short term, the US government may face difficulties in capital investment because the country's capital investment by the private sector tend to flow to the investment-receiving country, Vietnam in which there is lower tax. However, in the long term, the US government has got double benefits as a new market, pollution reduction by not producing in the country, new resources approach. Especially in countries with high taxes, the government is also entitled to their full tax incentives which Vietnam government has given to foreign investors.

For the host country receiving the investment, we cannot deny what foreign investment has contributed when looking at the real economy after 20 years. However, if fully comprehensive analyzed, we have lost more than received.