State Management of Transfer Pricing Activities of Foreign-Invested Enterprises in Vietnam

Abstract

The impact of State management factors on transfer pricing activities of foreign direct investment enterprises in Vietnam is examined in this study. This adds to the empirical evidence on factors affecting transfer pricing activities of foreign-invested enterprises in Vietnam. A questionnaire survey of officials directly involved in the inspection of transfer pricing activities is used as the research method. The study yielded 226 questionnaires. The author chose 210 questionnaires after deleting those that were ineligible due to a large number of blank cells. The following procedures are used to process the data from the satisfied votes: Cronbach's Alpha test to measure the reliability of the scale; Exploratory factor analysis to break down data into smaller sets of variables to discover the underlying structure; Descriptive analysis to describe the underlying quantitative features of the data; Correlation and regression analysis to evaluate the relationship between variables with the support of SPSS 25 software. Inspection pressure, professional inspector qualifications, and inspector role, State control organization, inspector professionalism, legal corridor on transfer pricing control, macroeconomic situation, and investment environment have a positive impact on state management on transfer price operations, according to research findings. The author has provided solutions to increase the efficiency of State management on transfer pricing operations of foreign-invested businesses in Vietnam based on the research findings.

1. Introduction

All economies throughout the world are moving toward international economic integration. To achieve this purpose, countries use preferential policies, such as tax incentives, to attract investment into their countries and areas. This is the primary reason why foreign-invested companies positively compute internal transfer pricing. These types of frauds are becoming more widespread in several ways, and the tactics are becoming more sophisticated. They are also commonly used in transactions with foreign-invested enterprises.

State management of FDI enterprise transfer pricing plays an important role in economic development, contributing to impartiality in the performance of tax payment obligations among enterprises, implementing state budget revenue, creating equal competition among economic enterprises, and improving FDI enterprise compliance with tax laws. With the trend of globalization and the opening up of domestic markets, transfer pricing has become increasingly difficult, resulting in negative implications for the receiving country’s economy. Over the years, the tax sector of countries and international economic organizations has always recognized the management of transfer/transfer prices as one of the major challenges of tax administration to avoid and eliminate illicit transfer pricing activities. In the world tax forums of the Organization for Economic Co-operation (OECD) and the Study Group on Asian Tax Administration and Research (STAR), the control of price transfers to counteract the transfer of income over price is a critical topic.

Vietnam has achieved significant economic success with accompanying foreign investment over the past 30 years of innovation and attracting foreign direct investment. Currently, Vietnam has received a total registered capital of US$404 billion from 141 countries and territories, and has contributed to over 34, 200 projects totaling US$247 billion in investment. The majority of FDI enterprises in Vietnam are subsidiaries of large multinationals from around the world. In fact, foreign investment has become a significant source of revenue for Vietnam’s social-economic development, serving as a positive contributor to GDP growth, export promotion, economic restructuring, management capacity, and corporate governance, as well as economic sector competition; state budget revenues; science and technology transfer; job creation. However, despite the excellent outcomes, the operation of this economic zone reveals several flaws, the most serious of which appears to be the transfer pricing of FDI businesses, which attempts to leverage tax avoidance and evasion opportunities. As a result, identifying and requiring appropriate transfer pricing control measures has become an urgent problem to ensure a fair and sustainable business and investment climate in Vietnam.

The purpose of this research is to look into the impact of state management factors on the transfer pricing activities of foreign-invested firms in Vietnam and to make some recommendations for improving the efficiency of state management over foreign-invested firms’ transfer pricing activities in Vietnam.

2. Literature Review

In the world, research on transfer pricing has been available in most of the countries that receive and export investment. There are two schools of research on transfer pricing: The school against transfer pricing fraud and the school that considers transfer pricing as a business strategy of enterprises.

According to Rego (2003), large firms are more likely than small firms to engage in business operations and financial transactions, allowing them to take advantage of fraud opportunities. Tax evasion by corporations. MNCs also have an easier time avoiding corporate taxes than exclusively domestic enterprises, according to the study, because they can attain economies of scale in their planning. Using commercial activity between enterprises in different nations to reduce taxes. Multinational corporations often apply tactics to reduce tax costs and it is expected that companies with subsidiaries that have foreign sources of income will have motivations and chances to participate in tax avoidance (Rego, 2003).

MNCs can lower their corporate taxes by transferring income from high-tax jurisdictions to low-tax ones and taking advantage of differences in national tax legislation. He also claims that multinational corporations (MNCs) employ a series of strategies to reduce the amount of tax they owe as a whole (Slemrod, 2001). Financial leverage is used by companies to avoid paying corporate income taxes by lending money to subsidiaries in other countries (Richardson et al., 1998; Newberry & Dhaliwal, 2001; Rego, 2003; Dyreng et al., 2008).

