Coca-Cola Vietnam remains embroiled in a long-running tax dispute, with authorities ordering the company to reduce its reported losses by over $30 million (VND762 billion) following an audit. However, the case remains tied up in court as Coca-Cola challenges the decision.

The General Department of Taxation (under the Ministry of Finance) has highlighted Coca-Cola Vietnam as a notable case of transfer pricing manipulation among foreign direct investment (FDI) enterprises operating in Vietnam.

Tax audit reveals financial irregularities

According to the tax department, between 2007 and 2015, Coca-Cola Vietnam engaged in related-party transactions, purchasing raw materials, flavor concentrates, and fixed assets from affiliated companies.

The company used these ingredients to produce branded Coca-Cola beverages, which were then distributed and sold in Vietnam. The formula for the concentrates remains proprietary to The Coca-Cola Company, meaning Coca-Cola Vietnam relied entirely on imports from its parent company.

“Coca-Cola Vietnam filed related-party transaction reports from 2007 to 2015, consistently declaring losses that offset taxable income,” tax authorities stated.

An audit of Coca-Cola Vietnam’s transfer pricing practices found that between 2007 and 2012, the company’s profit margins were below industry benchmarks - even using comparison models selected by Coca-Cola itself.

Despite operating below market profitability, Coca-Cola Vietnam did not adjust its financial reports, prompting tax authorities to impose a mandatory transaction price adjustment.

Key findings of the tax audit:

Coca-Cola Vietnam was required to increase its taxable profit by nearly $14.2 million for 2007, 2011, and 2012.

The company’s declared cumulative losses were reduced by $30 million.

However, Coca-Cola Vietnam did not accept the audit results and has since pursued legal action to challenge the tax adjustments.

Legal challenges and obstacles in tax enforcement

Vietnam’s tax authorities acknowledge that tackling transfer pricing and tax evasion among FDI firms is complex and time-consuming, often leading to legal disputes.

“Coca-Cola Vietnam disagrees with the audit findings. The case is still under review at various levels of appeal and remains in court,” a tax department representative stated.

Vietnam, like many other countries, faces challenges in detecting and prosecuting transfer pricing schemes, as multinational corporations leverage tax policies and legal loopholes across jurisdictions.

Additionally, Vietnam’s tax enforcement workforce is limited, while multinational firms have expert financial teams and legal advisors helping them navigate tax obligations.

A major challenge is the lack of cross-border financial transparency, making it difficult to verify financial transactions between a company’s Vietnam operations and its overseas affiliates.

“Tax audits on transfer pricing require extensive time, resources, and financial data analysis, but the duration of tax inspections is legally limited,” tax officials explained.

Future measures to combat transfer pricing

To address transfer pricing and tax evasion by multinational corporations, Vietnam has committed to the global minimum tax framework (Pillar Two), aimed at curbing excessive tax incentives and preventing profit shifting.

Once Decree 107/2023/QH15 on global tax compliance takes effect, tax authorities believe multinational firms will find it more difficult to manipulate internal pricing strategies to reduce corporate tax obligations.

Vietnam’s tax authorities plan to:

Enhance international cooperation with organizations like OECD, JICA, and ADB to improve tax enforcement capabilities.

Study global best practices to refine Vietnam’s corporate tax regulations.

Increase audits of high-risk FDI firms suspected of engaging in transfer pricing schemes.

Strengthen inter-agency coordination to collect data on corporate transactions, tax incentives, and cross-border investments.

By tightening tax regulations and leveraging global tax initiatives, Vietnam aims to close loopholes that allow multinational corporations to avoid tax obligations.

Binh Minh