VietNamNet Bridge – The HCM City Tax Department has established forces to fight transfer pricing. It will collect and study transfer-pricing tactics used by foreign-invested companies in Vietnam.

Is Coca Cola is a typical case of transfer pricing? The answer will depend on the inspection results. However, it is a big question for the public as a big firm like Coca-Cola has been reporting losses for years so as to not have to pay corporate income tax.

A representative of the HCM City Tax Department said that Coca-Cola Vietnam ranks first in the tax agency’s list of suspects of transfer pricing for its losses for years. So far this company has yet to pay a single VND of corporate income tax.

Coca-Cola began investing in Vietnam in the early 90s. For nearly 20 years doing business in Vietnam, this corporation has continuously declared losses. That helped the firm avoid paying taxes to the host country.

In 2010 alone it reported a loss of VND188 billion, equivalent to $8.98 million in Vietnam. The accumulated losses in the last decade are $180 million.

Despite continuous losses, in the next 3-year plan, Coca-Cola is still expected to invest another $300 million to expand business in Vietnam. This makes Coca Cola the top suspect for transfer pricing.

In a document sent to the HCM City People's Committee, Coca-Cola Vietnam said that after a prolonged period of losses, the business has been profitable. In particular, its taxable profits in 2014 reached $16.6 million, doubling that of 2013 ($7 million).

Total taxes that Coca Cola paid in 2014 reached $20 million and its sales increased by 25%. Financial experts said that Coca-Cola Vietnam’s tax payment notice was a movement to protect its brand. After being warned by the Vietnamese authorities, this firm was forced to "accept" profitable businesses to protect their reputation in the eye of Vietnamese consumers.

However, $20 million is a very small number compared with the business effectiveness of Coca Cola in Vietnam.

Coca-Cola entered Vietnam in February 1994. Although its revenue grew steadily annually, averaging 24%, as of 2011, its financial statements recorded an accumulated loss of up to VND3,768 billion, exceeding its initial investment capital. That means the enterprise did not have to pay even 1VND of corporate income tax.

Coca-Cola Vietnam has constantly expanded its business network and has had good sales but it can still declare losses thanks to the import of flavoring from its parent corporation at very high prices.

For example, in 2010 the costs of imported raw materials from its parent company was up to VND1,671 billion on revenue of VND2,329 billion.

To date Coca-Cola Vietnam has yet to play any corporate income tax.

This corporation is also suspected of taking advantage of Vietnam’s investment incentives to expand its production facilities.

The case of Coca Cola Vietnam has been strongly opposed by domestic public opinion. Some Vietnamese consumers reject Coca-Cola products.

Who is responsible?

According to a lawyer, who is member of the HCM City Bar Association, the suspected transfer pricing case of Coca-Cola Vietnam has four main points to clarify.

Firstly, why is a business that has declared losses for many years still permitted to operate in Vietnam?

Under the provisions of the Enterprise Law, it is violation of the law if a business, even state-owned enterprises, keep reporting losses for five to 10 years but still continue operating.

Secondly, where is the company’s financial budget for operation while it has been reporting losses?

Thirdly, who will take the responsibility for this case?

In principle, the HCM City Department of Taxation will have to bear some responsibility because it directly manages tax operations and production activities of enterprises. However, it must be said that the HCM City Tax Department is very enthusiastic with fighting transfer pricing.

Fourthly, during the time of Coca-Cola operating in Vietnam, has the HCM City Tax Department asked this corporation to explain the doubt of tax evasion?

The statement made by the HCM City Tax Department on inspecting Coca-Cola Vietnam's business operation, particularly transfer pricing inspections with the participation of the General Department of Taxation, has received the consensus of public opinion.

Dien Dan Doanh Nghiep