Nguyen Quang Tien, director of the Ministry of Finance’s Tax Reform and Modernisation Department, said Hanoi Department of Taxation (HDT) was investigating whether Keangnam Vina transferred profits to its parent company through related party transactions. He said Keangnam Vina was inspected on fees for loans, consultancy services and other matters with its partners to determine whether violations designed to dodge local taxes occurred.
Tien said when carrying out the Keangnam Hanoi Landmark Tower project in Tu Liem district, Hanoi in May 2007, Keangnam Vina borrowed $400 million from Kookmin Bank, also a member of Keangnam Group.
However, Keangnam Vina had to pay the average interest rate of up to 12 per cent per year, higher than Vietnamese banks’ interest rates of 5-7 per cent for loans in US dollars at that time. The loan was kept in a business account with the value of VND2,030 trillion ($97.6 million)
Ha Jong Suk, Keangnam’s Vina president, told VIR that the suspicions reflected an incorrect appraisal of the company’s dealings.
“We started this project in 2007. At that time, many Korean banks wanted to lend and promised to provide money for the project. However, when Vietnam’s foreign exchange market imploded in April, 2008 due to high inflation rate and global finance market turbulence, all the banks cancelled their promises and stopped providing money,” said Suk.
Suk said, even though the market situation was difficult and required considerable work, the loan was assembled by variety of contribution from about 20 banks, with Kookmin serving as the representative bank.
“This difficult situation has lasted from 2008. Naturally, lending interest rate was going up and the additional cost was high,” Suk said.
Also, the contract between Keangnam Vina and its contractor Keangnam Enterprises was claimed to be much higher than it costs. Accordingly, Keangnam Vina had to pay a fee for loan arrangement for its contractor of up to $20 million and the fee for advertising and consultancy on granting land use rights and an investment licence of several million dollars per year. In 2008 particularly, Keangnam Vina reported financial costs of $30 million.
Tien said tax authorities found Keangnam Vina’s main contractor had a profit of up to 55 per cent of its revenue, which would entail a corporate income tax (CIT) obligation of up to 13 per cent of revenue, with the CIT rate of 25 per cent in Vietnam. But the contractor paid just 2 per cent.
“The tax agency suspects that there was a related party transaction among three members of Keangnam group. It is considered a sign of transfer pricing,” Tien said.
In 2011, Keangnam Vina began to earn revenue from Landmark Tower project, bringing in more than VND5.2 trillion ($250 million), but reported losses of VND140 billion ($6.7 million). By late 2011, its cumulative losses reached VND277 billion ($13.3 million). Due to its losses, Keangnam Vina has never paid corporate income tax in Vietnam.