The transfer of intangible assets for transfer pricing destination, according to Grubert (2003) and Mutti and Grubert (2007), is a major issue connected to transfer pricing fraud. Intangible assets are difficult to value, and transfer payments in global corporations are equally difficult to value.

According to Elsharawy (2006), a multinational corporation is an organization that operates in multiple countries, each of which has its own legal, political, economic, cultural, social, and environmental environment. Technology is subject to change. International transfer pricing operations are heavily influenced by economic variables. As a result, research into the economic factors that influence transfer pricing in international corporations is required.

The primary factors of transfer pricing aggressiveness are investigated by Richardson et al. (2013). After controlling for industry-sector effects, our regression results show that firm size, profitability, leverage, intangible assets, and multi-nationality are significantly associated with transfer pricing aggressiveness based on a hand-collected sample of 183 publicly-listed Australian firms for the 2009 year. Their supplementary regression results further suggest that the combined effects of intangible assets and multi-nationality help enterprises increase their transfer pricing aggressiveness.

Total ownership and organization ownership, according to Tran et al. (2021), have a beneficial impact on transfer pricing decisions. Total ownership has a lower degree of influence than organizational ownership. To be able to oversee transaction activities involving transfer pricing, Vietnam’s state management authorities must focus on improving the legislative environment by supplementing and modifying transfer pricing rules.

In Vietnam, recent research on foreign direct investment (FDI) can refer to Ta et al. (2020) investigate FDI attractive factors, which are important to formulate policies to attract Korean direct investment into Vietnam, Nguyen (2020) assessed the impact of FDI and international trade (export and import) on Vietnam’s economic growth for the 2000–2018 period.

3. Research Methods and Models

3.1. Research Method

The research method used includes surveys questionnaires of officials directly involved in transfer pricing inspection to determine the extent of influence of state management factors on transfer pricing activities of foreign-invested enterprises in Vietnam. State management of transfer pricing activities, Inspection pressure, Professional qualifications of inspectors, Role of state control organizations, Professionalism of inspectors, Legal corridor on Transfer pricing control, Macroeconomic situation, Investment environment are measured on a five-level Likert scale very good, good, average, not good, weak. The 5-level Likert scale is familiarly used in many studies, so the author also quantifies each factor according to five levels.

Research data was collected in the form of face-to-face interviews and email interviews with officials directly involved in the inspection of transfer pricing activities. The survey results obtained 226 questionnaires. After eliminating invalid questionnaires due to many blank cells, the author chose to use 210 questionnaires. The data of the satisfactory votes are processed by the following methods: Cronbach’s Alpha test to measure the reliability of the scale; Exploratory factor analysis(EFA) to break down data into smaller sets of variables to discover the underlying structure; Descriptive analysis to describe the underlying quantitative features of the data; Correlation and regression analysis to evaluate the relationship between variables with the support of software SPSS 25.

3.2. Research Model and Hypothesis

From the research overview, the proposed research model is as follows

SMTP = β₁ + β₂ × IP + β₃ × QI + β₄ × RSO + β₅ × ROI +β₆ × LC + β₇ × MS + β₈ × IE + E

The variables in the model are described in the following table (Table 1).

Table 1: Description of Variables in the Model

To evaluate the impact of state management factors on transfer pricing activities of foreign-invested enterprises in Vietnam, the study uses three detailed hypotheses as follows:

H1: Liquidity pressure is a positive relationship between inspection and State management on transfer pricing activities in foreign-invested enterprises in Vietnam

H2: Professional qualifications of inspectors have a positive relationship with State management of transfer pricing activities in foreign-invested enterprises in Vietnam invested enterprises.

H3: The role of state control organizations has a positive relationship with State management of foreign- Transfer pricing activities at foreign-invested enterprises in Vietnam.

H4: The professionalism of inspectors has a positive relationship with the State management on transfer pricing activities in enterprises. foreign-invested capital in Vietnam.

H5: The legal corridor on transfer pricing control has a positive relationship with State management of transfer pricing activities in foreign-invested enterprises in Vietnam.

H6: The macroeconomic situation has a positive relationship with State management of transfer pricing activities in foreign-invested enterprises in Vietnam.

H7: The investment environment has a positive relationship with State management on transfer pricing activities in foreign-invested enterprises in Vietnam.

