The national tax office of Vietnam launched an extensive tax investigation on the transfer price transactions of foreign-invested companies. According to the Korea Trade-Investment Promotion Agency (KOTRA), approximately 50 enterprises are subject to the investigation, and 40% of them are Korean companies.
A transfer price can be defined as the price applied to transactions between a parent company in its home country and its local subsidiary abroad. The purpose of an investigation on transfer price transactions is to prevent cross-border tax avoidance by means of taxation based on a normal price in a case when the two entities try to transfer taxable income by using a price higher or lower than the normal price.
The problem is that more Korean companies in Vietnam are likely to come under scrutiny, which will affect their business activities. The taxation authorities of Vietnam are applying a profit rate of 20% in the investigation, but the percentage does not reflect the reality. Besides, taxes and surcharges are predicted to be imposed on past transactions to exacerbate the situation.
According to the Export-Import Bank of Korea, a total of 2,695 Korean companies are doing business in Vietnam. Its Ministry of Planning and Investment has recently announced that Korean corporations made a new investment of over US$3.6 billion in the country in 2013, to beat Singapore and Japan and top the list.