Why does this happen? Is it a major concern?
All enterprises hope to minimise their tax liability. One of their tricks is to claim losses in one country and report a profit in another. This can be viewed as a transfer pricing issue.
While the trick is becoming popular and is not difficult in the hands of skilled experts, it is reaching an alarming level. If it continues it may lead to a huge tax losses for the government, challenge the flow of foreign currencies and create an unhealthy competitive environment. When losses are recorded the local party in a joint venture may withdraw, leaving everything to the foreign investor. Serious action is needed to fight such tricks.
Do you think these FIEs are actually recording losses?
It is hard to reach a concrete conclusion. Auditors are responsible for identifying anything untoward but in many cases the evidence is only regarded as being an indicator. Further, the transfer pricing issue requires auditors to have a broad knowledge not only of the local market but also the international market, which many local auditors do not possess.
What is the role of independent auditor as regards this issue?
Such actions constitute fraud. Local and international standards on auditing are clear: auditors are required to plan and perform necessary audit procedures with due care to identify and address any fraud.
Can authorities manage the situation via the recently-launched Law on Independent Auditing?
The Law on Independent Auditing imposes and strengthens the requirements on audit firms and auditors, which helps to strengthen the competence and expertise of those who directly conduct the audit. A better quality audit means more significant findings can be made. The issuance of the Law also raises awareness among entities subject to compulsory independent auditing.
What should authorities do to improve the situation?
Vietnam’s legal framework has kept pace with economic development and is proper and adequate. MoF recently issued Circular No 66/2010/TT-BTC guiding the determination of market prices in business transactions between associated parties, as well as the Law on Independent Auditing.
Improvements to the legal framework are evidence of the effort being made by authorities to bring about better outcomes. What they should do is to turn these efforts into action by improving the implementation of and compliance with the regulations.