Transfer pricing: Keangnam catches a Tartar

The big guy that made big loss

Keangnam Vina has been “famous” in Vietnam after it got involved in many scandals relating to the transfer pricing.  It has recently admitted its behavior of conducting the price transferring worth VND1.22 trillion.

However, Keangnam Vina catches a Tartar; there is another foreign invested enterprise which outstrips Keangnam in the value of the transfer pricing deal.

While Keangnam Vina has reported losses for the last five years, Hualon Corporation, the Malaysian – Taiwanese – British Virgin Island joint venture has reported loss for the last 20 years in Vietnam.

The South Korean real estate group declared the wrong expenses which were five times higher than the real expenses to evade tax. Meanwhile, the gap between the actual value and the book value declared by the joint venture was 40 times.

Both the groups have been found as conducting the transfer pricing deals worth approximately $70 million.

Hualon Corporation is the enterprise which makes fiber and fabric, operating in Nhon Trach 2 Industrial Zone in Dong Nai province. After importing the old production line at the declared high price, it bargained the line away at a low price. Not only evading tax, the corporation’s behavior of importing “scrap iron” production line to Vietnam has brought serious consequences to the Vietnamese environment.

Licensed in December 1993, Hualong Corporation is listed as the first-generation foreign invested enterprises in Vietnam. And it has been repeatedly reporting loss over the last 20 years. By the end of 2010, the corporation’s accumulative loss had reached over VND1 trillion.

However, despite the loss, Hualong Corporation still continues expanding its business in Vietnam. Its official website showed that in 1995, the knitting workshop, and in 1996, the draw textured yarn workshop was established.

In 1997, it set up Two for One workshop and Weaving workshop. In 2000, it opened Dying workshop with 22 dying machines. The company now employs 3,000 workers.

Explaining the repeated loss, the corporation said that it had to buy specific equipment and buy input materials at high prices, while the selling prices were low which could not cover the expenses.

What tricks the big guy play?

The fact that Hualong Corporation imported a production line at $16 million and then bargained it away at $400,000, raised doubts in taxation officers.

They later found out that the corporation conducted the transfer pricing, not only in the production line import affair, but in the input material imports as well, totaling VND1.156 trillion.

With the trick, Hualong reported the “virtual” loss of up to VND956.2 billion.

At the time when Hualong was inspected, there were still some more old and backward machines and equipment, imported at high prices. If the corporation had repeated the same trick, the virtual loss would have been even higher.

Taxation officers have found out that Hualong actually made fat profit, while it has to pay the corporate income tax arrears of VND78.1 billion.

An official from the General Department of Taxation said making transfer pricing by declaring wrong prices of the import fixed assets is the thing many foreign enterprises apply.

It is very difficult for Vietnam to discover the real value of the import production lines, technologies or equipments to find out if enterprises make transfer pricing.

Pham Huyen