4. Research Results

4.1. Testing the Scale

The results of evaluating the reliability of the scale by Cronbach’s Alpha show that the scales have reliability greater than 0.6 and the correlation coefficient of the total variable is greater than 0.3. All scales satisfy the conditions for EFA exploratory factor analysis. The reliability of the scales is summed up in the table below (Table 2).

Table 2: Scale Test Results

4.2. Exploratory Factor Analysis

Factor analysis was performed with Principle Component extraction, Varimax rotation for the dependent observed variable. The results show that the coefficient KMO = 0.752 (condition > 0.5); Significance level and Barlett test = 0.000 (meet condition < 0.05) show that EFA analysis is appropriate. The total variance extracted is 64, 558 % > 50%, and factor loading factors are all greater than 0.5, so they are satisfactory. The official scale after EFA processing includes 7 independent variables with 24 observed variables as proposed (Table 3).

Table 3: Result Table of Discovery Factor Rotation

4.3. Regression Analysis

The adjusted R-squared reflects the influence of the independent variables on the variation of the dependent variable, in this case, the factors of inspection pressure, qualification of inspectors, the role of State control organization, Professionalism of inspectors, Legal corridor on transfer pricing control, Macroeconomic situation, Investment environment affects 62.9% of State management over operations. The Durbin-Watson coefficient is 1, 913, in the range from 1.5 to 2.5, so there is no first-order sequence autocorrelation (Table 4).

Table 4: Statistical Results of Factors

^aPredictors: (Constant), IE, QI, MS, POI, LC, IP, RSO.

^bDependent Variable: SMTP

To check the regression model are consistent with data sets collected and meaningful application or not, the authors continue testing the suitability of the model through accreditation ANOVA as follows (Table 5).

Table 5: Testing the Goodness of Fit (ANOVA)

The sig value of this model test has is 0.000 < 0.05, so the built linear regression model is suitable for the population (Figure 1).

Figure 1: Normalized Residual Frequency Plot

The model’s F-statistic Sig value = 0.000 < 0.05 shows that the model fits the data set and can be generalized. VIF coefficients are all less than 2, so there is no multicollinearity between components that do not appear in the research model.

Regression results showing the influence of state management factors on transfer pricing activities of FDI enterprises are shown in the table below (Table 6).

Table 6: Regression Results Multiple

Sig test value for each independent variable < 0.05: all variables are significant in the model. Beta coefficients are all positive: all variables have the same effect on the dependent variable.

The regression model is written as follows:

SMTP = 0.073 + 0.121IP + 0.228QI + 0.226RSO + 0.137POI + 0.263LC + 0.27MS + 0.167IE + E

Based on the results of quantitative research on the impact of State management factors on transfer pricing activities of foreign direct investment enterprises in Vietnam, the following conclusions can be drawn:

The Beta coefficient is used to extract multiple linear regression. The factor of Legal Corridor on Transfer Pricing Control (0.263) and Macroeconomic Situation (0.27) had higher standardized Beta coefficients than all other components, according to the standardization. Inspection pressure (0.121), inspectors’ professional qualifications (0.228), the function of state control organisations (0.226), and inspectors’ professionalism (0.137) are the remaining components’ standardised beta coefficients (0.167).

Thus, inspection pressure, inspector qualifications, the role of state control organizations, inspector professionalism, the legal corridor on transfer pricing control, the macroeconomic situation, and the investment environment have the same impact on transfer pricing activities as state management.

5. Recommendations and Conclusion

The authors make some recommendations based on the findings of a study on the impact of state management elements on transfer pricing operations of foreign direct investment enterprises in Vietnam. The following are recommendations to increase the effectiveness of governmental management of foreign direct investment enterprises’ transfer pricing activities in Vietnam:

State management of operations is a difficult activity. Therefore, from the Ministry of Justice’s proposal to promulgate legal regulations on anti-transfer pricing until the stage of investment receipt by the Ministry of Finance, thorough, timely, and comprehensive cooperation among ministries and sectors is required. Planning and investment, as well as monitoring the import and export value of machinery, equipment, materials, items, and so on before and after production, by Customs, the Bank, and so on, till inspection. The Tax Agency, the State Audit, and the Economic Police inspect the operations of businesses throughout the production and commercial process. Regulations on controlling transfer pricing activities have been promulgated based on documents to provide solutions and effective coordination mechanisms to improve the state’s management capabilities Furthermore, the inspection of transfer pricing operations should concentrate on the inspectors’ professional qualifications, professionalism, and inspection pressure on foreign-invested firms in Vietnam. Vietnam.

*Acknowledgements:

The authors are thankful to the Academy of Finance for funding this research. We would like to thank the anonymous referees for their helpful comments and suggestions.