Despite reporting losses, Hualon opened many new production facilities. Photo vef.vn

HA NOI (Biz Hub) — Hualon Corporation Vietnam, a foreign business in southern Dong Nai Province's Nhon Trach 2 Industrial Park with investment capital from Malaysia and Taiwan-British Virgin Islands, dodged VND78.1 billion (US$3.7 million) in income taxes.

Hualon, which opened in 1993 and specialises in fibre production and fabric weaving, was one of the first foreign direct investment businesses in Viet Nam. Its primary products are Draw Textured Yarns, knitting fabrics, gray fabrics and dyed/finished fabrics.

The corporation reported losses for nearly 20 years, stating cumulative losses of more than VND1 trillion (US$47.7 million) at the end of 2010. The result was that it did not have to pay income tax.

However, inspectors concluded that Hualon had actually made major profits and planned to collect VND78.1 billion in back taxes.

Despite reporting losses, Hualon opened many new production facilities. In 1995, the company opened a knitting plant with a daily capacity of 13 tonnes. This was followed by a Draw Textured Yarn plant with 124 draw texturizing machines, a two for one plant with 73 high and low twist machines, a weaving plant with 3,190 water jet looms and a dyeing plant with 22 machines.

According to the General Department of Taxation, the corporation blamed the losses on too much investment in expensive production lines and materials, which selling prices could not compensate for.

The corporation declared that it had imported a fabric weaving production line for nearly US$16 million. However, it then sold the line to another company for $400,000, 40 times lower than the original price.

A source from Vietnamnet online newspaper said that this production line was very outdated and the corporation had not used the line since it was imported to Viet Nam.

Hualon used transfer pricing to avoid paying taxes, a strategy adopted by 121 other FDI firms in the 2007-12 period. The businesses have been forced to pay back more than VND200 billion ($9.5 million) in taxes. FDI businesses in Ha Noi had to pay VND98 billion, HCM City firms paid VND15 billion, Thai Binh enterprises paid VND7 billion and those in Lam Dong paid VND5 billion.

Keangnam Vina Company Ltd. in Ha Noi paid the most taxes, VND95.2 billion.

Most FDI firms in Viet Nam purchase fixed assets, usually from their associated businesses in foreign countries, as a ploy to evade taxes, according to the General Department of Taxation.

It's difficult to assess the real value of the fixed assets because the businesses might use high-tech machines that Viet Nam has not produced yet, so auditors struggle to compare them with other businesses in the country.

In addition, Vietnamese auditors' abilities are still limited. A transfer pricing investigation is very complicated, so a number of cases are currently at a standstill, such as those of the US's Kad Industrial SA Vietnam, which is involved in garment and textile production, and Taiwan's DaiWa Vietnam, which makes fishing rods.

"We just discovered a giant loophole when Keangnam Vina borrowed $400 million from South Korea's banks and doubled the interest in Viet Nam," said Nguyen Huy An from the Ha Noi Bar Association.

The case of Keangnam, he explained, showed that the Vietnamese tax sector needed to take care of legal loopholes allowing FDI businesses to engage in transfer pricing.

Viet Nam has no regulation on the ceiling interest rate for foreign currencies. FDI firms operating in Viet Nam borrow from foreign partners under various forms, including credit and international bond issuance. He urged policy makers to close this loophole.— VNS