More than 50% of foreign direct investment (FDI) enterprises in Vietnam reported losses, with 18,140 companies accumulating total losses approaching 1 million billion VND (approximately $40 billion).

Experts warn that "fake losses, real profits" may be leading to significant tax revenue losses and market distortions.

The concern behind nearly $40 billion in reported losses

According to the Ministry of Finance, by the end of 2023, among approximately 29,000 FDI enterprises in Vietnam, 16,292 reported losses, while 18,140 recorded cumulative losses amounting to nearly 1 million billion VND.

Additionally, tax contributions from these enterprises to the state budget in 2023 decreased by nearly 4,000 billion VND compared to 2022.

Experts consider the fact that more than half of FDI enterprises are reporting losses a major concern.

Speaking to VietNamNet, economic expert Dr. Vu Dinh Anh stated that FDI firms experience losses due to both internal and external factors.

Some companies face genuine business risks, leading to losses or even bankruptcy - an expected outcome in a competitive market.

However, many FDI enterprises report continuous losses while still operating for years and even expanding production.

This contradicts market principles and suggests tax avoidance through transfer pricing - where losses are artificially created while profits are siphoned elsewhere.

The issue of transfer pricing

Dr. Anh explained that transfer pricing is a common practice among multinational corporations, allowing them to maximize profits while minimizing corporate tax obligations by exploiting differences in tax rates across countries.

"Transfer pricing and the resulting artificial losses not only reduce tax revenues but also distort market prices, preventing fair competition. This practice skews both domestic and international markets while placing local enterprises at a disadvantage, especially since FDI firms already enjoy substantial tax incentives," Dr. Anh noted.

Nguyen Binh Minh, a lecturer at the University of Commerce, emphasized that transfer pricing is a challenge for all countries that attract foreign investment, not just Vietnam.

"From an investment perspective, if an FDI company continues expanding operations, creating jobs, and growing its business, then accumulating losses over time can be expected due to reinvestment.

However, if a company neither expands nor increases sales revenue yet continues reporting losses, it is highly likely engaging in transfer pricing to evade taxes," Minh said.

Meanwhile, digital transformation and financial expert Vu Tuan Anh highlighted the complexity of transfer pricing, particularly when parent and subsidiary companies set their own internal pricing structures. This makes it difficult to establish a universal standard and regulatory framework for fair taxation.

"Companies often manipulate internal transactions to optimize tax obligations, potentially causing substantial revenue losses for host countries," he said.

Proposed solutions to prevent transfer pricing

To address transfer pricing concerns, Vu Tuan Anh proposed three key measures:

Stricter investment approvals for FDI projects

Before approving an FDI project, authorities should conduct rigorous evaluations.

Investors should disclose tax payments in other countries where they operate. For instance, if a company has a similar project in Thailand, it should report taxes paid there for comparison with Vietnam’s tax obligations.

This transparency would help prevent firms from exploiting tax rate differences between countries.

Requiring detailed transfer pricing disclosures

FDI enterprises should provide regulators with a clear pricing structure between parent and subsidiary companies.

Businesses must submit a projected tax payment plan covering 5-10 years under various financial scenarios (profit and loss).

This would help authorities assess long-term tax contributions and mitigate potential tax evasion.

Equal investment policies for FDI and domestic enterprises

Investment incentives should be based on total committed capital rather than the origin of investment funds.

This would ensure a level playing field and create a transparent business environment, promoting fair competition between foreign and local enterprises.

Nguyen Binh Minh further suggested that regulatory agencies closely monitor FDI enterprises that consistently report losses without expanding their investment or market reach.

"Every investment project comes with a planned break-even and profitability timeline. Authorities should cross-check these projections and enforce tax compliance accordingly," he stated.

Dr. Vu Dinh Anh added, "Vietnam has a range of anti-transfer pricing measures, but successful implementation requires not only technical expertise and strong governance but also commitment and ethical integrity from authorities."

Binh Minh